Wolf Theiss
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M&A in times of Covid-19: looking ahead

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The current crisis remains unprecedented and will continue to have a tremendous impact on M&A activity. However, with all caution currently warranted, we are confident that activity will pick up again. Those players who are able to position themselves well, take a strategic perspective and prepare for opportunities to come will benefit most and may well be able to enhance their market position long-term through clever dealmaking.

In our M&A Client Alert in March 2020, we looked at certain immediate consequences of the Covid-19 crisis, particularly on what to expect in specific phases of the M&A process. By now, some aspects of the market have become clearer while others remain highly uncertain. We provide our updated analysis below in this forward-looking outlook.

The immediate impacts have slowed activity

Extreme volatility and unpredictability in global markets are never helpful when it comes to M&A activity, and the current situation is no different.

While we have seen parties in late-stage deals trying to push them across the finish line, early-stage transactions have often been put on hold. We expect that a general reluctance and wariness to engage will continue as long as parties cannot properly interact with one another and while a longer-term impact on business plans and valuations remains unclear.

A chance for distressed deals and public M&A

It should not be underestimated, however, that the current crisis may offer an opportunity to invest in fundamentally sound businesses at lower prices. Investors with the ability to finance cash-drained companies and the right risk appetite may be able to take advantage of the current environment. In particular, PE funds are well-placed to push forward given their flexibility to adjust to market conditions and the speed at which they can conduct transactions.

Another area which may see an uptick of activity is public M&A. In Austria (as in many other countries), minimum price requirements in a public takeover are tied to the average stock exchange price during the last 6 months prior to the announcement of a bid. If stock prices remain subdued, some interesting takeover opportunities may emerge.

Partial offers (i.e. offers not aimed at control) are not subject to statutory minimum price rules. Potential bidders and target companies are thus well-advised to take preparatory measures, which include securing financing for bidders and implementing defense measures for targets.

Finally, we expect to see increased activity in distressed deals, restructurings and state interventions. The ongoing negotiations for a potential rescue of Austria's flag carrier "Austrian" is just one example from recent headlines.

The mid-term view is positive

In a more mid-term outlook, we remain confident that M&A activity will rebound. In addition to the considerations above, companies may engage in transactions either as a direct consequence of the Cobid-19 crisis, such as e.g. when forced to sell non-core but well-performing assets to shore up their liquidity or to re-engineer their supply chains.

We also expect shareholder activism to rise in this time of crisis, and companies are thus well-advised to (i) keep a close eye on and interact with their shareholder base, and (ii) prepare for potential activist requests, both regarding abstaining from or engaging in M&A activity.

Other deal-drivers could include consolidation moves to achieve or increase cost efficiencies. We may see joint ventures in pharma, both as a direct result of the Covid-19 pandemic but also in other areas. Joint ventures will also provide opportunities for companies in other sectors to upgrade their existing technological capacities. With state-sponsored investments on the horizon to shore up the economy, investments in certain infrastructure sectors are another area of potential focus.

Further, we anticipate that deals offering access to key technologies, important resources or new sales channels will be at the forefront of M&A activity. Finally, companies should keep in mind the growing interest among investors pre-Covid in evaluating the performance of companies based on ESG criteria. There is no reason to believe that sustainability factors will not play an – even more – important role post-Covid-19. We expect ESG will influence how companies select potential targets and business partners and play an increasing role during due diligence, in particular regarding key ESG risks such as e.g. corrupt business practices, privacy and data security, emissions, diversity and employment policies.

Foreign investment controls set to increase

The last weeks have also seen an increase in interest in potential transactions by investors from Asia, in particular China.

This has triggered proposals to tighten foreign investment control legislation in a number of EU member states, including Germany and Austria, and prompted the EU Commission on 25 March 2020 to encourage member states to use existing foreign investment screening processes "to take fully into account the risks to critical health infrastructures [and] supply of critical inputs".

Foreign investors should thus beware that investment control review processes will be more detailed and thus more cumbersome, requiring more preparation (time) and closer interaction with regulators. We anticipate that buyers will need to spend considerably more time and effort on the preparation of an application and will also be well-advised to factor in the time required to obtain clearance in their transaction planning.


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