COVID-19 continues to devastate the world economy. Now, in particular, there is a significant drop in activity in international mergers and acquisitions. However, unlike the global financial crisis, the situation affects almost all areas of business and not some specific industry. National governments are trying hard to respond to the crisis by creating new rules for the long term, as no one can predict when the pandemic will decline, and even more so when it will end.
This material is useful for reading to those who plan to start an international M&A deal, as they suggest considering how the COVID-19 crisis can change the nature of such deals.
Strategic M&A deals
For companies with high capitalization who plan to conduct strategic mergers and acquisitions in Covid-19, the current business environment provides an opportunity to consider transactions in various forms. These may be large transformational mergers and acquisitions or smaller acquisitions of companies in the member states of Europe. The latter seek to expand their business with small investments. Leverage companies focus more on increasing liquidity (for example, through the sale of valuable assets).
The urgent need for M&A transactions during a pandemic is the reorganization of supply chains, which naturally entails certain risks. Mergers and acquisitions of the target business in emergency circumstances are also very relevant.
It is important to pay attention to the fact that regulators are trying to tighten control over foreign investment in the target business during the COVID-19 pandemic. The degree of government intervention to preserve enterprises vital to the economy is also increasing.
International “problem” mergers and acquisitions
Before the transaction begins, the parties need to resolve the issue of pricing. It is important that it is carried out at fair market value. Parties must ensure that both price and structure are properly documented. M&A insurance in Europe may also be required.
It is difficult to make an assessment correctly with market volatility, which will not decline in the near future. For greater effectiveness, parties can share the risk in the assessment by structuring transactions. For example, allow a conversion date when the market is more stable, with a coefficient that depends on the value of the investment at that date. As one of the possible options, you can create a joint venture in Europe to save the buyer from the estimated risk, to ensure the phased acquisition of full control in the prescribed manner.
Joint Venture Agreements
When registering a joint venture in a pandemic, it is important to apply an individual approach and flexibility, including:
- Blocking periods, mandatory exit conditions that take into account the increased risk of investor default;
- Protective obligations to limit the participation of several members of the consortium in one industry or, conversely, to allow investments in various industries for private equity funds;
- Unconventional operational and tax decisions that may be taken in case of unforeseen circumstances.
If you plan to start an M&A deal during the COVID-19 period, it is useful to know that in the context of mergers and acquisitions the following peculiar features are observed:
- The response of the public and authorities should be taken into account in relation to integration plans;
- Strengthening control of foreign investment to prevent the sale of critical European assets;
- Increased investor attention to transactions.
Transaction Terms and Practical Issues
Standard conditions for the completion of the transaction, such as obtaining permission to merge and take over, approval of regulatory authorities, stages of closing a transaction that require personal involvement play an important role if you want to enter into an M&A transaction in Europe during and after COVID-19.
The 2020 fiscal year is sure to go down in history as one of the unprecedented shocks for the global business as a whole. Although the market for mergers and acquisitions during the COVID-19 period undergoes significant transformations, as well as the motivation of investors, the exceptional nature of the current circumstances indicates a constructive re-arrangement of forces for those who act thoughtfully and carefully.
IQ Decision UK specialists offer clients business restructuring advice to mitigate the effects of the pandemic.