Every spring DLA Piper publishes its annual M&A intelligence report. This past spring, we could only speculate on the effects of the pandemic as COVID-19 had just hit Europe. Informed by our experience of the past few months, we have recently published our updated M&A Global Report. Below we highlight a couple of trends that are impacting CEE.
COVID-19 has affected businesses in many different ways. The vast majority of deals have been adversely affected (usually by being delayed or postponed), causing a significant slowdown. However, in certain rare cases the pandemic has actually accelerated deals. The recently announced consolidation in the Hungarian banking sector is a prime example.
Most of us predicted in spring that the number of conditions to closing would increase. Parties involved in deals chose the opposite: they have tended to opt for deal certainty, and where possible, have chosen simultaneous signing and closing. Where there is split signing and closing, new types of conditions appeared, with the introduction of new/extended foreign investment screening regimes being the most obvious. These often catch intra-EU transactions as well – a somewhat unexpected development. Given that approval conditions are often vaguely worded in the makeshift laws, the new screening procedures often cause delays in transactions (and sometimes even incentivize parties to try to find a transaction structure where screening can be lawfully avoided).
Active Sectors: IT, Food and Beverages
The pandemic has required all businesses to adopt to new requirements, with home office/flexible working becoming the norm in several segments. Web-driven sales/distribution have also been on a constant rise. It’s no surprise that technology has been our most active sector. We have also seen increased activity in the food and beverages sector. Recently we have seen growing investor interest in the private healthcare segment – most likely as a reaction to the struggle of national healthcare systems with capacity constraints.
Deal Types: Increase in Asset Deals
The vast majority of transactions continue to be structured as share deals, where the buyer acquires all or the majority of the shares of the target. Nevertheless, we have come across a significant increase in minority share deals, too (with investors sometimes contemplating a gradual investment to manage the heightened uncertainty). We have also seen an increase in the proportion of asset sales over the 2019 numbers, although not as much as we anticipated in the spring (this may be explained by the fact that despite the challenging market conditions, target businesses are not (yet) in such a critical situation that would justify buyers taking the usually much more complex asset transaction route).
Although global statistics show that there is no material change in the use of Material Adverse Change (MAC) clauses, we have definitely seen that parties spend much more time negotiating over them, including their consequences. Given that several points of the “boilerplate” MAC clauses have become reality in the past few months (from export restrictions to curfew and protests), it’s no wonder that parties are reading these clauses much more closely.
Pricing: Completion Accounts
We predicted that the uncertainty associated with the pandemic would result in a significant shift from the locked box pricing mechanism to completion accounts. Our experience shows that there has been a perceivable increase in the use of completion accounts – it appears that the volatile market circumstances make the use of locked box arrangements too risky for buyers.
Security and Limitation of Sellers’ Liability
Escrow and purchase price retention is still in the minority. However, where an escrow mechanism is used, we see that the amounts are larger and the escrow periods are longer than before. This also seem to be true of the limitations on seller liability: we have seen longer periods, higher caps, and lower thresholds.
The above is, of course, only a middle of the road snapshot of our COVID-19 experience. It would be good, though, if it soon turned out that in fact this was an end of the road experience and things can get back to normal.
By Gabor Molnar, Partner, and Biborka Jojart, Senior Associate, DLA Piper Hungary