Speculation about the impact of coronavirus and recent stock market volatility, including Thursday’s worst decline since the 1987 market crash, on M&A activity has intensified. Members of Ballard Spahr’s Mergers & Acquisitions Group report seeing the virus impact deals due to issues with sellers’ backlog and supply chain.
While it is impossible to know whether COVID-19 will result in reduced deal flow or altered M&A terms in the long run, members of Ballard Spahr’s Mergers and Acquisitions Group report seeing deals impacted by market volatility and the impact of the coronavirus on sellers’ backlog and supply chain.
In other cases, buyers are attempting to renegotiate deal terms. Many terms previously agreed upon—pricing, deal timing, pre-closing covenants, conditions to closing, etc.—are back on the table. In many cases, parties are taking a closer look at the definitions of “material adverse effect” and covenants requiring a target to operate “in the ordinary course of business” during the executory period.
On a practical level, office closures and travel restrictions are slowing down the due diligence process. Many legal diligence calls are being cancelled or postponed because necessary members of the seller’s management team are not available to talk or cannot access the materials they need. In addition, buyers may need to cancel or delay site visits and in-person meetings with management teams due to travel restrictions and health concerns. These delays will extend the time it takes to close a transaction and, in some cases, may result in the deal being postponed indefinitely.
In addition to deals already in process, travel restrictions could prevent or delay new deals from getting started. Management presentations—an important part of every competitive auction process—have become challenging to schedule and many now must be conducted electronically. What’s more, uncertainty about the impact of coronavirus can make valuations difficult. Deals are commonly priced based on a multiple of earnings, and it is difficult to predict the virus’ impact on these multiples.
Nonetheless, there are certainly reasons to remain optimistic that the long-term impact of coronavirus on M&A activity will be minimal. Robert Tunheim, co-leader of Ballard Spahr’s Private Equity group, sums it up this way: “It is no secret that historically high deal multiples have resulted in private equity funds holding onto a lot of capital that needs to be invested. If those deal multiples start to come down, as many predict, we anticipate our private equity clients will become very acquisitive.”Ballard Spahr’s Mergers and Acquisitions Group is monitoring developments and advising M&A clients across the country on these matters. We will continue to provide updates as the situation develops.
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