M&A is a great way for businesses to adapt and achieve their objectives, which can be diverse (i.e. growth into new territories, sectors or markets, acquiring talent or assets, etc.). Having said that, how is the COVID pandemic currently affecting M&A deals? What is the impact of this crisis in the structuring and the execution of deals compared to the pre-lockdown market?
Impact in the planning, development and negotiation of the deals…
The pandemic has affected the manner in which deals are developed and negotiated. Having the main actors of the deal working remotely has forced all of them to use different tools, technologies and techniques in order to achieve a successful closing of the deal.
Deal timelines are longer now due to COVID related factors. Negotiations take longer (as indicated above, having everyone in the deal room is not always possible), third-party consents and internal approvals take longer to be obtained, etc.
Because of all those factors, planning the deal with time has become more important than ever. One of the things that has changed in this renewed landscape is that the pandemic has accelerated the implementation of reinforced foreign direct investment controls in most of the European states, based on national security grounds. Mechanisms vary across jurisdictions and careful planning ahead of the implementation of the transaction is key to ensure the compliance with these screening rules. It is important to keep in mind that we now see generally lower thresholds for control, a greater scrutiny, and a broadening of the scope of transactions that will be caught by screening. In Spain, for instance, certain foreign investments above €1,000,000 in companies which operate in strategic sectors (such as energy, telecoms, AI, biotech or with access to sensitive information, in particular personal data) are, amongst others, subject to prior administrative authorization. For more information on foreign investment control mechanisms in Spain, click here .
… New trends in deal terms
With respect to the impact of COVID in deal terms, we are seeing, as a general trend, an increase of contingent elements in most of the deals, such as earn-out clauses (e.g. extending the period for the target company to achieve certain milestones in order to pay part of the purchase price) and other price adjustment mechanisms in order to cover potential diminutions in value of the target company or business due to the pandemic, adapted MAC/MAE provisions, and renewed pre-closing obligations attached to business performance.
There is also an increasing number of buyers looking to gradually invest in the target company by acquiring a certain percentage of shares in the first place and then having the option to acquire the rest of the shares, through the execution of symmetric put and call options at the time of the closing of the first acquisition. This split in the investment mitigates the risk assumed by the buyer and ensures having the management involved and growing the business during the option term. It also enables to adjust the purchase price to the future evolution of the company up to the time the option is exercised.
COVID focused due diligence processes
Due diligence processes are also being adapted: the thorough review of the measures adopted by the target company during the pandemic is now key (employment measures adopted, public aids or grants received, etc.). The analysis of the degree to which COVID has adversely affected the seller’s business, operations, financial condition, customers and suppliers, personnel, and business prospects may even be requested to happen before the signature of the LOI or the Term Sheet, which would have been quite unusual in the market prior to the pandemic.
Logically, adapted specific indemnities are being included as well in the transaction documents in order to cover any potential contingencies arising from these reinforced due diligence review.