The ongoing pandemic has stalled economies across the world for months now. We have seen how it has impacted both individuals and businesses, but only so far as rising unemployment rates and business bankruptcy cases are concerned.

Yet, how does the pandemic affect the operations of companies that are still active? Beyond remote work or heavily updated safety protocols, practically every facet of a business has been changed since the COVID-19 crisis, including mergers and acquisitions. 

Some companies have had to cancel their transaction plans, while other companies have had to completely modify their deal terms. Here is a look into how the pandemic has transformed middle market M&A:

Potential Takeover Bids

The U.S. stock market is bearing the brunt of economic losses and business disruption that has resulted from the coronavirus. With stocks reaching all-time lows, many public companies now come as easy targets for potential hostile takeovers. The sharp depression in stock price is also leaving these companies open to activist agendas, wherein shareholders try to sway control through pressuring the company’s board of directors. A takeover attempt, however, will require mobilization of a lot of key people.

A company that is targeted for acquisition will need immediate legal and strategic assistance from a host of professionals, including legal and financial advisors, investment banks, and PR firms, among others. In addition, the company must prepare a response plan that entails each board of directors’ member’s roles and responsibilities during the transaction as well as a communications plan that details prepared responses for different scenarios.

Unpredictable Future Events

It is not clear how long the pandemic will last or what the extent of its damage will be to economies, so future events remain highly uncertain. From a transaction point of view, this makes it incredibly difficult to predict future performance and value of both the acquiring company and the company being targeted for acquisition. Both companies must factor in the loss or gain in value and performance in both a non-pandemic and pandemic situation. This brings to light certain parts of the acquisition agreement, such as the Material Adverse Effect Causes and Valuation Issues.

As for the latter, an unbiased third-party valuation firm should be hired to perform fairness opinion and purchase price allocation. There are several strategies that companies involved in a transaction use to fill valuation gaps, including earnouts, buyer stock, and purchase price adjustments.

Earnouts are used to account for downside risk while enabling the acquired company to obtain complete value if they are able to hit all performance metric targets. Buyer stock, on the other hand, may be used in lieu of cash by the acquired company while day-to-day operations remain volatile. Lastly, purchase price adjustments are designed to compensate either party if predetermined financial measures behave abnormally as the transaction closes.

While broad economic outlook remains bleak, financial markets will have to stabilize at some point. Companies will gain a better understanding of the residual effects of the pandemic and the resulting opportunities that COVID-19 brings.

If you are considering or are in the midst of a transaction, contact us today. Our team will walk you through the process and ensure you have everything you need for a successful merger or acquisition.