COVID-19 is encouraging dealmakers to reassess virtually everything, including valuations and pricing mechanisms. Buyers and sellers should embrace new methods for mitigating deal disruption. It’s important to think about risk allocation, especially in the MAC clause, including how risk may shift over time as the outbreak evolves.
Considerations
Buyers and sellers are now forced to reflect on virtually every aspect of a transaction, including:
- valuation, and how the pandemic may have altered financial projections
- who gets to determine the company’s response to the pandemic
- whether to expand the process of due diligence
Deal Process
The pandemic may fundamentally alter a once-familiar deal process. Consider the following:
- Sellers may need to rethink auction timelines.
- There may be restrictions on physical negotiations. This can reduce trust and slow the deal.
- Buyers may demand a more detailed due diligence process, requiring more time and more expert oversight.
- Parties should weigh whether the outbreak may delay access to key data.
- Market uncertainty may make it more difficult to access financing.
- The timelines for key purchase agreement dates may change, especially when the purchase depends on the action of third parties.
- The mechanics of closing may need to change, particularly if travel disruptions close business or regulatory offices.
Material Adverse Changes
Material adverse change provisions are always heavily negotiated, since MAC affects risk allocation. In the wake of the pandemic, sellers may seek exclusions for pandemics, while buyers may want widespread illnesses included. It is unclear if current MAC exclusions will affect COVID-19.
One noteworthy consideration here is that MAC provisions often include language about “disproportionate effects.” In this framework, a MAC favors the seller only if the company is not disproportionately impacted relative to its peers. It can be difficult to even assess what constitutes a disproportionate impact, and litigation could occur.
Is the Time Right for a Deal?
Perhaps the most important thing of all to weigh is whether now is the time to consider a deal. Buyers must ensure that their purchases have the capacity to create real value immediately. They must also be prepared for substantial business interruptions. Teleworking and office closures may mean that cultural integration takes much longer. Buyers must weigh whether it is time to sell their company. Waiting for a market rebound may give you more time to prepare, and will certainly reduce the deal uncertainty that can erode value.
One thing remains clear: both parties will continue to require expert advisors as they navigate the deal process.
