03 Nov Tech M&A and COVID-19
The COVID pandemic has enormously affected M&A transactions. Following two months of paralysis, it began acting as a major driver of digitization in the European market. Many observers initially believed 2020 would be a major year for deals, and are now having to downgrade those expectations. Nevertheless, the tech giants are ignoring this trend and going on spending sprees.
The impact of the pandemic will likely differ substantially across different tech sectors. We may see a boost in activity and a rise in the number of M&A transactions in e-industries and software, as well as data-centric industries such as data and cybersecurity and virtual conferences. New approaches have the potential to make certain sectors big winners.
Sellers of well-run companies in these thriving sectors can expect bigger valuations. But the flip side is that crises inevitably bring about consolidation, and there will be more distressed tech M&A. While 64 percent of companies saw valuation declines during the pandemic, more than a quarter saw values increase.
As with most catastrophes, there will be consolidation, with many more transactions in distressed tech. Lower stock market prices will also lead to more hostile takeover attempts in public M&A companies. Investors in regions that emerge early from the crisis may seek bargain-basement M&A opportunities in struggling regions. To mitigate risk, M&A parties should be well prepared for transactions. That may mean delaying transactions in some cases, and it will always mean diligent contract review.
The pandemic will almost certainly affect contract structure. Buyers will seek protection from hidden risks, and merger control provisions should account for procedures that will be delayed by the pandemic. Parties must agree to realistic deal-making timelines. Material adverse change clauses will likely change significantly, since they allow a buyer to withdraw in the event of a substantial deterioration in value. Deals will become more buyer-friendly, as buyers seek to mitigate risk in exchange for moving forward with deals.
We also anticipate more negotiation around purchase price adjustments and earnouts to distribute economic risk. Earnout clauses can be difficult for sellers, though, since there may be disagreement about when the earnout provisions have been met. Moreover, the uncertainty of COVID makes it difficult to meet certain provisions because of the unpredictable economic environment. Parties who want to use earnouts should work with an experienced advisor to ensure proper structure.
Finally, we will likely see significant changes in how tech M&A deals are signed, closed, and planned. Timelines may shift, and social distancing may fundamentally alter the deal making landscape. Encryption will become critical to deal security, and deals may take much longer. We also anticipate greater regulatory restrictions on foreign direct investments. There will likely be pressure to tighten FDI in general in the European Union, especially in Europe, with the goal of making Europe more resilient. This could affect any transactions in the EU.