An impact on M&A working environment
M&A is a labour-intensive activity that requires much diligence, evaluation and collaborative effort across several organisations, multiple negotiation sessions, site visits to assess physical assets, evaluating markets and sifting through thousands of documents. Unlike in past events that have affected deals and activity (for example the 2008 sub-prime mortgage crisis), Covid-19 has disrupted the manner in which transactions are developed and negotiated. The need for social distancing and the limits placed on travel made the deal-making process and related M&A and due diligence advisory more challenging.
Fortunately, technology acted as a catalyst for change, creating efficiencies that had not existed before. Building trust and hammering out deal points remotely through video conferencing providers like Teams or Zoom had become a standard practice, which was hard to imagine before the Covid-19 outbreak. The effective use of new and creative collaborative tools and techniques have become more critical as buyers, sellers, providers of M&A financing – and all of their respective financial, tax and legal advisers – adjusted to the changed environment.
An impact on M&A deals
Covid-19 pandemic also influenced the deals themselves. Indeed, for some companies, M&A may be the more efficient way to adapt to the Covid-19 and post Covid-19 world. Sectors like healthcare and pharmaceuticals, life sciences and technology were particularly attractive for financial and strategic investors, and will most probably remain a primary focus for deal activity events after the end of the pandemic. Many firms active in the manufacturing industry were also forced to reconsider their supply chain from a resilience point of view, rather than just cost efficiency.
In that context, for international investors, Poland in particular and Central & Eastern Europe in general proved to be an interesting alternative to China and South-East Asia. Thus, based on Investing in CEE inbound M&A report 2020/2021 published by Mazars in collaboration with Mergermarket, Poland ranked first in Central Europe in both deal volume and aggregate value terms in 2020. Total disclosed deal value rose 41% year-on-year to €11.2 billion, an impressive performance given the impact of Covid-19, though volume fell to 124 deals, from 154 in 2019. Four Polish deals ranked in the top ten deals of the CEE region (excluding Russia). Poland’s biggest deal of the year saw French telecoms operator Iliad acquire Polish telecoms operator Play, the mobile market leader in subscription terms, for €3.7 billion. Iliad acquired Play from its reference shareholders, London-based, Icelandic-owned fund Novator, and Greece’s Olympia Development. As we can see, even in the face of headwinds caused by the Covid-19 pandemic, M&A deal-making in Poland remains robust in comparison with other emerging countries, thanks to the strong fundamentals of the Polish market.
An impact on M&A advisory exercises and related documentation
The Covid-19 pandemic reminded investors and advisors of the inherent difficulties in factoring the impact of a crisis into financial forecasting and asset valuation exercises. As shown in the Forecasting your financial performance in a time of crisis, Mazars’ experts report the value of an asset is indeed intimately linked to its ability to generate future probable gains: however, in times of crisis, the future appears much more uncertain and the field of possibilities is much wider. Similarly, in such times, common forecasting and valuation approaches present their own set of difficulties. On one side, market-based approaches are influenced by highly volatile market data and fragmented information on listed companies. On the other side, income-based approaches face two major problems: the ability to re-forecast in a context of uncertainty; the uncertainty over the level of risk associated with these forecasts, and to what extent any risk premium should be applied when using them as a basis for valuation. Not all valuation exercises can be postponed until a business gains visibility of when a crisis will end. On the contrary, the performance of some valuation exercises can have major knock-on effects: for example, impairment tests on goodwill, for which impairment losses are recognised by companies, are irreversible.
The legal content of transaction documents has also been influenced by the pandemic and related specific allocation of pandemic-related risks in purchase agreement. For example, one of the key impacts on M&A deal-making relates to material adverse change (MAC) clauses. This provision, in the context of a transaction, gives a purchaser the right to terminate if, between signing and completion, an event or development occurs that has, or is expected to have, a materially adverse effect on the target company.
To conclude, we can say that Covid-19 significantly impacted the M&A market in Poland and worldwide. While some of the consequences will be temporary, others are likely to be durable, with business behaviours, working practices and market trends remaining the ‘new normal’ even after the pandemic. Thus, the level of face-to-face meetings and physical business trips by car, by train or by plane will most probably be significantly lower than during the pre-Covid-19 area. Nevertheless, physical diligence for a few critical parts of the M&A process will be still necessary, especially in the context of site visits and final closing of the deals.
In terms of deal-making, the perspectives for upcoming months are relatively positive: the outlook is for a promising 2022 year, supported by further roll-out of vaccines, as well as continued government and European support for the Polish economy. The country is well-positioned to benefit from the post Covid-19 period, with industrial nearshoring, succession planning, PE funds activity, the shift towards renewables and further market consolidation in selected sectors being the main drivers of that trend.