Getting ready for distressed transactions; the impact of Covid-19 on 2021 dealmaking

The M&A market is one of the less obvious victims of the coronavirus pandemic. Already weakening in 2019 because of overpricing, the arrival of coronavirus in Europe and America saw it grind to a halt in March this year. Since then, with businesses being kept afloat by government support and lenient banks, the M&A market has been fairly dead.

This is ironic because if ever there was a time to do deals, it is now. Valuations have been falling since May this year, and with millions of businesses barely idling, the need to raise cash is growing by the day. Normally, M&A would play a big role in this. But unlike earlier crises, which suspended “business as usual” but did not change it, the impact of the corona pandemic is both wider and deeper. As well as a financial and economic impact, the virus has a cultural and social impact that is going to transform the way we conduct M&A, at least in the short term and most likely permanently.

Factors to consider in the new M&A market 

  • Increase in number of distressed deals expected in the course of 2021 as recession bites and support ends
  • more companies in urgent need of cash to stay in business or pay off creditors, plus
  • extensive buyer/ investment opportunities across multiple industries at once
  • Companies need to start planning different scenarios to adapt to new reality
  • Sellers and buyers must be ready to move fast when time/opportunity comes
  • Seller options include selling part(s) of company and/or attracting new investors
  • For buyers and sellers, coronavirus complicates buying/ selling/ investing in a distressed asset

The M&A market is likely to pick up soon. It will have to because governments and banks cannot continue their current level of support indefinitely. And when this happens, there are many companies that are going to have to act fast. Given the breadth and depth of the economic slowdown, those companies need to start preparing now for what is inevitably coming next. Specifically, they need to work out scenarios for the new reality and their potential options – or the positions they could find themselves in – going forward. Specifically, whether to sell, to close or to attract. Sell all or part of the business, liquidate the business or attract new investors and investment.

Preparing for M&A is always a challenge. Preparing for distressed asset M&A is an even bigger challenge. Factor in coronavirus, however, and you need a whole new way of working. For both buyers and sellers, the coronavirus complicates the process of selling, buying or investing. Speed and insight are harder to achieve in a socially distanced business world. And then there is the issue of choice. So many opportunities. While most recessions affect only a few industries and sectors, the coronavirus has touched pretty much every industry and sector.

Key considerations for buyers and sellers going forward

  • Examine financing structure rigorously as little legal protection once deal has been closed
  • What information will insurers require to accept a potential liability?
  • Due diligence must be even more thorough than in the past
  • What will happen if seller or buyer goes bankrupt?
  • Be ready to complete the process much more quickly than used to

The uniqueness of the coronavirus pandemic and our response to it look certain to change the way we think of and conduct M&A, accelerating trends that were already emerging and making them commonplace in the market. What we think of as the normal process and progress of an M&A deal is unworkable in a pandemic. Coronavirus is set to upend deal terms, the way we do due diligence, the availability, cost and terms of deal financing, and the time required to get transactions approved.

 As a result, buyers and sellers are going to have to be even better at examining financing structuring as there will be little protection once the deal has closed. Insurers, who could well play a key role in closing deals, will want more information before committing. Due diligence will have to be even more thorough, including having a plan should the seller go bankrupt before the deal is done. And all this in a much shorter timeframe than we are used to.

How both parties can strengthen their positions

  • Buyers will be in a strong position to demand more information and squeeze prices.
  • Sellers need their ducks in a row to close deal/secure investment
  • Therefore, both parties will need to be ready to act quickly and flexibly
  • At the same time, it is crucial that due diligence does not suffer. In fact, it needs to be better!

A distressed deal, by its nature, is more complex than a 'normal' takeover. But a distressed deal in the middle of a pandemic sends complexity off the charts. Once M&A activity starts to pick up, history teaches us that buyers will be in a strong position to demand more information and squeeze prices. They will try to do this because it is what buyers always do, if market conditions allow. For the sellers in this world, the only possible response is to be as prepared as possible to move as fast as possible. Like an athlete waiting for the starting gun.

How Legadex can help both parties win

  • We have experts, systems, processes and technology to ensure you meet any non-negotiable cut-off dates set by investors and courts
  • We offer AI-enabled document analysis, fast data point reviews and reporting at different information levels and requirements – for sellers, buyer in DD and for risk analysis in relation to W&I insurance coverage
  • We are experienced in employing virtual data room (VDR) technology to accelerate the speed of execution. This is a big win when time is paramount
  • Partnership with AI companies for contract analysis and to search for and examine specific data points

The upshot of all these variables – more demand, broader opportunities, new ways of working and so on – is that M&A is going to undergo a high-tech revolution. As a company, Legadex has the people, systems, processes, technologies and partners to deliver this. We can help sellers ensure they are ready to act the moment opportunity – or need – arises, and ensure buyers get the deep-dive information they require swiftly, securely and remotely.

The key, the gateway, is the virtual data room. Even in normal times, VDRs provide a fast, efficient, secure and transparent way for M&A sellers and M&A buyers to exchange information. In addition, VDR solutions are driving exciting new applications. These include advances in workflow and reporting applications and technology that enables rapid and detailed searches and analyses of vendor documentation. The increasing sophistication of AI software is making it easier and easier to automatically collect and categorise documentation, analyse contract clauses and identify potential risks.

We first set out our vision around legaltech-enabled M&A in July last year. Back then, we were proposing it as a faster and more efficient solution that would improve control, improve efficiency and improve the quality of information and vendor due diligence. It would also reduce costs. All true. Fast forward to today, and the era of corona, and we can see that innovation in M&A is not only central to maintaining employee safety, by facilitating remote working, it’s going to be central to the very act of restarting M&A itself.

More information?
For more information on the Legadex M&A services and AI enabled Due Diligence, please feel free to contact Luc van Daele or Morad Kada:

Luc van Daele

Morad Kada