In spite of the ongoing Covid-19 situation, the level of M&A activity is returning to normal. A number of important deals were announced in September, and year-over-year technology deals are up 18%.
But let’s be realistic. Whatever statistics may tell us, the fact is that M&A deals are not the same as they once were, and may never be again—particularly when those deals involve global companies. Covid-19 has changed the legal landscape.
Less Obvious Changes in the Legal Landscape
From the perspective of the stakeholders in an M&A deal, the rules of the legal landscape have not changed significantly. But business leaders need to be aware of some less obvious changes.
For example, 63% of the total government workforce in the U.S. is working from home, and this likely will continue for many more months. This means that regulatory approvals at all levels are going to be delayed, ranging from pre-clearance reviews to antitrust clearance, to approvals from the Committee on Foreign Investment when non-U.S. buyers are involved. These delays in turn will impact the long stop date, which should probably be renegotiated.
From an operational perspective, some sellers in the middle of a deal will have to struggle with interim operating covenants. Although they may have the best of intentions, circumstances may require them to take on additional debt, reduce their workforce, defer capital expenditures, or even close some facilities.
Because of these and other Covid-19 factors, the material adverse change (MAC) clause in M&A contracts has gained importance. Issues range from a sudden lack of customers, as in the travel industry, to problems with supply chains in manufacturing.
Office space has also lost value as work-at-home evolves from being a necessity to a long-term trend. Conversely, the same trend has made telepresence capabilities more valuable than ever.
Every deal is different, of course, and there are complicated legal nuances associated with MAC clauses. Sellers will argue that such clauses need to be viewed in the long term, while buyers will point to uncertainties and risks that never existed before. The point here is simply that these clauses have gained importance in the negotiation process.
The current phenomenon with Covid-19 is also resulting in a surge in special purpose acquisition companies (SPAC)—which already hit a record IPO fundraising of $13.6 billion last year.
This alternative way to go public is attractive for several reasons. First, it saves considerable time when it comes to regulatory approval—and as mentioned, with the government workforce working remotely and expectations that regulatory approvals will be delayed for the foreseeable future, a shorter time frame is particularly advantageous for cost savings and planning purposes. (SPACs are typically allotted 18months to 24 months to acquire a company.)
SPACs also come with added security. Not only do shareholders have financial protection if the SPAC fails to acquire a target company within the allotted time frame, but because SPACs are formed and led by deal makers with specific credentials and industry expertise, shareholders can have greater confidence that their financial investment will be successful.
As an added bonus during the Covid-19 environment, SPACs also require less in-person interaction.
2021 Predictions for M&A Deals
Taking into account the legal landscape considerations mentioned above, it’s likely business leaders will continue to favor M&A deals over IPOs.
And while talks of vaccines are promising, it’s also safe to say that the M&A deal-making process in the short term will continue to rely heavily on technology platforms (e.g. Zoom and Microsoft Teams) in lieu of in-person meetings, personal visits to sites located in foreign countries, and informal get-togethers at the end of the business day.
This virtual alternative isn’t perfect, and I’d argue that a few strategically chosen face-to-face meetings are still going to be necessary. But if key players are careful, a good balance between in-person and video conference meetings can be struck to foster positive relationship building and successful deal making.
Taking the Long View
My personal experience has shown me that getting deals done with almost no face-to-face interaction is not an insurmountable challenge. For the short term, stakeholders need to be creative, take advantage of technology to bring people together, and take calculated, strategic risks.
They must also keep the long term in mind when viewing the legal landscape. M&A deals should be entered into with a focus on business value that is sustainable over time. Short-term contingencies should not be deal-breakers if the fundamentals are sound.
The bottom line is that leaders need to stay flexible as the situation evolves.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Steve Murphy is CEO of Epicor Software Corp. He is responsible for providing a long-term strategic vision for the company—with a focus on customer experience and delivering innovative products, services and support that drive business growth.