Mergers & Acquisitions Post COVID-19: A Much-Needed Calculated Risk
The unprecedented spread of the virus i.e. Covid-19 has been seen as one of the most imperative factors in down-turning the rate of economic growth in the year 2020. The substantial uncertainty of Covid-19 and the immediate measures like lockdowns, curfews, and cross-border trade restrictions which were instilled in order to curb the spread of the novel virus have resulted in severe economic and business losses. Moreover, the impact has not been collateral as each sector has seen a different rate of downfall and slump depending upon the nature of their business activities.
Even though the activities have been resumed and the economic life in a pandemic is perceived as new normal; companies and businesses are still resisting to open up to plan, operate, and prioritize the different market opportunities that can help them in balancing and mitigating the economic risks which are currently being forecasted and are causing hindrance for the businesses to work without fear. Mergers & Acquisitions (M&A) is one such process that can act as a driver in helping companies to reset, recast, and recover the damages rapidly.
In common parlance, M&A is a process or a plan of arrangement wherein in case of Mergers there is a combination of two firms which subsequently forms a new legal entity under one name whereas in Acquisitions one firm purchases/acquires the other firm and then the parent company governs the managerial and other concerns of the firm which is acquired. M&A has certainly been respected as one of the important corporate strategies in today’s globalized time as M&A has helped companies like Disney (who merged with Pixar) or JP Morgan (who merged with Chase Manhattan Bank) to survive the rough weather and to outstand their competitors. Therefore, timely actions are always beneficial within the walls of the corporate world, and therefore the process of M&A may act as a catalyst for business recoveries even now if probabilities and statistics are being diligently calculated.
Current market sentiment related to M&A
Presently, the M&A market has been sternly hit due to Covid-19. It is because the deals are either cancelled or has been indefinitely postponed. M&A as a process requires extreme cautiousness as such transaction would directly and substantially affect the future course of business and its survival. Therefore, the gravity of stress that was required to be put on M&A has now been deferred and diverted towards managing the business affairs which is being currently challenged due to extraordinary circumstances being created due to the pandemic. Moreover, different measures like travel restrictions, social distancing, etc. that are in force in order to prevent the spread of Coronavirus is causing difficulty to the decision-makers in taking a practical analysis of the key elements of the transactions and to enter into negotiations. Upjohn (a division of Pfizer) and Mylan whose megamerger was announced in 2019 has also stated in a press release conducted in March 2020 that their merger is been currently postponed due to unprecedented circumstances surrounding the COVID-19 pandemic, including associated delays in the regulatory review process.1 However, now the merger is again on track.
At the same time, certain industries that have been disproportionately affected by the pandemic are hesitating on further investing at this point of time and are focussing more on restructuring and ensuring business stability. As per the statistics, there was a 39% drop in M&A activities in the US in the first quarter as compared to 2019.2 Reduced availability of capital and delay of financing is also one of the important issues that have contributed to the halting of M&A activities.
Due diligence considerations have also become tighter and the companies are assessing the deal thoroughly that is resulting in a longer period of negotiations. Business runners are trying to be extra cautious with the financial issues and are open-endedly entering into intense discussions and are reviewing the effective position before and after the pandemic so that proper deal can be made out. Undoubtedly, even the lenders are now hesitant in providing loans to the companies that could have relieved them in locking their M&A deals because the banks or other lenders are in fear that there can be a rise in non-performing assets which ultimately would downgrade the economic turfness of the lenders. Therefore, the firms are speculating higher risks in going forward with the M&A deals at present due to unrest in the economic situation.
How M&A is beneficial during and post Covid-19?
It is clear that M&A has always played a significant role in the corporate world. Therefore, it is probable that M&A can also assess new opportunities for the companies to heal and grow even in the toughest times of the present pandemic. Currently, to motivate the market sentiments, the magnitude of shift required is colossal and it cannot happen or result from
itself organically. M&A can spark a wave of economic consolidation by outmanoeuvring uncertainty and certifying resilient future growth. The entire business weather has turned rough and hence, the whole corporate ecosystem needs recalibration. Such recalibration can be promoted by the process of M&A if it is followed by due diligence considerations.
Through M&A, companies can get rid of the problem of liquidity. In the current pandemic where companies are facing the problem of capital crunch, M&A can infuse capital through its arrangement obligations. Further, through M&A followed by infusion of capital, it can help in balancing of risk in those situations and sectors where already there is less capital available and high competition and there is the predictability of future markets. Fintech and Retail can be such sectors where all these conditions are met.
M&A can also be planned within those companies who are trying to expand their channels within their country or even abroad. Rather than setting up a whole new project from scratch, it is beneficial at present where limited resources are available to go for mergers with the companies having similar nature of work or rather engage in like-for-like acquisitions. This way, companies can expand their channels efficiently and optimally. At the same time, M&A can also be planned within those companies who are willing to divest their company’s portfolio into different sectors rather than sticking into one field. Pandemic has globally displayed that the sectoral classification is a necessity as absolute dependence in any one sector can cause irreparable damages in unprecedented times. Therefore, M&A as a process has a lot of potential in order to firstly, recover those companies which are in a bad state, secondly, to liquefy those companies which have resulted in high debts and defaults, and thirdly, provide opportunities for growth to those companies which are willing to take calculated risks and are financially and managerially capable.
M&A as an opportunity to grow
Certainly, if Covid-19 has flattened some of the opportunities, it has opened the doors for many as well. In India, there are ample opportunities opened for investors even at the stage of liquidation. By virtue of amended section 5(26) of the IBC, resolution plan means a plan proposed by resolution applicant for insolvency resolution of the corporate debtor as a going concern. A resolution plan may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger. Thus, any investor while submitting a resolution plan can opt for the route of merger, amalgamation and demerger as envisaged in section 230 of the Companies Act, 2013, towards restructuring of the Corporate Debtor. Where any resolution plan fails and a corporate debtor goes for liquidation, the liquidator appointed under IBC can also take steps in terms of S.230 for revival of the Corporate Debtor before undertaking the sale of its assets. Thus, the opportunity available at every stage of exit.
The Indian laws have also provided with the provision of Takeovers by majority shareholders of a company to buy out the shareholding of the remaining shareholders. The same has been envisaged in Clause 11 of Section 230 of the Companies Act, 2013 through the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020. Section 230 deals with scheme of compromise or arrangement between a company and its creditors or members and through the virtue of clause 11, the horizon has been broadened and now even any compromise or arrangement may include a takeover offer also. In effect, these provisions authorizes the majority shareholders, holding at least 3/4th of the total shares in a company to make a offer for takeover to acquire any part of the remaining shares, by way of an application before the NCLT. Therefore, the same can be done lawfully in only those cases where minority shareholders who are being squeezed out are offered a fair price. Therefore, M&A can act as an important for the investors depending on the laws and legislations of a respective nation.
Factually, new supply-chain opportunities are also in demand due to changes in necessities and demand-supply ratio. More countries are trying to displace and divest their production and manufacturing industries from any one particular to country multiple countries so that in the future there is no outright control of production in the vicinity of any one nation. Therefore, M&A’s can play a beneficial role in assisting and customizing the firms to diversify their productions. The process of M&A can assure liquidity and stronger management leading to effective administrative and financial decisions.
Similarly, the retail sector has seen a steep downfall in the Covid-19 time, however, M&A can boost this sector through acquiring those companies and firms which although performed well in their normal routine but have been affected due to pandemic. This process can help in bringing a V-shaped growth in this sector because most of the nations are now completely open and the consumer demand has returned to normal so, the products offered by the retail sector will again be in demand and M&A will make sure that the demand is met with adequate capital and other resources.
Other similar opportunities can be carved out as pandemic has shaken the roots of even the strongest trees. Thus, the support and cooperation of each other can be the best recourse for the businesses to survive from being slipped into the abyss of bankruptcy. It is manifestly evident that risk is always high in taking big management decisions like M&A; however, this new normal is all about taking risks with due diligence. Hence, the processes of M&A require proper diligence and calculations before coming into force but all in all, this calculated risk is much needed in today’s time for ensuring business survival.