Pre COVID-19, businesses were planning for the year ahead, whether those plans included growth, refinancing and restructuring, or preparing for eventual sale and retirement.
However, many businesses were forced to re-evaluate plans in an attempt to reserve cash flow, protect their employees, and survive the pandemic. Many businesses extended interest periods on borrowings, deferred payments, assessed additional funding needs and considered available government aid to provide further headroom.
But now that the Nation is slowly returning to some form of normality, or the ‘new-norm’ as many refer to it, what does the future hold for corporate deals and what changes has the pandemic forced on the business world?
In this article, I will be exploring the current market, and how the pandemic has affected future deals.
Has Corporate activity been affected by COVID-19?
Most businesses have been affected by the pandemic but how adversely affected will depend on a number of factors, including sector.
It is unsurprising to find that the consumer, leisure and retail sector has suffered the most, whilst the healthcare sector also saw a large decrease in deal activity. Research shows that deal activity in the leisure and retail sector fell by 38% against Q1 2019 levels, whilst the healthcare sector suffered a 32% decrease.
By April, UK mergers and acquisitions had plunged to the lowest level in almost 35 years after the pandemic damaged business confidence and froze economic activity.
However, COVID-19 provided opportunities to a number of businesses, and sectors least impacted included tech and cyber businesses, with those businesses viewed as pandemic-resilient.
Stable and growing businesses are expected to recover more quickly from the crisis, and valuations on those businesses remain at pre COVID-19 level.
What does the future hold for Corporate deals?
As lockdown restrictions ease, businesses can begin to recover and look beyond the pandemic.
However, it is difficult to forecast future corporate activity as the impact of COVID-19 remains to be seen and there are many factors that might affect predictions, for example, if there is a second spike of COVID-19.
Nevertheless, it is clear that those businesses who survive the pandemic will have more bargaining power in corporate negotiations.
Deal structures are already adapting to the current pandemic and we are already seeing changes in the way deals are conducted. For example:
new types of due diligence are emerging, with a heightened sensitivity and focus on commercial contracts and customer & supplier continuity;
there have also been lots of conversations around earn-outs which are contingent on new operations and management;
deals are becoming more dependent on completion accounts due to lack of figures for valuations, and assumptions and information fed into valuations are being challenged;
it is expected that Buyers will push for repetition on warranties and closing covenants.
It is, of course, a challenging environment to negotiate and complete deals, and the pandemic has affected deal flow.
Therefore, it is an opportunity for private equity investors and businesses to review their portfolio and assets and map out any opportunities to create value.
If you require assistance in reviewing your business and assets, and would like any advice or support, please contact a member of our corporate team.