The COVID-19 pandemic has had a significant impact on the mergers and acquisitions (M&A) landscape, influencing deal activity, deal structures, and the overall M&A process. Here are some ways in which the pandemic has changed the M&A landscape:
Deal activity and volume: The pandemic initially caused a decline in M&A activity due to economic uncertainty and market volatility. Many companies put their M&A plans on hold as they focused on managing the immediate challenges presented by the crisis. However, as the markets stabilized and companies adapted to the new normal, M&A activity rebounded in certain sectors, such as healthcare, technology, and e-commerce. Companies in distressed industries, on the other hand, faced challenges in finding potential buyers or completing deals.
Valuation uncertainties: The pandemic introduced greater uncertainties in valuing businesses. The economic downturn and its impact on financial performance made it difficult for buyers and sellers to assess the true value of companies. Traditional valuation methods and financial projections became less reliable, leading to increased caution and more conservative deal-making.
Shift in sector focus: The pandemic reshaped the priorities and focus of M&A activity. Sectors such as healthcare, technology, e-commerce, pharmaceuticals, and online entertainment experienced increased attention as they were seen as more resilient or even benefiting from the crisis. Conversely, industries heavily impacted by the pandemic, such as travel, hospitality, and brick-and-mortar retail, faced challenges in attracting M&A interest.
Virtual due diligence and deal-making: The pandemic necessitated a shift from in-person meetings and due diligence to virtual processes. Deal negotiations, due diligence reviews, and even the signing and closing of deals started happening remotely through video conferences and digital platforms. This virtual deal-making environment presented challenges in terms of building relationships, conducting thorough due diligence, and maintaining deal confidentiality.
Deal structures and considerations: The pandemic prompted changes in deal structures and deal terms. Buyers became more cautious and incorporated more extensive risk mitigation measures into agreements. Earnouts, contingent payments, and other performance-based structures gained popularity to bridge valuation gaps and provide flexibility in uncertain times. Material adverse change (MAC) clauses, force majeure provisions, and other contractual terms related to pandemics and future crises received greater attention.
Regulatory environment and foreign investments: Some governments increased scrutiny and restrictions on foreign investments to protect national interests and critical industries during the pandemic. Countries imposed stricter regulations on foreign direct investments (FDIs), particularly in sectors such as healthcare, pharmaceuticals, and critical infrastructure. This resulted in additional considerations and hurdles for cross-border M&A deals.
Opportunities for distressed acquisitions: The pandemic created opportunities for distressed acquisitions, as financially troubled companies sought rescue or restructuring through M&A. Buyers with strong cash positions and the ability to navigate distressed situations had the opportunity to acquire distressed assets at potentially attractive prices. This led to an increase in distressed M&A activity in certain industries.
It is important to note that the M&A landscape remains dynamic and subject to change as the COVID-19 situation evolves and the global economy recovers. The specific impact on M&A will depend on various factors, including the duration and severity of the pandemic, vaccination rates, government policies, and market conditions.