With each passing day, the COVID-19 pandemic challenges businesses around the world. Companies are faced with attempting to carry on their business in an uncertain and ever-changing environment. Mergers and acquisition (M&A) transactions are just one of many impacted business arenas. To be successful, transacting parties must identify and mitigate novel risks and challenges associated with the COVID-19 pandemic.
It was such a pleasure to present “M&A 2020”, along with Sagacity Legal’s Patent Intern Pranita Dharmadhikari, to a joint “Brown Bag” meeting of the American Intellectual Property Law Association (AIPLA) Mergers and Acquisitions and Corporate Practice Committees last month.
This blog post will summarize the first part of the presentation: the impact of the present COVID-19 pandemic.
M&A Before Covid-19
So let’s talk about M&A Before Covid -19. For nostalgia, Alan Jackson: “Remember When” is playing in my head.
Remember when corporations were focusing on core businesses? Many big companies were selling non-core businesses; and buying technology and other assets they needed for their core business. The rapidly changing technology-based growth environment promoted tremendous M&A activities.
Remember when financial confidence was high? Before COVID-19, we were in a bull market. US debt and equity capital markets were high.
Remember when auctions became more commonplace? Buying and selling businesses, portions of businesses, and technologies through auctions increased the transaction success rate vs. direct sales.
For me this was a way of life. The corporation I worked for bought numerous businesses each year; and sold off or closed the non-core businesses. It was a win-win for everyone involved and an exhilarating opportunity for rapid growth and change.
M&A During Covid-19
Then it was March 2020 and the pandemic became a reality. The COVID-19 pandemic impacted everyone and everything, including every type of business transaction. Everything we have been experiencing has disrupted not only our everyday lives, but also M&A activity.
In just these past few months, uncertainty has undermined M&A activity. Specifically, economic activity has slumped. With so many uncertainties, businesses are risk averse. Credit markets have tightened. These coupled with government mandated shutdowns and stay at home orders have undermined M&A activity.
The results? 2020’s business environment and unknowns have led to numerous challenges never before experienced. For example, COVID-19 ambiguities impacts enormously on business valuation. This along with social distancing business operations creates acquisition financing difficulties. Disruptions in due diligence activities and other contractual obligations leads to lapses in drop-dead dates and outside dates. With no clear definition, disputes erupt between the parties of what constitutes ordinary course of business.
M&A in the “Corona-conomy”
Now don’t just take my word for it, let’s take a look at the results. A picture says a thousand words.
Take a look at this chart from Skyline Advisors’ 2nd Quarter 2020 M&A update. According to this update, “The second quarter was evidence of the impact of economic uncertainty on mergers & acquisitions activity. Just over 1,800 deals were estimated to close during the quarter, at a total value of $3.7 billion. These figures represent declines of 33.1% and 26.6%, respectively, from the quarter a year ago and declines of 41.8% and 25.2%, respectively, from just the first quarter.”