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Buyers and Sellers Experience Impact of Coronavirus on M&A Activity

The current COVID-19 pandemic has had, and continues to have, a significant impact on business in nearly all sectors of the U.S. economy.  This widespread impact has trickled down to mergers and acquisitions, as the M&A industry has taken a substantial hit. On April 19, Reuters reported that, for the first time since September 2004, no merger and acquisition deal worth more than $1 billion was announced worldwide for the prior week. According to reports from Dealogic, as noted in an article in Forbes, “The value of M&A activity in the first quarter was significantly lower than the last quarter of 2019, down 35% globally and 39% in the U.S.”

Here in the Pacific Northwest, businesses of all sizes are feeling the impact as well. Buyers and sellers are walking away from deals for various reasons, including changing deal conditions and higher levels of uncertainty, as parties on both sides try to figure out the extent of the pandemic’s impact. Buyers and sellers alike are turning their attention to their own companies in an effort to minimize losses and handle difficult employment decisions, and as a result, M&A activity is adversely impacted.

Areas of impact include the following:

  • Valuation – uncertainty with respect to performance have resulted in lower valuations for private companies, if not significantly lower, which in certain situations can cause sellers to get cold feet and push the pause button. Even if the parties are negotiating the purchase and sale agreement, buyers may question the previous valuation.
  • Deal financing – buyers are experiencing uncertainty with respect to third party financing, including changes to the availability and terms of funding and the covenants they will be subject to.
  • Number and quality of offers have taken a hit
  • Due diligence issues – office closures and travel restrictions are slowing down the due diligence and inspection processes. Site visits, client meetings, and other in-person interactions are postponed or canceled entirely, which impacts the logistics of a deal. Securing approvals and consents from governmental authorities and third-parties (i.e., customers, vendors, suppliers, etc) is slow and burdensome.
  • Timing – the timing of closings have been delayed or canceled entirely.
  • Risk allocation is heavily negotiated.
  • Re-negotiation or re-evaluation of deal terms, including price, structure, covenants, and closing conditions, due to uncertainty caused by the pandemic.

What business owners can expect as we move into the uncertain summer months:

  • Expect buyer appetite to slow.
  • Deals currently in the works will take longer to close, for various reasons listed above.
  • Expect debt financing to be harder to secure, given instability and uncertainty in the markets and the impact on liquidity.
  • If you are able to secure financing, expect lenders to push for more stringent closing conditions and covenants.
  • Be patient when it comes to negotiating or determining deal terms in a letter of intent. Each buyer is different. Where one buyer may want to address specific terms in the letter of intent, another may only want reference to a price and little else to provide flexibility.
  • Negotiations may focus on specific terms such as “material adverse effect” and “force majeure”, as parties will want clarity and certainty with respect to closing conditions and options for walking away from a deal.
  • Exclusivity periods may be longer. Given market uncertainty, buyers will likely want more time to perform their due diligence on a prospect.

The immediate impact on M&A activity will likely be that buyers will have greater leverage. This is dependent of course on the industry, but for now it is clear that, for a significant percentage of deals, buyers and sellers are feeling the effects of the pandemic.

For questions or more information, contact Jonathan Brodin or any of PRK Livengood’s business attorneys.

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