Mergers and Acquisitions on Covid-19 Times
We were expecting an increase in the M&A transactions in Brazil in 2020. However, Covid-19 is causing the opposite effect. Thus, many transactions that had already started are being suspended, and others which were already signed, may not close.
The global Covid-19 pandemic made many companies’ value shrink. Partially in view of the reduction of activities and, thus, of future profits, and partially because of the forthcoming unemployment.
Like in any other crisis, the strong gets stronger, and companies with more difficulties lose value and become targets for acquisitions. Sometimes is just a matter of survival.
In view of the above, good M&A strategies must be implemented by sellers and buyers. The M&A transactions will come back as soon as the world’s situation gives signs of improvement and the economy picks up.
Special care must be taken with M&A ongoing transactions, as well as with those to come, such as:
Due diligence – buyer must verify the continuity of the target’s activities; possibility of home office; potential mass dismissals and labor claims; lawsuits related to breach of commercial agreements; continuance of supply chain; terms and conditions of the target’s relevant agreements, etc.
Regulatory approvals – delays with approval of regulatory authorities must be taken into consideration. Approvals of the antitrust authority (CADE), for acts of economic concentration, as well as authorizations of other public agencies (e.g. environmental authorities, local health authorities, Ministry of Telecommunications, etc.) may have their deadlines altered, either as a result of new legislation or in view of the reduced number of employees working in certain public offices during the Covid-19 pandemic;
Sunset for closing – considering the current potential delays for the closing of an M&A transaction, such as regulatory approvals, difficulties to meet a condition precedent or otherwise, the sunset for closing must be carefully reviewed by the parties;
Activities in the ordinary course of business – the provision that obliges seller to keep the target’s activities in the ordinary course of business is very relevant in the current situation. It is important to evaluate the measures that are being taken by the target to minimize the impacts of Covid-19, such as dismissals, reduction of work shifts, remuneration adjustments, suspension of production, etc. These measures certainly fall out of the ordinary course of business and may jeopardize the closing of the transaction. Avoiding gun jumping (involving the potential buyer in the decision-making process) when implementing a measure out of the ordinary course is crucial;
Earn out payments – The results of many companies will be adversely affected as a result of Covid-19. Consequently, the earn out payments based on future earnings will also be impacted. Thus, the parties must reevaluate this payment method while negotiating the agreement.
Material Adverse Change – MAC – clauses involving MAC may give a way out to the buyer not to close an M&A transaction. Therefore, it is very important to negotiate the definition of MAC, considering the Covid-19 pandemic and its effects. The allocation of risks will be very relevant in M&A transactions these days.
In view of the abovementioned issues, investment funds, banks and companies that are usually involved in M&A transactions will have to bear in mind the challenges that Covid-19 brought. These days we will not be doing business as usual.