What you need to consider when undertaking a transaction during COVID-19

12 August 2020

Byron Watson , Associate Director, Corporate Finance |

While M&A activity across Australia experienced a decline in the first half of 2020 associated with the financial impacts caused by COVID-19, the appetite for mid-market deals in Western Australia (WA) appears strong.

The impact of the pandemic has been particularly pronounced on larger inbound transactions due to the increased difficulties of conducting the necessary due diligence and subsequent integration remotely.

Yet there are still plenty of opportunities. In the second half of the year, pending any further prolonged lockdowns, deal activity in Australia is expected to recover as previously postponed deals materialise and struggling businesses present buying opportunities.

Locally this recovery is likely to be driven by the return to the office of the majority of the workforce and by the mining and IT sectors which have demonstrated relatively more resilience to the impacts of the pandemic. Indeed, WA remains an attractive location for onshore and offshore investors.

We have witnessed several of our clients continue to maintain strong balance sheets and revenues meaning the crisis presents an unexpected opportunity to execute on strategically significant deals at reduced valuations.

For companies negatively impacted by the pandemic, we are seeing some acceleration of non-core disposals as these companies seek to maintain liquidity, as well as an increased willingness to explore defensive strategies.

Since initially turning their focus to existing investments in light of the pandemic, private equity players are now telling us they will continue to invest in new opportunities. This approach relies on getting to know management teams and has necessitated the use of technology to help build relationships remotely and successfully close deals while travel is not possible.
With this all in mind, there are a number of factors to consider when undertaking a transaction, including;

  • Will the impact on profits, whether positive or negative, be short-lived or long term? We are seeing numerous examples of companies being net beneficiaries of the pandemic and the associated government incentives.
  • There will be a focus on stress testing business models to ensure targets can weather the COVID-19 storm.
  • Parties will need to allow for additional time and plan for logistical challenges and disruptions in light of the current environment, including preparing for a more digital or online approach to the transaction. For example, we recently worked on a transaction with a US inbound investor which experienced a three month FIRB processing time.
  • There will be more focus on working capital, including how strong payables and receivables are and net debt and net cash arrangements.
  • Deferred consideration structures are likely to be used to bridge valuation expectations and insure against downside performance.

We believe that this is a perfect time to review strategic plans. Buyers with strong balance sheets or access to capital should identify which businesses they wish to acquire, and for sellers, it is the right time to prepare their businesses for sale.

Contact your local partner for a confidential discussion to ensure you have the necessary support to achieve the best value from a transaction.