What impact is Covid-19 likely to have on M&A deals in India, for as long as most economies around the world remain under government-issued lockdown?
Deal making in India, even before the cloud of a pandemic-induced lockdown loomed large, has always been beset with unique challenges. As the air clears (pun-intended), so will the economic uncertainty, but until then there are decisions to be made and consequences to be dealt with.
It is evident that some sectors have or will be worse hit than others, such as the ill-fated aviation and hospitality industries, while others such as FMCG, pharma and other ‘essential’ sectors could have benefited.
Similarly, into the already well-mixed simmering cauldron of uncertainty, arrives the just announced fund origin restrictions. That being said, this crisis may still give rise to new deals in sectors/ businesses impacted severely. Based on margin factors, these businesses may be attractive to strategic acquirers, looking for long term synergies. Similarly, given that capital market exits will ebb in the near to mid-term, strategic acquirers can expect investors looking to exit to offer terms which would otherwise not have been on the menu.
As far as on-going deals are concerned, it is imperative to recognise that most investors, even those that have ‘better than most’ reputations, are facing increased strain to re-evaluate underlying valuations, even as the sellers, particularly family owned/managed are likely to yet assert that this slowdown is but a blip. For transactions currently in early stages, the impact of Covid-19 on their underlying valuation assumptions will need to be re-assessed and further in deals where valuation is based on projections, they may require re-examination.
With respect to due diligence exercises currently underway, data privacy will require special attention. With almost a third of the world working from home in some form, time and attention should be spent to educate all participants on the use and distribution of sensitive data, ethical walls and clean teams, particularly if the deal involves a listed entity. Written information should also be collected, stored and protected appropriately. It is also prudent to undertake additional stress-testing as part of the diligence exercise to ensure that statutory obligations and contractual terms have been honoured.
Integrity diligences, which in India till now, were yet a tick-the-box exercise, will increase, as white-collar delinquency is expected to be an under-reported consequence of any slow-down. Diligence teams should spend more time and effort in ensuring that such risks are identified, and suitably mitigated. Special attention is also warranted on ‘force majeure’ provisions in contracts, especially if such contracts impact key business indices.
For the most part in late-stage deals, we have seen the parties reach commercially reasonable conclusions including valuation adjustments benefitting all participants involved. Tranched investments, particularly in the start-up space, will now need to re-examine fund sources and potentially re-align to the government’s recent left jab at opportunistic neighbours.
Revisiting concluded deal negotiations should be from a position of awareness and strength, ergo, contracts should be fully reviewed to identify any triggers or pain points. This information can then be leveraged to have meaningful discussions with counterparties. In case of long-term shared management constructs, current circumstances will also visibly demonstrate the guts and gumption of the investor/strategic partners—will they leverage this crisis as an opportunity to earn goodwill and trust all-around by complying with the terms of the agreement, or as an opportunity to squeeze an extra pound of flesh?
Covid-19 and its impact are unique on all scales. Accordingly, it is natural for it to affect deal dynamics in unprecedented ways. All participants involved have, and will continue to, take necessary measures to re-calibrate strategies to ensure the commercial impact is minimum. What is undoubted is that this pandemic has clearly demonstrated how the global economy is intertwined, which could serve as a spring board for a consumer heavy market like India, once this pandemic is over.
Contributed by: Mithun V Thanks, Partner; Gaurav Dugar, Senior Associate.
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
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