The outlook for mergers and acquisitions

30 April 2020
The coronavirus pandemic is affecting industries unevenly, but in the worst impacted sectors, it may lead to the survival of the financially healthiest

There will not be many businesses that remain unaffected by the Covid-19 crisis, but some sectors will feel its impact more than others. While international trade, stock markets and the travel industry are likely to be hit hard, the situation could also create some winners, such as the online retail and specialised medical supply sectors.

However, it is safe to say that the overall effects of the Covid-19 crisis are negative for businesses and this is expected to create a dampening of mergers and acquisitions (M&A) activity in the short term, but provide significant potential for opportunity in the medium term.

Understanding the impact

The wave-like movement of lockdowns across the world over the course of 2020 has significantly affected global manufacturing and supply chains, and caused major disturbances for businesses.

Markets that have ordered a nation-wide lockdown will continue to feel the economic effects for several months; countries where lockdowns have been lenient, such as Sweden, are likely to recover more quickly.

Companies will re-evaluate their ongoing deals and consider whether these should be called off or pushed to closure

Within the GCC, the UAE is the central hub for M&A transactions, and Covid-19 will have an impact on how such transactions will be conducted in the upcoming months.

Regardless of which path the pandemic takes, and whether we can expect to see a u-shaped or w-shaped recovery or a quick or long return to normality, it is safe to say that a great number of businesses will incur economic damage.

Short-term M&A slowdown

The economic downturn faced by companies due to the lockdowns, supply chain disruptions and labour shortages is likely to slow down M&A transactions as companies seek to preserve liquidity and keep their businesses safe during these unprecedented times.

Companies will re-evaluate their ongoing deals and consider whether these should be called off or pushed to closure. This could lead to delays in due diligence and closures.

Parties may resort to material adverse change and price adjustment clauses to renegotiate their deals, depending on the extent of the effects, and the projected impact of the Covid-19 crisis on the business for the months to come.

Cash-rich investors will find attractive investment opportunities over the next six months

Potential for investment

Immediate financial pressure may force numerous business owners to adopt restructuring measures, such as cost cuts, restructuring and laying off employees at short notice.

Those failing to restructure their business fast enough may face financial turmoil. This will allow cash-rich investors to find promising investment opportunities in the short term, over the next six months.

Financial pressure caused by Covid-19 will force individual businesses to concentrate on their core income-generating activities

While Covid-19 effects can be mitigated through governmental stimulus packages, it should be noted that much will depend on how fast such measures will reach those in need.

It is safe to say that a reduction in licence renewal fees in markets such as the UAE, for example, is a welcome measure, yet it will hardly prevent businesses from mitigating months of full revenue loss. 

Carve-outs in the medium term

Financial pressure caused by Covid-19 will force individual businesses to concentrate on their core income-generating activities and products to cut costs and mitigate risks.

The accelerated refocusing of businesses on their core competencies and away from managing wide-ranging portfolios in the Middle East will see an increased number of carve-outs in the medium term, between six and 18 months from now.

Both original equipment manufacturers (OEM) and their suppliers have had to deal with production cutbacks. Where full lockdowns have been in effect, such as in Dubai, regulatory uncertainty over what constitutes a vital industry that is exempt from government restrictions has caused additional constraints.

Strategic players will use Covid-19 as a catalyst to consolidate their industry positions and supply chains by binding strategic suppliers through cash instruments or M&A in the medium term.

It is expected that cash-rich investors will find attractive investment opportunities during the crisis, and that carve-outs and vertical and/or horizontal integration of suppliers by OEMs will take place once the crisis has peaked.

About the author

Constantin Frank-Fahle is a multi-jurisdictional dispute negotiator in the GCC. He is the managing partner of Germela Law (Abu Dhabi) and advises clients on legal and tax-related corporate structuring, including localisation strategies. Constantin is also a lecturer in international business law at the International School of Management in Cologne, Germany.

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