March 26, 2020

Covid-19 and M&A: Impact On Public Deals

We’re starting to see some information on how Covid-19 has affected the deal market, along with some speculation about what it may mean for M&A going forward.  Here’s an excerpt from this Greenberg Traurig memo on the current state of the market for public deals:

It’s not surprising that, to date, M&A activity for Q1 2020 is down substantially from the corresponding period of 2019. While activity was already somewhat slower due to uncertainty about future fiscal, tax, trade, regulatory, environmental and other policies at issue in the U.S. federal elections in November, the COVID-19 pandemic has had a pronounced negative impact on deal making and poses significant threats to near and medium-term corporate earnings performance and the global economy.

Industries such as travel, tourism, hospitality, sporting events, motion picture exhibition, live entertainment, consumer retail, home construction, auto manufacturing and financial services are being hit hard by the sharp reduction in demand as well as state and local government directives to cease operations at least for the near-term. Several industries will have to continue to contend with significant disruptions in their supply chains.

Not surprisingly, the memo goes on to say that until the crisis passes, U.S. & global M&A will likely remain soft.  The memo also provides some interesting commentary about deal structures – including this excerpt addressing whether the precipitous fall in market values will impact stock for stock “mergers of equals”:

Except in cases of unusual, historical issuer-specific stock price volatility (where collars, price protection mechanisms and possibly walkaway rights might be requested, but are seldom agreed to), concerns about diminution of the issuer’s stock price between signing and closing are mitigated because, assuming the rationale for a synergistic business combination is sound and accepted by investors and analysts, macroeconomic impacts should affect the stock price of each merger constituent approximately equally and their stock prices should trade in tandem between signing and closing.

As a result, the memo concludes that the decline in stock values due to Covid-19 shouldn’t influence the business decision of strategic dealmakers about whether to proceed with true business combinations or MOEs.  Of course, the memo says it’s likely to be a different story in situations involving a sale of control, where sellers are likely to have a strong preference for cash in a “volatile and bearish” stock market.

John Jenkins