M&A Goes MIA During COVID-19

Friday, May 22, 2020

After a record-setting decade, the number of private equity firms buying companies has slowed. 

According to data from Dealogic, M&A volume in the U.S. plummeted a jaw-dropping 50.2 percent compared to the same period last year. Worldwide, there was a 35.5 percent decrease in M&A volume and 16.3 percent drop in revenue.  

The reason isn’t a mystery. With the COVID-19 pandemic shutting down much of the world and its economy, it’s no longer business as usual—and it may never be again—for attorneys used to regularly striking eight- and nine-figure deals for private equity firms and Fortune 500 companies. 

“I believe this will change the way we do business, as a lawyer and for the businesspeople, too,” says Dan Clivner, the global co-head of Sidley Austin’s mergers and acquisitions and private equity practice. 

Money well spent by not spending

With such instability in the market, Clivner says it’s difficult to know what the unaffected sale price should be. At issue: the seller wants to be paid a pre-coronavirus price while the buyer has obvious financial questions and concerns. 

For proof, he says, just consider the moves—or lack thereof—by Warren Buffett, the mega-billionaire who held his annual Berkshire Hathaway shareholders meeting remotely last week. Buffett told investors that the company has $130 billion in cash but is sitting on the sidelines. 

But the sidelines aren’t a comfortable place for M&A lawyers, especially right now, and it’s especially important for attorneys to stay in close contact with clients and for firms to be prepared for major disruptions, says another attorney, Tobias Knapp.  

Knapp is the head of the U.S. M&A and private equity practice for O’Melveny & Myers, an international firm with more than 700 attorneys in 11 offices around the world. 

“The COVID-19 crisis is the most significant of our age, and it will affect how risk is allocated across deal certainty provisions like interim operating covenants, representation and warranty bring-down conditions and indemnification.” 

Despite the perception that COVID-19 is the first crisis of its sort, he’s devoted considerable attention to contingency planning that would allow the firm to continue working with clients in case of a pandemic. Past outbreaks like SARS had disrupted business deals, and attorneys learned from that, he says. 

That planning, he says, was extremely helpful as the firm transitioned to a remote work environment.  

Planning for something unexpected 

M&A lawyers are accustomed to helping clients navigate major changes, but the current crisis means attorneys like Clivner and Knapp are doing so in more immediate ways, like helping obtain needed liquidity, reassessing strategies and spending effectively.  

Most deals, Knapp says, have addressed the pandemic threat in material adverse effect clauses and other provisions where appropriate. Sellers, especially, have added exclusions for COVID-19 in MAC clauses, but since the cause applies differently to each company, a global pandemic may not quality.  

“The COVID-19 crisis is the most significant of our age, and it will affect how risk is allocated across deal certainty provisions like interim operating covenants, representation and warranty bring-down conditions and indemnification,” Knapp says. 

Right now, the world isn’t seeing large-scale transactions like the recently approved merger between Sprint and T-Mobile, because of market conditions, along with antitrust, regulatory and other challenges, according to Christopher Sheaffer, a partner in Reed Smith’s private equity group. 

“That being said, we expect to see some consolidation coming out of this crisis, especially for companies that have been hit particularly hard by the COVID-19 economic shutdown,” Sheaffer says. 

Clivner agrees that if you’re trying to deal in hospitality, retail, travel or oil and gas, the only deals are in a very depressed environment. That’s good for a firm looking to scoop up companies on the cheap, but it’s definitely not a seller’s market. 

Buying a company at discount 

Because of that, distressed assets or restructuring deals are much more active than at any time in the last few years, Clivner says. The industry was preparing for a recession, but this happened quicker and deeper than anyone thought, and some companies won’t come out of it without help—think bankruptcy protection.  

“If somebody needs capital within those industries, those deals are going forward, but they’re distressed deals,” Clivner says. 

Going forward, all three attorneys agree that how deals are consummated and constructed will be fundamentally changed. Some of the “road shows” between investors and executive management will be replaced by video conferencing, which is more efficient and costs less than flying a team of people around the country.  

Still, “It’s very hard to start the process of buying a company without the face-to-face with the management,” Clivner admits. “Old timers might say that two analysts can talk about a model by video, but my clients still want to meet the CEO.” 

Sheaffer says while much of his work at Reed Smith can be done virtually, current restrictions will particularly impact private equity and other deal professionals who rely on in-person meetings to vet management and conduct on-site facility visits. 

“Most attorneys agree that these [virtual meetings] do not provide the same level of comfort, but they understand they’ll need to adapt to the new normal if they want to engage in transactions,” he says.

For the latest stories on how the legal community is responding to COVID-19, please follow Vanguard’s dedicated LinkedIn page. The stories are hosted on Vanguard’s blog