What does M&A look like during a pandemic?

LINDA LE, MARKET ANALYST, THEDOCYARD

COVID-19 has had an unprecedented impact globally. It has heralded fundamental changes to the world around us and the way that we live our lives; companies have been knocked off balance as a result of changes to consumer behaviour, supply chains, and the virus recession. M&A activity has not been immune from this.

Deals being abandoned and postponed

Sharp falls in global M&A have occurred, with deal-making brought to its lowest level since 2012. The value of mergers and acquisitions fell to 50% in the first half of 2020. General uncertainty compounded by the virus recession has meant that a number of transactions have been either delayed or cancelled altogether. A notable example of this is Xerox abandoning its $35 billion acquisition of HP after postponing meetings with HP shareholders to focus its efforts on its coronavirus response. Boeing suppliers Hexcel and Woodward have also terminated their $6.4 billion merger citing “unprecedented challenges” created by the pandemic.

A challenging time for M&A

For the deals that have proceeded, they do typically take longer due to challenges relating to due diligence, more cautious buyers who increasingly want to shift as much risk as possible onto the sellers and concerns relating to the ability to accurately value a seller in volatile circumstances. As a result of this, sellers may find that their business is more closely scrutinised than usual, and they are likely to be forced to demonstrate the impact of the pandemic on their customers, supply chains, marketing, and infrastructure. Current deal activity has also been limited by disruptions to travel and social mobility, office closures, and restrictions on physical meetings.

Tightening foreign trade law

The pandemic’s impact on M&A has been further compounded by geopolitics and the tightening of foreign trade law. In June, comprehensive reforms to Australia’s foreign investment review framework were announced. Proposed to come into effect on 1 January 2021, these changes will impose a permanent $0 threshold for all foreign investments in sensitive national security businesses, whilst the current temporary $0 threshold for all other foreign investments will revert to pre-covid thresholds. Under this new regime, stronger penalties for breaches have been introduced and more powers have been granted to enforce compliance with FIRB approval conditions, impose new conditions and unwind a transaction after FIRB approval has been granted.

Shifting objectives and the rise of opportunistic M&A

However, it has not been all doom and gloom, and the M&A market is showing promising signs of life as companies adapt to this brave new world we now find ourselves in as a result of the coronavirus pandemic. Deals are still taking place and generally speaking, Asia Pacific has held up better with overall volumes falling just 7% and most sectors seeing smaller declines than in other parts of the world. Indeed, the technology, media and telecommunications industry actually reported a 13% increase.

We’re also seeing a potential increase in opportunistic M&A, particularly in sectors such as retail, travel and casual dining, as buyers seek to capitalise on the unprecedented times and its many casualties that were otherwise successful businesses prior to the pandemic. These businesses are eligible targets for opportunistic M&A as investors may seek to acquire them for a steal now while the tides are rough, and whether the storm at the helm with a view of reaching calmer waters in the not-too-distant future.

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