The Impact of COVID-19 on M&A Transactions

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The COVID-19 pandemic has resulted in unprecedented changes worldwide within a few months across economies, supply chains, companies, healthcare and more. The spread of the virus has sent markets into turmoil and investment decisions have become challenging and consequential. Whilst attempts are being made to flatten the curve, countries and financial markets are paying a steep price with the significant decline in economic activity, with financial markets adjusting to this new and uncertain reality. The significant volatility in stocks, has also rapidly closed the IPO window for capital market access, as current levels of valuation render listings unfeasible.


The deterioration in capital markets naturally affects the M&A market given the strong correlation in activity, and with no definite horizon on when conditions are expected to improve, several private equity firms and other deployers of capital are holding their cash dear and decelerating transactions. Restrictions in countries under lockdowns, hinders travel and in-person meetings, which impacts the deal making process, financing road shows, etc. As the priorities of companies shifts towards managing supply chain, inventory, creditors, and other operational issues, this distracts focus away from transactional opportunities.


Numerous deals have been pulled back or delayed, for instance, targets such as d&b audiotechnik (Germany), lastminute.com (a subsidiary of lm Holding NV, UK), Oxford International Education Group (UK), Kurt Geiger (UK), Motor Fuel Group (UK), to name a few have been adversely impacted. There is a general expectation that the volume of deal flows will decline in the coming quarters. With deals under negotiation, there is already a downward shift in valuations, with deal terms swinging in favor of the investors. It is likely that private equity firms could trigger a material adverse change clause to abandon a deal process, or revert to earn-outs/ deferred consideration or staggered consideration payments to compensate for the uncertainty. Exit opportunities for a number of private equity and venture capital firms have become hazier given the circumstances, with no definite horizon on when markets will bounce back.


On the other hand, there were segments that despite the pandemic, have seen a lot of traction over the last few months. In Q1-2020, based on data from PitchBook as at 31 March 2020, 106 companies closed deals of $100 million or more, with nearly 25% of the funding rounds/ deals announced in March 2020, where many parts of the world were going into partial or complete lock-down mode. Some illustrative deals (Source: PitchBook) are as follows.

Target company Industry segment Country Deal size Timeframe
Gojek Ridesharing/ food delivery platform Indonesia $ 3 billion March 2020
Kuaishou Social media China $3 billion February 2020
Waymo Autonomous cars USA $2.25 billion March 2020
Yuanfudao Online education China $1 billion March 2020
Quibi Media USA $750 million March 2020
Chime Fintech USA $700 million March 2020
Lyell Biotech USA $493 million March 2020
Byju’s Online education India $400 million January 2020
Privitar Cybersecurity UK $80 million March 2020

In fact, China has seen a comeback in deal-making post-Covid19, with 66 VC deals for the week ended 28 March 2020 (Source: PitchBook), which is a positive sign, but needs to be dealt with tempered optimism. With the numerous uncertainties ahead, investors are sitting on the fence, either waiting for the right opportunities or waiting for this pandemic to pass, depending on their respective risk appetites. The current decline will result in overall deal quality in the future, as new deals receive more scrutiny and investors reserve capital for the most promising companies. Valuations are likely to get challenged more, as investors become more skeptical and stringent in sourcing and diligence.

Whilst Covid-19 has caused a dent and jolted the M&A market, there are opportunities that one can already foresee that will shape the way we do business in the future, and which in turn is expected to generate interest amongst the investor community. For instance, technology driven segments such as ecommerce, education related-tech, cybersecurity, etc. are likely to see investment activity in the coming quarters.

Market slowdowns can be detrimental to businesses in the short-term, as was experienced with the recession in 2008-2009, however, they bring with them new market opportunities, and lower competition, as many businesses may not be able to ride out the storm. Andy Grove the former CEO of Intel once said, “Bad companies are destroyed by crisis, good companies survive them, and great companies are improved by them”. A study by Kauffman Foundation found that around 57% of companies on the Fortune list were launched during a recession or bear market. This reinforces the fact that in the middle of chaos, some of the best companies of the future are being created. From a hungry investor’s perspective, this thought presents ample opportunities. PKF has a team of highly experienced professionals who have several years of expertise in valuing companies, and providing end to end transaction advice, and would be happy to discuss any of your requirements. Please feel free to get in touch with us on difc@pkfuae.com.