Merger & Acquisitions (M&A) is one of the best modes for expansion of business operations by a corporate to either leverage the full potential of a specific line of business and / or to venture into any unexplored line of business.
In recent years (till Covid19 happened, that is) M&A segment witnessed a significant spike in the number of business deals. Accordingly, experts had predicted that 2020 would end up as another strong year for M&A segment following on a strong 2019.
However, the outbreak of corona virus has completely altered the dynamics of the world economy completely and has brought about unprecedented economic challenges for nations, companies and people all over the globe.
The unpredictable nature of the corona virus outbreak is making it extremely difficult for the companies to evaluate the potential impact thereof on their business prospects.
The world is witnessing a chain of lockdowns and confined social participation to deal with the corona virus crisis. As a consequence, there is a breakdown in the supply chain of the commodities, quantum of consumer consumption capacity and cash reserves posing a daunting economic challenge for all stakeholders involved.
Already corona virus crisis has jammed the normal life of all walks of people all over the world and has brought the economic progress of companies to a grinding halt.
Post corona virus crisis, majority of companies may have to fight for survival and some of them may even have to face the prospect of business closure - Due to this proposition the M&A segment is likely to witness a significant drop in business deals.
However, necessity is the mother of invention and adversities bring about opportunities.
I feel post-corona, companies facing the survival challenge may end up collaborating with other companies via mutually benefitting business strategy to survive the unprecedented economic challenges.
The corona virus crisis is also likely to bring to the fore substantial magnitude of stressed assets – forcing financial institutions to leverage these stressed assets.
On the other hand, companies with strong cash reserves post crisis may find the time appropriate to acquire available stressed assets at a more affordable cost. It may be an appropriate time for these companies to evolve a proactive plan to expand business via acquisition of companies with stressed assets. The key challenge for these cash rich companies could however be to identify potential business opportunities and associated risks (be it legal risks or otherwise).
A successful M&A strategy would be to optimally explore potential business opportunity with an apt business strategy along with to mitigate the legal/business risks will be the yard stick for a successful M&A.
Post Covid19, acquirers will have to place additional emphasis on some key areas like due diligence, business valuation, business structure and legal documentation.
Due diligence: As the part of the due diligence process, the acquirers must carry deep evaluation of business impacting aspects such as:
· Assessment of revenue flow and business progress/performance.
· Material provisions of contracts with special emphasis on force majeure/related provisions.
· Legal/business risks of the target entity.
· Elements covered under insurance.
· Cyber security and risk assessment.
· Liability associated with employee welfare.
· Assessment of impact of pre-COVID EBITDA.
· Estimated time to recover back to normalcy from the impact of corona virus crisis.
Some challenges involved in the due diligence process could be:
· Choice of virtual and remote working as much as possible.
· Constraint on traveling arrangements / on site inspections / review.
· Challenges in procuring first hand information.
Aspects to be integrated into due diligence process:
· Adoption of virtual working style via usage of virtual interactions and virtual data rooms.
· Allocation of dedicated senior team for due diligence task.
· Management level assessment of challenges encountered in the business progress/performance.
· Adjustment of due diligence timelines.
Business valuation
Acquirers may have to pay special consideration on the following prospects in the business valuation:
· Revenue assessment/projections during and post corona crisis.
· Economic burden in the form of debt obligations, deal specific expenses and one-time settlement of obligations.
· Economic assessment of the business vis a vis liquidity status.
· Comparative analysis of success/failure of similar M&A adventures, if available.
Challenges involved in the business valuation process:
· Economic uncertainty and vulnerability in the economic forecasts.
· Cloud over the credibility of economic projections due to lack of benchmarks to backup economic projections.
Economic precautions that may be followed in business valuation:
· Consideration may be adjustment based on the market reality and post-pandemic performance.
Legal / Regulatory angle
Acquirers should focus on the following legal/regulatory aspects as well:
· Implication of the transaction structure on all the stakeholders involved from the tax and regulatory perspective.
· Likelihood of potential penalties/claims on the pretext of corona crisis.
Challenges:
· Exposure to unmeasured economic liabilities and risks due to corona crisis.
· Restricted financing deals.
Measures to mitigate economic risks:
· Consideration in cashless form – e.g., share swaps.
· Reduce tax liability by availing tax waivers/benefits/concessions (if available).
· Link the finance payment to the escrow/hold back module.
Legal documentation:
Key pointers to be incorporated into the legal documentation:
· Reasonable timelines for securing approvals from government/regulatory authorities or third parties.
· Interim measures to mitigate the risks associated with the corona crisis.
· Using force majeure clauses to terminate some agreements which have material adverse impact on business.
Challenges in the legal documentation:
· Identification of material adverse impact events and course of action to be taken in the occurrence of such cases.
· Procurement of deal specific representations and warranties.
Legal provisions to counter these challenges:
· Reasonabilty with timelines
· Secure specific information rights till closure
· Incorporation of situation specific representations and warranties.
· Securing indemnity and risk mitigation
The Author, Bhumesh Verma is Managing Partner at CorpCommLegal with over 2 decades of experience in advising domestic and international clients, with a place in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters. Research and inputs by Paruchuri Baswanth Mohan
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