By: Apoorv Bansal
Bharati Vidyapeeth Deemed University
This article analyzes the impact of COVID-19 on the M&A deal making process. We will see that how these deals making process will change the way it was before this pandemic and how various sectors will be flourishing like it never did even before pandemic. We will see that how the “Force Majeure” clause can be the deciding factor in M& Transaction and various alternative considerations which emerged due to this pandemic. Further we will also see the post covid-19 effect and the opportunities after COVID-19.
The pandemic and the subsequent lockdown had a major impact on M&A deals. Hundreds of thousands of companies have closed or dramatically decreased their operations in a short period of time, millions of jobs have been laid off or furloughed, consumer spending has plummeted, supply chains have been disrupted, and demand for oil and other energy sources has plummeted. Suspension of IBC post lockdown is also a biggest factor which had affected the business transaction in India. According to a report by Grand Thornton, India’s has reported the decrease in the aggregate Merger & Acquisition transactions in April 2020 in comparison to April 2019.
The country have seen the economic crisis in past as well like Great Recession of 2007, demonetization. But this time, however, the effect of the pandemic is not only on the financial system as a whole, seller valuations, and buyers’ appetite to close deals quickly, but also on a variety of other factors affecting M&A deals. Furthermore, unlike previous crises that have had an effect on M&A deals and operation, this time there has been a significant shift in the way M&A transactions are formed and negotiated. However there are certain sectors which have showed positive opportunities in M&A transactions like Healthcare sector, Telecommunications and other essential services sector.
EFFECT OF COVID-19 ON M&A:
Owing the fact that the country has imposed one of the most stringent lockdown and the second wave have hit the country very badly, buyers would naturally be worried about the effect of COVID-19 on the Target’s financials and company activities in light of the COVID-19 scenario. Due Diligence is the mechanism through which a customer learns about the sale business, assesses the dangers of purchasing it, and verifies that the classified details relayed to the buyer by the target business is accurate. Owing to workplace lockdowns and work-from-home schemes, however, the due diligence process is getting more difficult by the day.
Besides the problem of due diligence, “Force majeure” clause in the contract will be the deciding factor in M&A transactions. “Force majeure” applies to contractual conditions negotiated upon by contracting partners to comply with circumstances that might happen, about which the parties have little or little power, and which may hinder or obstruct the contract’s efficiency. The wording of the contract in this pandemic will depends on the ‘Force majeure’ clause on the contract. Indian government has imposed moratorium period on 3 months loan and suspend the new insolvency filing has aided in the reduction of distressed transactions. However there is a fear in the mind of the lenders that it may threaten their own recovery and can result in losses.
ALTERNATIVE CONSIDERATION FOR INDIAN M&A TRANSACTIONS:
A big lot of companies in India market prefer these transactions in the form of cash deal because they are simpler and include fewer obstacles than their counterparts. However, times have changed dramatically, and businesses have been forced to use their cash reserves to fund a variety of other activities in order to stay afloat in this pandemic. Although cash-rich businesses have been able to easily join M&A transactions, most companies that need external funding have not. Apart from that the suspension of IBC proceeding, RBI COVID package and the 3 month moratorium on term loans have added the insult to injury.
The inability to pay through cash in M&A transactions, the door of share swap merger and acquisition opens. This will also assist businesses and their owners in reducing their tax burden by reducing the amount of transfer taxes they must pay. Companies may also want to consider investing in hybrid instruments that combine cash and stock. For example, HUL consolidated with GlaxoSmithKline Consumer Healthcare Limited in 2020 using a share swap arrangement, with GSK Consumer Healthcare Limited owning 5.7 percent and HUL owning 61.9 percent of the merged entity.
Furthermore, some businesses may prefer a recession selling to escape the additional hassles of due diligence and minority shareholder permissions. This can be advantageous to sellers because the risk of undisclosed liability is reduced, requiring the buyer to spend less time on due diligence.
POST COVID EFFECT ON M&A TRANSACTIONS
The current covid-19 may be seen to possess the negative effect on M&A transactions in the current scenario but we may witness a drastic change in the rules & regulation owing to the M&A transactions. The mood of the businesses may also change from the all cash deals to the all-stock deal or we can say the share swap mergers. Many of sectors have seen a flourishing wave in graph despite the pandemic. These sectors include Healthcare sector, telecommunication industry, Pharma sector, Education sector and other sectors which include essential service. This has resulted in several commercial prospects for market participants. The parties’ main focus should be on regulatory problems and the framework of their agreements following COVID-19. Business valuations are currently at an all-time low; this is an aspect that a buying corporation should examine in order to acquire enterprises for pennies on the dollar and then profit handsomely after the epidemic.
The many initiatives and privileges announced by the Government of India in the Union Budget of 2020, as well as the current tax exemptions/reliefs, have been a benefit to M&A agreements and may function as a catalyst in concluding the agreements in question. In the event of a finance problem, both the buyer and the target company have options. Given the current circumstances, buyers can back out of a purchase by citing a lack of financing from the government or third parties without suffering any legal consequences. The seller, on the other hand, might counter this by making requests to sequestration in order to keep the sale on course and avoid any payment delays.
Despite the negative perspective, the pandemic may open up specific investing junctures, causing lower assessments in the short term in order to explore huge “return on capital” in the long term. Following the 2008 recession, a similar pattern emerged, with PE funds and MNCs with sufficient “dry powder” using their capital to acquire significant stressed assets on the cheap in the case of a crisis.
Various practises being considered by our government as a solution to the Covid-19 pandemic, such as allowing telemedicine via video and online platforms, and expediting retail drug sales to consumers’ doors, in addition to technological advancements and artificial intelligence, will undoubtedly result in a new set of business opportunities.
Furthermore, given that a large segment of our country’s population lacks any sort of insurance, a pandemic of this magnitude is likely to increase the urgency of the need for insurance, particularly health insurance, resulting in a significant increase in the insurance sector and, as a result, increased M&A activity. Furthermore, critical industries such as FMCG, IT, medicine, and others may see a boom, resulting in an increase in M&A activity.
The COVID-19 epidemic has created a lot of concern in the negotiation process. While the pandemic has had a negative impact on the global economy, it has touched various sectors in various ways. Deal-making as a process is going to take on a new face and take on a completely different shape and form. The M&A landscape in India will undergo a significant change. Certain realities that have become the new normal for the country will force corporations to react. The unpredictability of COVID-19 has made it difficult for businesses to effectively assess the objectives, and they will need to devise strategies to change appropriately.
As NCLT approvals are required for schemes of compromise or arrangement, the corporations would like to go with acquisition as the method of structure rather than schemes of compromise or arrangement. Furthermore, due to many unsolved regulatory and technical difficulties, the time it takes to complete the full procedure may be extended. Times are difficult, and the crisis may have impacted the world’s most powerful nations, but normality will return shortly, and all the sectors and its players should be prepared.