Strategies for Corporate Recovery through M&A during COVID-19

[By Nandini Shenai]

The author is a student at the NMIMS School of Law, Mumbai.

Countries around the world are imposing strict restrictions and social distancing norms as the Covid-19 outbreak worsens and the number of positive reports and casualties continues to rise. The catastrophe has transformed into a financial downturn plummeting the financial sector into an unprecedented recession, as the wheels of economic development come to a stop. The economic standstill in India comes as a consequence of the same.

Changes in the market landscape, valuation problems, and a shortage of financial backing as a result of banks’ restricted lending and corresponding reallocation of excess funds are some of the primary factors of strategic planning. With regard to current negotiations, corporations must choose between bringing deals to a halt or accelerating the process.

M&A transactions already in the planning phase or on the verge of being implemented would most probably be postponed until the economic downturn passes. Potential buyers are more likely to drop out of market bid systems. Multinational companies and Private Equity funds are expected to save capital in this volatile environment and move their focus to ventures that are domestic to their respective countries, which could have an impact on cross-border trade.

Interpreting mergers and acquisitions in light of the existing conditions and circumstances would provide clarification when facing complexities.  Companies are resorting to a variety of unconventional corporate strategies, including emerging innovation technology acquisitions, risk mitigation, divestiture of secondary resources, collaborations with competitors, funding beyond venture capitals, diversified alliances with experts, and strategic associations with governments, in addition to rigid M&A.

These incredibly turbulent times have given rise to a rare set of possibilities.   While some of the M&A transactions were due to companies restarting deals that had been placed on hold given the financial slump caused by the various national lockdowns, a large majority of it also demonstrated companies’ endeavors to undergo transformations and succeed in the post-pandemic setting.

Transactions in the COVID Era:

Various schemes and tax relaxations that were put forth by the Central Government in the 2020 budget including the inflow of cash that comes from sovereign wealth funds and the implementation of eased policies by the SEBI and the MCA have proved to act as a boost needed for M&A transactions in the times of the pandemic. Highlighted below are certain factors that may change the way M&A deals have traditionally been followed in India:

  1. Scope for investment: M&A deals completed during this span of time will need to account for the constraints imposed by the current situation and the strategy to decision-making will have to be rectified to meet the current challenges. Nevertheless, the downturn can provide some prospects for investors, who can take advantage of lower stock prices in the immediate future to gain a greater profit on investments once normalcy returns.
  2. Due Diligence:  A focused emphasis would be provided on clauses of contracts like indemnity clause, termination clause, risk of insolvency, ability to repay debts, medical insurance and benefits for employees, and regulatory compliance. Due to the evolution of the virtual corporate world in times of the pandemic, a stricter data protection and data privacy regime would be followed by companies. Pertaining to cross-country data transfers, stronger enforcement of international data protection rules like the GDPR needs to be done.
  3. Digitization of Regulatory Practices: Although the SEBI and the RBI have allowed stakeholders to file petitions digitally, the CCI allowed them to submit a tandem of applications digitally in March 2020, as well as pre-filing consulting via virtual conferencing in connection to, among other things, combinations that are in the ambit of the green channel path.
  4. Regulatory Interference: Opening up the possibility of delays in receiving clearance from statutory bodies, shareholders may opt for systems that do not have many regulatory configurations. As a result, a share purchase could be preferable to a downturn transaction under a corporate transfer arrangement.
  5. Indemnity: Potential buyers will need to determine the risks posed by the financial meltdown caused by Covid-19 to pursue detailed indemnity. Not only will the owners use information and subjectivity qualifiers to properly establish these indemnities, but they will also consider revealing any clear details pertinent to the Covid-19 situation in the form of a documented declaration.

 Strategies for Corporate Recovery:

The role of M&A will be reshaped in a post-Covid-19 setting as companies struggle to hold their standing in the market, accelerate the recovery process, and brace themselves to survive through a mix of offensive and defensive M&A strategies. Owing to the current pandemic, companies are resorting to either of the two processes of corporate revival.

  1. Defensive M&A:

Defensive M&A strategies are the ones that are used to safeguard the functioning of the company. These strategies basically cater to hostile takeovers and are used to salvage the value of companies and safeguard markets to maintain competitive parity. To save capital from loss-making segments and maintain a stable primary sector, financially troubled businesses need to take drastic measures, such as the sale of assets that are distressed. The sale of distressed assets in crisis situations necessitates the quickest possible process to increase profits. Some defensive strategies that are could be followed by companies are mentioned below:

  1. Divestments: Due to the current economic strain, secondary assets that are and widely desirable after and do are not usually set for sale can be divested. In this type of situation, those who sell such assets must be fully cognizant that the number of prospective purchasers will be limited, and they must be mindful of how to handle asset fire-sales.
  2. Investor Activism: At the time of downturns, vigorously seeking value creation initiatives is critical to long-term success, as is knowing what investor activists or competitive bidders would seek. This may include rethinking shareholder returns, capital allocation, and trade finance, among other things.
  3. End-to-End M&A: Companies can aggressively reduce expenses and open up cash flow by taking pivotal steps to consolidate recent acquisitions. Private equity firms, institutional investors, distressed venture capitalists, and large corporations with solid investment portfolios are all in a hurry to act quickly and pursue potentially “predatory” M&A approaches.

      2. Offensive M&A:

Companies undertake offensive strategies to accelerate the transformation of the nature of their business. Companies vigorously undertake the process of exploring co-investment opportunities with partners.  Along with asset restructuring, companies are rapidly undertaking unconventional M&A initiatives such as joint ventures, partnerships, transformative M&A, and venture projects in sustainable infrastructure. A few examples of offensive M&A strategies are listed below:

  1. Cross-Sectoral M&A: Medical Care, financial services, technology, and communication, which are more robust, should be focused on due to the demand for the sector.  Innovative M&A prospects should be presented to such sectors to be able to collaborate for recovery of losses caused to companies by the pandemic.
  2. Joint Ventures: Advertising, finance, and commercial retail all have business models that support sectoral integration. Companies must seek new alliances as well as M&A as the “new normal” speeds up market transformation, guided by new consumer preferences and purchasing trends. Collaborations could involve flexible start-ups as players as well as conventional players.
  3. Portfolio Optimization: Production, automobile, oil, and services sectors with systemic disturbances will need to rebuild and “de-globalize” their valuations; holes in the supply chain or pathways to business must be filled. Most valuations that have declined during the pandemic have led to sellers expectations being reset, presenting a once-in-a-lifetime opportunity to buy and expand the market at affordable costs This was particularly prevalent among companies in the manufacturing and biomedical sectors.
  4. Community Leadership: The pandemic ushered in a sea shift in corporate expectations in terms of their effect on the sustainability agenda, from responsible procurement and development to climate mitigation and social leadership. Companies can achieve their efficiency goals more quickly by engaging in M&A transactions.

Conclusion:

Traditional elements such as outdoor inspections for organizational due diligence and physical negotiations will likely be phased out. Instead, virtual and computational resources will almost certainly remain an essential part of the overall M&A mechanism from procurement to implementation to post-deal value generation.

Unique consumer preferences and purchasing habits are likely to intensify cross-sector integration as the “new normal” emerges. This will allow unconventional entities to penetrate existing markets with innovative business concepts, potentially displacing those who have established players in the market. The effect of Covid-19 has accelerated the incorporation of technology in many industries’ practice systems.  Technology acquisitions will be pursued by companies, especially those in the sectors that are not digitally inclined, in order to develop flexible operating and consumer networks.

Owing to the significant number of transactions conducted this year, it is clear that businesses have begun to use virtual and interactive resources in M&A. During these unprecedented times, companies face challenges that are unheard of.  As a result, companies must focus on maintaining their core operations while staying vigilant to potential growth M&A prospects in the face of major uncertainty.

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