August 26, 2020
Assessing The Pandemic’s Impact on M&A Going Forward
Deal activity took a nosedive when the pandemic hit, but as buyers & sellers begin to re-engage, they find themselves in a changed environment. This Simpson Thacher memo addresses what the pandemic may mean for M&A going forward. Among the topics addressed in the memo are changes to the due diligence process, purchase price adjustments, the terms of interim operating covenants & MAE clauses, and pandemic-related R&W insurance exclusions. Here’s an excerpt on the pandemic’s impact on purchase price adjustments:
Another aspect of M&A that the pandemic may affect is purchase price adjustments. These have typically been used to compensate the buyer if the seller’s working capital deviates from the expected level at closing. The expected level is often calculated by examining the target’s balances over the last several months.
However, the pandemic may cause a particular target to have reduced working capital or to have far more cash on hand than normal if lines of credit were drawn down or new borrowing had taken place. A seller may request an adjustment to the working capital target that takes the pandemic into consideration. Alternatively, a seller may seek a collar or floor to ensure that any adjustments do not reduce the purchase price below an acceptable number.
By contrast, buyers will wish to ensure that the target has adequate levels of working capital and liquidity. If working capital has been reduced, buyers should examine the underlying reasons (for example, reduced accounts payable) and the durability of these reasons. In some industries, customer demand may take a number of years to return to pre-pandemic levels.
In addition to these topics, the memo addresses the changes that may lie ahead for unsolicited acquisition proposals and activism, including the potential impact of proposed federal legislation aimed at predatory investments.
– John Jenkins