Companies are considering renegotiating previously announced mergers and acquisitions after the outbreak of the coronavirus, according to law firm Hogan Lovells.
Some dealmakers are seeking to change the terms of pending transactions, while others are postponing deals, Hogan Lovells said in a report Tuesday. In some cases, parties are weighing the possibility of triggering so-called “material adverse change” clauses that allow them to pull out of a deal agreement without the usual penalties, according to the law firm.
Healthy corporate balance sheets, private equity firms’ high amounts of capital and activist investors pushing for changes will all be triggers for deals this year, it said. Still, anxieties around the spread of the coronavirus and the possibility of an economic slowdown in certain countries “could dampen deal volume and deal values to a substantial degree,” Hogan Lovells said.
It’s already been a slow start to the year, with the volume of transactions globally this year falling 9% to $585 billion, according to data compiled by Bloomberg. The market rout’s effect on dealmaking is widening, hurting some large initial public offerings as well as financing for private-equity buyouts. Acquisitions involving buyers from China, where the outbreak originated, have plunged 46%.
Bankers are finding it increasingly difficult to get deals done due to travel restrictions that complicate essential tasks such as face-to-face negotiations, investor pitches and due diligence.
Consumer, Industrials
Deals in the consumer and diversified industrials sectors could be the most vulnerable to the consequences of the epidemic as companies rely heavily on supply chains in China and Southeast Asia, Hogan Lovells said. Other sectors could also be at risk if coronavirus becomes a pandemic.
To be sure, some large strategic deals are still happening. Tesco Plc agreed this week to sell its Asian businesses to Thai tycoon Dhanin Chearavanont for more than $10 billion, a record deal for Thailand. Thyssenkrupp AG is selling its elevator division to a group backed by Advent International and Cinven for 17.2 billion euros ($18.9 billion), the biggest private-equity deal in Europe in at least a decade.
Getting more transactions across the line will be challenging in the coming months. Overall deal flows will likely slow due to financing difficulties and the impact of travel on negotiations, according to a separate report from law firm White & Case dated Tuesday. Some buyers may also hold off on acquisitions hoping that they will be able to snap up those assets at a lower price in the future, it said.
Legal provisions in deal agreements may also be changed to add “pandemic” to the list of catastrophic events — such as war, terrorism and revolution — that companies can cite to cancel a transaction, it said.
“Global markets are now focused on the widespread impact of the coronavirus, which may lead to an economic downturn being sooner than expected and could materially delay some M&A activity,” Alex Zhang, a partner and head of China at White & Case, said in a statement.
Source: Bloomberg.com