March 26, 2020

Will unicorns have virus immunity? And other predictions from our M&A lawyers

M&A lawyers' predictions

The M&A team here are Royds Withy King are working with a number of clients involved in transactions and James Worrall, a partner in the South West team, shares some of his experiences and advice below.

What's been the impact on ongoing M&A transactions?

Prior to the Chancellor's Budget on 11 March, buyers and sellers were motivated to get deals over the line so that sellers could benefit from Entrepreneur's Relief in its then existing form, with the material reduction in scope of the Relief widely forecasted prior to the Budget.

Since then, the impact of the coronavirus on the UK has escalated day to day and coincided with the ramping up of government measures and restrictions on how citizens live their lives and how businesses operate. Alongside financial markets reacting by continuing their downward trajectory, the M&A markets reacted with overwhelming negativity to the situation.

What's happened to transactions already underway?

Much has depended on the status of the negotiations of particular transactions.

A significant proportion of early stage deals have been put on hold, with buyers and sellers planning to reassess once the situation, and wider economic conditions, return to normal.

Transactions where negotiations are at a more advanced stage have seen buyers carefully examining the prospects of the target post-completion and likely consequences for its ability to keep generating revenue at forecast levels. To apportion risk between buyers and sellers, we’re seeing earn-outs being introduced into transaction structures with deferred consideration becoming contingent on future performance. Additionally, with corporates seeking to retain cash, we’re seeing reductions in the proportion of the consideration payable on completion.

For transactions which have exchanged but not completed, parties are analysing termination rights to explore options to walk away, or the rights of the counterparty to walk away. Particularly relevant are the terms of material adverse change clauses, whereby the buyer can walk away if there has been a material adverse change to the target company.

What's the medium-term outlook?

We're expecting to see the market being supressed whilst the wider economy is "on ice". The scale of government intervention, as it seeks to protect the economy in the long term, should mean that once Britain is able to go back to work, things can pick up where they left off and an economic bounce will be triggered.

In the meantime we're anticipating that cash retention will be the priority for corporates with businesses looking to reduce expenditure. There’s likely to be a significant increase in the number of distressed M&A transactions, as struggling business are acquired. As the economic situation recovers, private equity firms with significant amounts of cash will be analysing the changing market and looking for value as they try to pick the bottom of the market to invest.

Any other predictions?

One of the major consequences of the global turbulence, and not as yet widely discussed, will be difficulties for the fintech industry. Fintech has seen a remarkable rise over the past decade, but the current climate puts this under threat. As the global markets tighten, access to funding is significantly reduced. Young fintech businesses, relying on multiple funding rounds to grow and establish market position, will face challenges to secure the investment needed. Founders may end up being driven to exit early, for a price or multiple unthinkable only a few months ago.

With supply and demand decreasing, the valuations of unicorn tech businesses will likely suffer as high growth levels were likely 'priced in' to these valuations. With significant proportions of their budgets funnelled to marketing functions to generate growth, a reduction in access to capital will likely have a materially adverse effect on a number of these businesses and reductions in value will ensue.

The situation remains a moving target, and the normal, when it returns, may well be 'the new normal'. We'll keep updating our predictions and highlight issues and opportunities as they inevitable emerge.

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