The SARS-CoV-2 virus pandemic which causes the COVID-19 illness is negatively impacting the global economy, including the Polish market. The question which needs to be answered now is not whether the pandemic will affect the mergers and acquisitions market in Poland, but to what extent and for how long will these negative consequences influence the health of businesses, and likewise their ability to continue ongoing transactions and investments as well as to carry out new ones.
At the current stage it is difficult to clearly foresee whether mergers and acquisitions will be suspended entirely for some time, however, it is already visible that parties to transactions approach them with more caution and must take new factors and risks into account when trying to adapt to new means of managing them. In the last two weeks a number of transactions got simply suspended or the pace at which they are progressing was significantly slowed-down.
Consequences of the pandemic are already visible at every stage of currently pending transactions. Starting with due diligence processes, given the current lock-down and the recommendation to stay at home, entities planning sale of their companies or enterprises encounter significant problems in collating documents for the purposes of disclosure within VDR. Within already pending DD processes, lawyers and other advisors will need to bear in mind the impact of the SARS-CoV-2 pandemic itself, as well as its effects on the ability of businesses to perform their obligations, and thus their financial situation, protection of their supply chain, availability of markets, etc.
Changes in the approach taken towards ongoing and future negotiations should be expected, especially in transactions where the signing and closing do not happen concurrently. Parties with concerns about the pandemic’s influence on their financial results and their expected return on investment may attempt to apply a variety of legal solutions. It can certainly be expected that MAC (Material Adverse Change) clauses, enabling the purchaser to withdraw the transaction in case material adverse change occurs, will come to be used much more often than was the case recently.
We also expect that the current pandemic will influence wording of other provisions in the SPAs such as the parties’ representations and warranties and the interim period covenants to the extent applicable to the company’s operations in the ordinary course of business (and how these are protected against the impact of limitations imposed in connection with the pandemic), or the conditions precedent to closing (e.g. implementation of certain solutions enabling to soften the impact of the pandemic on the business). It should be also expected that parties will move away from applying a Locked-Box price formula (which in recent years was gaining popularity in Poland) and that transactions will be settled based on Closing Accounts formula, most likely coupled with Earn-Out formulas set for a number of years such that the sellers could participate in the potential increase of target’s value in future years, once the effects of COVID-19 are overcome.
One may also not exclude that for those entities that have accumulated and will retain financial resources that they could use for investment purposes, opportunities will arise on the market to take over interesting assets at preferential prices (whether as part of ordinary M&A processes, where companies will be selling their non-core assets to maintain liquidity, or within insolvency or restructuring proceedings).
All in all, the M&A market is likely to look very different in the coming months comparing to what we were all used to in the recent years.