M&A activity during COVID-19 and beyond

Despite the impact of COVID-19 on transactions to date, M&A deals are starting to come back to life.

Our head of corporate Sandy Mak discusses the state of the market, the impact of regulation and critical hallmarks of successful deals during the pandemic.

This publication is part of our insight series COVID-19: Navigating the implications for business in Australia and beyond. To get notified by email when new COVID-19 insights are released, please subscribe for updates here.

Transcript

What are you currently seeing in the M&A market?

We are certainly starting to see deals come back to life again in the M&A market after a long pause. They’re highly industry and deal specific and it does feel a little bit fragile especially with events such as the lockdown again in Victoria playing out but there are definite signs that the M&A market is not willing to wait for life to return to the pre-COVID metrics before we start to do deals again. And I think we will see more and more of this as the results season wraps up and many of the companies that were really badly hit at the outset of the pandemic are starting to show signs of recovery, especially in the last couple of months and this upward trajectory is giving sellers a bit more confidence and I think that they will seize on it and will start to reengage on sales processes that went on hold in about February or March. Another one of the really encouraging signs that we’re seeing is the number of private equity sales processes that are starting to start up again and private equity players are incredibly sophisticated so it’s always encouraging when we start to see them kick off their sale auction processes because that indicates that they seem to think that the tide is starting to turn.

How will regulation impact deals during this time?

I think that regulation is going to play a huge part in influencing M&A transactions during this period. The obvious one is FIRB, everyone is talking about that because of the changes that we’ve had to the rules recently which has meant that there is additional scrutiny on transactions and the workload on FIRB has increased and so that has inevitably led to delays in approvals because of the desire to protect the national interest. Given that so much investment in Australia comes from foreign capital this will have the effect of bringing the regulatory piece to the forefront in the consideration of deal execution and so I think when you’re structuring deals or you’re considering the manner or risk in relation to execution, you need to take into account the regulatory component, more now than ever. And the sales processes that I mentioned earlier will have to take all of this into account when they’re considering what their likely timetables are, what the horizon is going to be in terms of closing and the universe of potential buyers. On the other hand, there are other regulatory changes that have been very facilitative to businesses. So the ability to raise more public capital as the result of some of the waivers that ASX and ASIC have granted has meant that companies have been able to bolster their balance sheets in a manner that has enabled sustained operations and continued solvency and possibly even the ability to look for more acquisition opportunities.

Are there hallmarks of successful transactions during COVID-19?

I think there are three possibly four hallmarks of a successful transaction in this current environment. The first is the ability to agree on value, that is absolutely key. And this is where some innovative structuring can help, so deferred consideration models, shared risk allocation mechanisms, joint ventures, share for share mergers, these are all tools that can help. The second is funding. A lot of PE clients have a lot of equity capital to deploy but even then their model relies on leverage and for non PE clients, debt financing is a very common way of financing M&A transactions, so at this point in the cycle strong relationships with your banks is a really critical factor in being able to execute a transaction. And the third thing is the ability to navigate through regulatory hurdles and understanding how best to maximise your regulatory outcomes. As I said at the outset, foreign investment approvals are one of those and really understanding what it is that FIRB is looking for in the approval of a transaction to maximise the prospects of getting not only the approval but an expedient and speedy approval is really critical. And then finally, a huge part of it comes down to luck, and in the current environment being in the right industry with the right universe of buyers is going to make a big difference to whether a transaction is successful or not.