The disruption and uncertainty created by the COVID-19 pandemic has affected all aspects of M&A transactions and are likely to continue for the foreseeable future.
As a Buyer looking to acquire another company’s assets, whether through an asset or stock acquisition or via a merger, here are some key considerations:
- Valuation & Financing:
- Valuations of target companies have become more difficult as companies deemed “non-essential” were required to work remotely or close, and even “essential” businesses allowed to remain open faced work flow disruptions that will likely negatively impact 2020 financial projections. Consider moving a portion of the purchase consideration to an earn-out over the next 2-3 years to reduce the risk of valuation swings.
- Bank financing has become more difficult to obtain, and deals requiring financing are taking longer to close. Financing terms are evolving to address the risks associated with COVID-19, and termination fees between the parties and other deal terms are being revised in light of the new financing risk.
- Due diligence:
- Anticipate longer timeframes and/or virtual diligence challenges. Factor in additional time for targets to gather materials, respond to diligence inquiries while working remotely or with reduced staff.
- Consider the feasibility of conducting site visits or management meetings remotely and plan for the pieces where virtual access is not possible, such as environmental assessments and surveys.
- Due to forecasting uncertainties, dig deeper and seek detailed responses from Sellers on their current and expected business in their pipelines, stability of supply chains, anticipated costs, remote working capabilities/IT infrastructure, business relationships and strategies.
- If using Representation & Warranty Insurance, expect more detailed COVID-19 questions from underwriters which may result in additional delays in diligence completion.
- With delayed or reduced diligence available, Buyers may consider a due diligence condition “out” where the Buyer’s obligation to close depends on the completion of diligence to the Buyer’s satisfaction.
- Representations and warranties should also be expanded to address the current and future impact of the outbreak on the target, its key customers and key suppliers.
- Material adverse effect or condition (“MAE” or “MAC”) clauses and ordinary course of business covenants are becoming more scrutinized as ways to back out of deals or negotiate purchase price adjustments.