AVELLUM researched how the coronavirus outbreak affected the plans of businesses to purchase or sell assets or companies in the next 6 to 12 months.
The economic downturn made sellers consider whether to sell their businesses or to attract investors. At the same time, buyers view this crisis as an opportunity to increase their market share at a low cost. We witnessed a similar situation in Ukraine in 2014-2016.
According to AVELLUM’s survey results, almost 30% of companies plan to sell their business in the next 6 to 12 months. Only 1 out of 5 companies plan to do so because of the crisis. This indicates that the majority of large Ukrainian companies withstood the COVID-19 economic crisis rather successfully.
More than 60% of the companies for sale are prepared to offer a price discount. However, sellers soon may increase asset prices, because at the moment demand significantly exceeds supply.
There are 50% of potential purchasers and the majority of them expect a discount. This is natural since weak businesses will be primarily on sale. At the same time, over 40% of those willing to buy a business became interested in such a purchase due to the coronavirus crisis. This indicates that a large number of companies take an opportunistic approach and believe in the future recovery of the Ukrainian economy.
Over 60% of potential buyers have not changed their intentions to purchase assets in Ukraine. They continue to view the Ukrainian market as an attractive one and believe that it would be profitable to increase their market share. On the contrary, almost 40% of potential buyers gave up their plans to purchase due to the coronavirus crisis.
“Once the economy stabilises, such buyers will quickly return to the market pushing asset prices up,” comments Mykola Stetsenko, managing partner of AVELLUM. “As a result, in the next 6 to 12 months we expect active discounting of asset prices, but afterwards asset prices will increase again unless a new crisis comes.”
Despite the small number of assets for sale, purchasers plan to conduct full due diligence of the target and expect full warranties from the seller to cover the asset. We believe that such expectations will change soon following the increased competition for attractive assets sold at a discount.
60% of respondents believe that the seller does not need any advisors since the asset is sold at a discount. This contradicts expectations of purchasers as to warranties, which require active participation of lawyers.
“Consequently, the seller will either provide significantly fewer warranties in exchange for the price discount or engage legal advisors to deal with complex documentation.” – explains partner Yuriy Nechayev. – “I would also point out that almost 80% believe that an external advisor should be engaged on a distressed M&A deal anyway.”
Key findings from the report:
- Almost 30% of companies plan to sell their businesses in the next 6 to 12 months. Only 1 out of 5 companies plan to do so because of the crisis.
- More than 60% of the companies for sale are ready for a price discount.
- The number of potential buyers significantly exceeds supply. It may eventually cause an increase in the price of a target.
- Over 60% of potential buyers have not changed their intentions to purchase assets in Ukraine due to the coronavirus crisis.
- Over 60% of respondents believe that the seller in a distressed M&A deal should provide warranties to the buyer regarding the condition of the target.
- Over 74% are confident that the due diligence of the target is necessary for a distressed M&A deal.
- Almost 80% believe that an external advisor should be engaged in a distressed M&A deal.
AVELLUM conducted the survey in June 2020 among 56 owners, top managers, and heads of legal departments of Ukrainian and international companies. The conclusions are based on analysis of the answers of the respondents and AVELLUM’s extensive M&A expertise in various sectors of the Ukrainian economy during 11 years of AVELLUM’s presence in the market, in particular during the previous economic crises.
By Mykola Stetsenko, Managing Partner, Yuriy Nechayev, Partner, and Andriy Romanchuk, Counsel, Avellum