Since the outbreak of COVID-19 in Israel, we have witnessed three typical reactions with respect to M&A transactions: those who are aborting their transactions, before and after signing (whether they have a legitimate right or not); those who are still moving full steam ahead, sometimes subject to repricing and changes to the risk allocation matrix; and those who are well-funded buyers and are on the look-out for unique opportunities.
We were expecting to see many who fall within the first group, and we do see them. However, although it is still early days, a surprisingly large number of buyers and sellers are finding themselves in the second group. This is more common, naturally, in sectors less adversely affected by the virus (e.g., cybersecurity), as well as in sectors that actually benefit from it (digital work/life solutions, medical device, life-science, etc.). As a side note, it is interesting to see how COVID-19 helps separate ‘real’ technology businesses from those which merely wrap a real-world economy in a technological guise, and are actually real estate or travel businesses, for example. The third group is active to an extent, as many investors and buyers are still sitting on the fence.
In technology-driven Israel, M&A deals are forging ahead and are expected to continue to take place. However, carrying out such a transaction will require deeply updated thinking. Below are seven important points to consider when negotiating an M&A transaction in the COVID-19 era.
- Is your financing secured? Before launching, get enough comfort that you have funding in place (or take an informed risk, if the deal is compelling enough). Move fast with diligence, negotiation, and closing arrangements, to make sure that funding remains available. Mirror any protections included by your financiers in their financing documentation (financial covenants, material adverse change clauses, force majeure events, termination rights, etc.) in your sale and purchase agreement.
- Are you process-ready? Make sure you have a clear plan, and the required means and team, to remotely diligence the target business, negotiate the transaction, sign it, and close it.
- Is the target pandemic-ready? Make sure that the target business (from the production floor to board level) can adapt to, and endure the financial consequences of alternative working methods (home office, virtual meetings, etc.) and prolonged shutdowns. Confirm that the target business’s material contracts are “COVID-19 proof” and not too susceptible to termination or price adjustment.
- How do you prepare for the unexpected? Can any circumstances still be deemed unexpected? Pre-closing covenants, conditions to closing, and the definitions of material adverse change and force majeure events, all must be re-thought. Global case law on these matters will be thoroughly re-written in the coming months and years. Draft your contracts with that in mind.
- Can you rely on insurance? First, make sure that the target business insurance policies cover any losses that have already occurred or are likely to occur as a result of the crisis. Second, if contemplating warranty and indemnity insurance, make sure that the exposure you wish to protect against is not excluded (either as known risks or specifically if COVID-19 related).
- How will timing be affected? What does it mean for the parties? Think about new realistic timelines for fulfilling third-party closing conditions (merger clearance, other regulatory approvals, major customer/supplier change of control consents, etc.) considering potential delays resulting from the crisis (e.g., government officials on leave). Should such prolonged periods affect buyer/seller risk allocation? It should be noted that other than in a select group of highly coveted, competitive transactions, the market is in any case likely to be a buyer’s market, which will determine the basic risk matrix.
- Should specific COVID-19 provisions be negotiated? Consider whether to include specific COVID-19 warranties, disclosures, and indemnities, as a way of eliciting more information about the potential impact of the virus on the target business.
Every crisis presents an opportunity. This is even truer in a cutting-edge and highly dynamic market like Israel. The coming months will be challenging for all but may lead to extremely interesting outcomes for M&A players in such market.
Most importantly, we hope that everyone keeps healthy and safe.
Nimrod Rosenblum, Founding Partner and Head of Corporate and M&A