The novel coronavirus is creating havoc throughout the world. The world is in a state of lockdown and there is almost zero economic activity going on, except for the essential services. We are staring at the biggest recession since the great depression. The pandemic has severely affected the global economy, and there is complete uncertainty as to how the mankind will come out of it in general. But one thing is certain, there will be a new world order once the dust settles down. As it is, there will be a re-alignment across sectors, and as the financial markets bears the maximum brunt, the transaction market is going to see a major rethinking and fresh strategies being put in place. India, though, is likely to be affected to a much lesser extent. Still, M&A firms in India foresee hectic activities in the deal market in the aftermath of the current economic crisis triggered by COVID 19. 

Effect on Financial Markets

The novel corona virus came to light at the end of December in China and the seriousness of the development was only realized in the second half of January. The financial markets throughout the world, however, largely remained unaffected by it as the majority of the participants thought that the virus would remain confined to China only, and the rest of the world would not be affected so much. By the end of February and early march, the realization dawned upon the west and the Americas that the threat was much bigger than anticipated earlier. The financial markets, which had remained resilient till now, started discounting the fallout from the COVID 19 on the world economy. Threat of a deep recession looms large on the global economy.

Also Read:   Alexandria – A Perfect Destination for Experiencing the Old-World Charm

While the COVID 19 was fast spreading its wings around the globe, global equities indices reached record highs. However, from the highs of late February the benchmark indices have now shed 30 to 35% of their value. There is huge volatility in the markets because of increasing uncertainty. The turmoil in the financial markets is often the precursor to what is in store for the real economy. With recession looming large, corporate leaders are forced to take strategic decision, such as whether to go ahead with transactions that had been in the pipeline for some time. Under the current state of confusion and uncertainty in the economy, we look at mergers and acquisitions deals and what to expect from the transaction market.

Activity in M&A Deals

After years of robust growth, global mergers and acquisitions had already started showing signs of slowing down when the corona virus crisis struck. As fall out of the crisis, M&A deals have plummeted and now there is complete hold on all such deals. Whatever deals that have been closed in the past quarter were entered into before the global spread of the crisis.

Companies, that typically would have been buyers, are now focused on maintaining the health of their existing companies and staying away from pursuing their long term growth strategies. Even private equity players are focused on preserving their current investments, putting aside new deals. Many pending deals have been abandoned.

Delay in Deal Closure

M&A firms in India expect significant delay in deals across the board. Deals that have already been finalized and that survive the crisis will have their deadlines extended as acquires would struggle to mobilize funds. Deals that have been entered into recently will see delays in every stage of the transaction, such as preliminary discussion, letter of intent and term sheet, due diligence and final agreement, etc. There will be significant extension of timelines.

Also Read:   What is a Debt Management Plan and how it Works

Impact on Letters of Intent

The preliminary non-binding documents that shift the negotiating balance in favour of the buyer with the grant of exclusivity, and where the seller tries to clinch as many terms of the deal as possible, will now be pushed back. In light of the current crisis, both the seller and the buyer would want to wait for comprehensive due diligence on the degree to which the seller’s business has been adversely affected before entering into a conventional letter of intent or committing to any terms for the deal. The seller would want due diligence end quickly while the same resisting the exclusivity granted to the buyer.

Financing the Acquisition

Generally, majority of M&A deals are part financed through debt. The current volatility in the financial markets because of the uncertainty caused by the pandemic will make it difficult for the acquirers who are heavily dependent on external financing to mobilize funds for the deal. It will be a challenge for the acquirers to get sufficient debt financing at favourable terms.

Deal Terms

The impact of COVID-19 on M&A can also be seen on how deal terms are negotiated. Historically it has been seen that whenever there is uncertainty in the markets, as was the case during the Dot.com bubble and the Lehman Brothers collapse, leverage in M&A deal making shifts towards the buyer. Strategic buyers and private equity players are sitting on huge cash, and they can wait till the time is ripe for making investments at their own terms.

Also Read:   Things to do in Nepal

The COVID 19 has drastically affected the world economy, and its effect can be seen in the mergers and acquisitions market as well. According to M&A firms in India, there will be a significant difference in how mergers and acquisitions transactions are done.