Recent trends in deal-making: Taming the uncertainty
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With the first quarter of 2021 now in the books, it looks like the Greek market is in for a busy year of deal-making, regaining some of the impetus lost due to the unprecedented Covid-19 crisis. After the unavoidable stalemate that persisted over almost the entire previous year, deal-makers appear to have bounced back, adapting to the “new normal” and pivoting their mergers and acquisitions (M&A) activities toward opportunities that are most relevant to their strategic goals. With that in mind, this is a good opportunity to identify some of the recent trends expected to shape the foreseeable Greek, and for the most part global, M&A landscape amidst the slowly but surely lifting fog of ambiguity presented by the pandemic.
Just a few months ago risk allocation of Covid-19 consequences, including the now-infamous material adverse change (MAC) clauses, dominated nearly every single transaction, whether public or private. Now, however, both sellers and buyers have set their objectives in a more concise manner and are focusing on key aspects of the M&A lifecycle. Deal certainty will undeniably remain a focal point of negotiation, with both sides seeking to minimize the other’s walk-away rights. At the same time though, a perceptible, and presumably transitory, shift of negotiating power has also been observed, as credit-worthy and reputable buyers are increasingly sought-after.
In this context, greater importance is now placed on the remote due diligence performed on targets. Due to the lack of traditional tools, such as on-site visits and in-person meetings, buy-side advisers are adopting a risk-based approach focused strictly on material issues (“red flags”), for which contractual protection is usually sought. Examples include obtaining warranty and indemnity (W&I) insurance, so as to address the ensuing information asymmetry. These adjustments will also inevitably impact the valuation of companies and assets, highlighting the need for alternative deal structures to overcome any mismatches between the contracting parties’ expectations. In this respect, earn-out, deferred payment, and call/put-option mechanics that incentivize sellers to continue to perform are expected to become more commonplace, as a means of bridging this valuation gap.
Extended deal-completion timelines have been another persistent theme of late. Alongside the widespread adjustments to operating remotely, this is primarily attributed to delays experienced with public authorities struggling to cope with the backlog caused by limited working or even full closure. Timing will also be a factor in the increasing use of corporate restructurings and transformations deployed by companies in the wake of Covid-19 as a means of creating synergies and unlocking value. Going forward, executives and deal-makers will need to embrace a pragmatic approach to timing considerations, with respect to both pro-actively delineating action plans and risk-sharing in transactional documents.
There is no doubt that the road to recovery is still long and that the coronavirus will keep challenging corporate strategies, of which M&A is a vital facilitator. But if necessity is the mother of invention, the upside of this crisis could be significant for those companies that have done their homework and are committed to acting swiftly and decisively in their deal-making endeavors.
