“Father of value investing”, Benjamin Graham famously said,
“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
It therefore makes sense that PE and M&A tend to decrease rapidly in the short term during the Coronavirus crisis then increases slowly as investors start to see more clarity as the crisis along with restrictions abates.
The coronavirus pandemic and the accompanying restrictions is having a material impact on the economy and putting millions of people out of work, with trade and supply chains being hampered and domestic consumption demand in affected countries and around the world being depressed and India is no exception.
1. Impact on M&A activities–
M&A in India is not left untouched by the pandemic largely on basis of liquidity issues, valuation concerns, regulatory changes, and other practical aspects including to restrictions and lockdown. According to Centre for monitoring Indian Economy (CMIE), 135 new Investment proposals were announced in the first quarter of 2020 (aggregate value of INR 561 billion ($ 7.6 million)). This is the lowest volume for 16 years. As of August, 2020, India recorded 776 M&A deals worth $ 44.8 billion. This is an overall decreased of 14% from last years corresponding period. According to Refinitiv’s Investment Banking Scorecard, while strategic M&A – comprising of 626 deals worth $ 36.4 billion – remained largely constant when compared to the corresponding period of the last year, Private equity backed M&A – making up 141 deals of $ 8 billion in value – saw a 50% slump compared to last year.
In earlier crises & downturns, companies that pursued acquisitions and investments in a structured way tended to outperform their peers. A cautious study of the Asian financial crisis of 1997, the dot-com bubble of 2000 and the financial crisis of 2008–09 bears out this conclusion. In each of those crises, companies that acquired and divested in a strategic way (depending on their sectors) performed significantly better than others that were either too conservative or relied on one megadeal to recover. To regain momentum, a strategic approach to recovery will be a necessity and not an option for the adversely affected companies suffering from liquidity stress, falling valuations, etc.
The M&A activities will also be positively affected by the government’s Make in India initiative, designed to help the country’s manufacturers expand their global market share while encouraging foreign companies to consider India as an offshore destination. furthermore, Indian government’s new FDI policies, protects Indian companies from takeover by certain types of foreign investment.
1. Impact on PE activities –
Owning to nationwide lockdown, travel restrictions and the inability to have in-person meetings have led to sluggish progress in the ongoing deals. With the pandemic disrupting businesses, supply chains, valuation, as well as demand growth, the revenue was slowly started to drop but as the lockdown eases, certain industries such as Healthcare, Pharmaceuticals, Technology, E-commerce and Real Estate would continue to remain robust in this environment. These industries may offer opportunities for Investment firms for long-term growth. While PE witnessed a subdued in 2020, activity has picked up and PE funds are anticipating a bumper year in 2021 as Cheaper valuations and positive long-term growth projects are the positive side for PE investments.
Two main factors to be considered while cracking deals with the onset of economic uncertainty due to current pandemic –
1. how to scrupulously determine the price/ value of the new deals?
To mitigate the risk, Investors can explore investing in convertible instruments, with conversion linked to future performance of target company. Investors can invest in tranches, giving them an option of not to invest further in case of underperformance by the target company.
2. If the impact of the COVID-19 considered as ‘material adverse effect’?
Material Adverse effect should not be considered in general on the target company but case to case basis depending on the quantum of economic impact of COVID-19 on the business of the target company or/and the durational significance of the economic impact of COVID-19 on the target company or/and the foreseeability of the impact.
It is unequivocally agreed that Pandemic has created unprecedented challenges for private equity investors and M&A strategists in terms of deal uncertainty for transactions, which are at advanced stages of negotiation and also in terms of management of existing portfolio, which has been adversely impacted by restrictions/lockdown, it has, at the same time, given rise to new opportunities to invest in companies which are, or will be, in need of funds due to a steep fall in their funds and earnings as a result of the outbreak. With the right investment strategy, backed by a sound transaction structure, investors are now mitigating the risks involved and for it to succeed and there is no better time to do this than now. So was also advised by Winston Churchill, when he said “never waste a good crisis“.