Mergers & Acquisitions (M&A) in the post Covid-19 Era

The epitome of capitalism is the giant Mergers & Acquisitions (M&A), which, in addition to being necessary, are vital because they lead to the organic growth of companies and the redefinition of their strategy. During the Covid-19 pandemic and the implementation of their response measures in developed economies, M&A followed the trend of the time by applying the practice of social distancing but in the corporate version.

by Thanos S. Chonthrogiannis

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The reasons for implementing M&A

 The reasons for the M&A agreements can be summarised as follows:

  • Extend a company’s business to new markets.
  • Sedation of production.
  • Increase economies of scale resulting in cost reduction by gaining a comparative advantage.
  • Exit from loss-making activities.
  • Focus on areas with a comparative advantage.
  • Absorption of competition, etc.

Μ&Α in times of uncertainty (Covid-19 pandemic)

In times of uncertainty such as the Covid-19 pandemic, M&A transactions are drastically reduced and as companies seek immediate liquidity and given a lack of opportunities for buying interest and financing, their strategy is being reviewed. Also, the price gap i.e. the difference between buyer price and seller price leads to the postponement of any possible agreement.

But after the passing of the crisis, bankers and lawyers specializing in Mergers & Acquisitions (M&A) seem to be moving substantially towards the re-heating of this “market”. Having gone through the survival phase during the crisis, companies with a strong financial position and strategic planning can take advantage of emerging opportunities.

Indicatively, parts or entire companies that in times of uncertainty and complete normality would not have advanced these agreements may qualify for redemption or merger.

The M&A so far

  • On July 20th, Chevron announced that will pay $13bn for Noble Energy, a smaller oil-and-gas rival.
  • On July 21st, Adevinta (Norwegian Company), announced that will extend its advertisement action by buying a part of e-Bay worth $9,2bn.
  • On July 14th, Analog Services agreed to pay $19,8bn for the purchase of a chip manufacturer Maxim Integrated.
  • On June, Just Eat and Grubhub announced a food-delivery tie-up.
  • Aon’s planned $30bn purchase of WiVis Towers Watson, a smaller insurance broker.

The M&A tools used and how to reduce the risks caused by uncertainty

In the period of crisis, uncertainty about the development of the company for sale and its value is growing. The appropriate M&A tool in these cases is the earn-out mechanism in which part of the segment is paid during the transaction-agreement (taking into account the degree of uncertainty on a scale that will determine the price of the payment respectively) with future payment of a price balance, based on agreed objectives.

The advantages of using earn-out mechanism are:

  • Absolute flexibility in the time horizon (from one to more years).
  • Absolute flexibility in the indicators for assessing future performance.
  • Its application in stages or cumulatively (at the end of a period).
  • Its proportional or non-proportional application (payment depending on the results, etc.). In M&A among listed companies the earn-out mechanism can take the form of negotiable options in a regulated market (CVR-Contingent Value Rights).

On July 18th, Essilor Luxottica (France-Italian eyewear firm) sued Grand Vision, a retailer it had agreed to take over a year ago, arguing it is not being given enough information on recent trading.  This case is an example of poor M&A due to incorrect information. If you use earn-out mechanism this problem would have zero risk of occurrence.

However, except from the earn-out mechanism there are and other M&A tools like the reverse earn-out, deferred payment & stayed buy-out.

In addition to the price, however, there are other parameters in the buy-to-let agreement that can reduce additional risks due to uncertainty. We will mention completely indicatively include terms such as:

  • The future actions of the two companies.
  • In the form of milestones against payment or penalty.
  • Financial or legal protection against future obligations arising from the actions of sellers, etc.

What is certain is that at this time after the Covid-19 season, specialist professionals in M&A agreements will postpone their summer holidays due to workload.


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