Deal structuring amid a pandemic

  • Valuation: The COVID-19-induced global uncertainty is affecting potential valuations, and buyers are considering the possible impact on a target company’s cash flow when building DCF or projection models. Even if the buyer is not in a position to reduce the valuation due to the target’s unique positioning, it will take into account factors such as the target’s future performance when deciding the consideration to be paid.
  • Consideration structure: Agreeing on a consideration structure is an important part of the deal terms. With the potential COVID-19 impact on any business model being assessed globally, buyers are reluctant to pay the full consideration in cash. Strategic buyers are pushing for consideration in own stocks where possible.
  • Deferred payments: Tight liquidity positions in the current scenario are leading to deferred consideration payments. Deferral helps the buyer arrange the necessary financing at a reasonable cost, while ensuring its own capital structure has manageable levels of leverage.
  • Strict government regulation: Although the pandemic has created a number of obstacles, it has also presented ways for opportunistic buyers to find the most relevant and stronger businesses at lower valuations. Chinese corporates in particular have been very active in picking up good businesses across the globe. To restrict hostile takeovers, governments have introduced strict regulations, e.g., India has changed terms of FDI and made government approval necessary for any investment from neighboring countries, Australia has tightened its FDI rules to avoid a threat to its national security, and Italy and the UK have taken similar effort to defend strategic companies against foreign takeovers.

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Acuity Knowledge Partners

Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/