The rigmaroles of deal making during Covid-19

Trends show that a number of businesses are facing challenges related to cash flows and investors are looking for assets at attractive valuations.


The novel Coronavirus has resulted in people being locked down in their homes. Notwithstanding the widespread health concerns attached with Covid-19, it has been able to instil fear in the minds of people. The world is panicking at a rate faster than the spread of the virus. These unprecedented times have not only brought the world closer more rapidly than the modern means of communication and technology, but have also unified the world, in a way not seen or heard of before, in its fight against the virus. The virus has not discriminated, and its impact has been felt by one and all, businesses and individuals alike, across the globe – mentally, emotionally, physically, health-wise and financially. There is no right or wrong way of dealing with the present situation and each entity is doing its level best to manage the circumstances for its own preservation and those it is responsible for.

 Deal making in India has always had its sets of challenges, even before the ominous dark clouds of the Covid -19 pandemic spread across the world. On 24 March 2020, the Government of India declared a country-wide lockdown in the wake of the outbreak. A grinding halt in business operations, and hence, revenue generation, led to a dwindling of corporate cashflows. Few sectors such as the FMCG, pharmaceutical, etc. have been less hit than hospitality, automobile industries, etc. On 16 July 2020, the Business Insider reported that despite disruptions due to Covid-19, deal street was vibrant in the first half of 2020 with Mergers and Acquisitions value rising 14.5 % to USD 43.54 billion. However, the deal count dipped 24.7% to 183 transactions during the said period. While on the other hand, PricewaterhouseCoopers said that deals, including those by private equity funds and also strategic mergers and acquisitions, declined 14% to USD 38.4 billion in the first half of 2020 as compared to the same period last year, but were up 19% from the USD 32.1 billion in second half of 2019.

 The effects of the pandemic can be inferred from that fact that historic numbers no longer hold any water in these abnormal times. It may be in order here to say that equity valuations are trending at multi-year lows with Nifty 50 tanking 29.3% and Sensex cracking 28.57% in JanuaryMarch, recording the worst ever quarter since 1992.

Trends show that a number of businesses are facing challenges related to cash flows and investors are looking for assets at attractive valuations. Investors are looking for control transactions, thereby pointing out that governance concerns have led to an upward trend in buyouts over the last few years. Telecom and technology have been the sectors with the most activity when it comes to private equity money, followed by energy and real estate.

Factors influencing deal-making during the pandemic

Business fundamentals drive investment cases, but deal making depends on softer factors: People, connections, collaboration, sentiment and confidence. All of these factors have been altered by Covid-19 and the lockdown. Covid-19 has caused fundamental changes to working practices in banks and financial institutions, and one of the most significant is in technology and the shift to virtual working.

COVID-19 has obliged investment banks and financial institutions to adopt new working practices. Those that have already taken steps towards digitalization have a distinct advantage. Employing technology in this new environment is far more involved than simply slick information-sharing. Physical, human interaction and pushing the boundaries of deal making capabilities need to be replaced using digital capabilities. While Covid-19 has created a valuations mismatch between buyers and sellers, and a sense of new risk awareness, this will eventually give way to a new world of deal terms and financing.

Additionally, various other factors, owing to the pandemic, have affected the way in which business operate, particularly in India, such as — Keeping up with legislation; Crisis management and response; Operations and supply chain; Workforce consideration; Finance and liquidity; Finding balance and achieving a healthy mindset; Selecting the right focus. It seems like the Government releases new regulations that affect business owners almost every day. In order to understand and follow new legislation and changes, business owners will need to monitor news from the State and Central Governments on a daily basis. Information and impacts are changing hourly — requiring a well-organized crisis command centre that structures the response activity, flow of information, and communication to both internal and external stakeholders. Depending on how centralized their operations are and how geographically dispersed their supply chain, companies will experience the effects of border closures, travel bans, and other slowdowns in different ways. Remote working is quickly becoming the standard for many companies, with implications for technology, cybersecurity, and safety, among other issues. Companies may need to rethink their financial forecasting, modelling, and communications. We are all experiencing a lot of intense emotions, including but not limited to fear, anxiety and hopelessness, during these ever-evolving times, and entrepreneurs are no exception. To make it worse, there is an additional level of stress as they try to do best by their employees and customers. Business owners are dealing with a million concerns right now and it is difficult to know where to prioritize time and resources. One way to choose is to consider what is truly important to your business. There are challenges that the IT teams within the organization are grappling with – how to secure data and assets from cyber threats and make them securely remotely accessible by the users.

Deal-making trends during COVID-19

 COVID-19 has by all measures increased the degree of uncertainty in the deal-making process and naturally raised the question “How should the deal parties allocate business performance risk between signing and closing?”. In an uncertain and rapidly changing world, some of the key questions that a buyer will have is “How do I now value the target business? Is the historical financial information truly representative data for how a business is to perform on a going forward basis, taking into consideration a potentially disrupted supply chain, unusual inventory levels, and distorted accounts receivable and payable? What does this mean in terms of cash flow conversion? Do the business’ financial projections and their underlying assumptions still hold water”?

Sellers may predictably take the position that the impact of Covid-19 is only temporary and that the fundamentals of business will remain unchanged throughout and after the Covid-19 crisis. Buyers could, in turn, suggest a partial deferral of the purchase price along with earnouts. The key challenge with earnouts is ensuring that the parties build the trust and mechanisms required to avoid diverging incentives. The use of average results over a longer earn-out period to measure value, together with more flexible payment terms or payment deferral will tie the parties together for a longer period on the one hand, but may spark a more refined dialogue on governance and course of action on the other hand, often improving alignment of interests

In addition to the impact that Covid-19 may have on valuations and pricing mechanisms, travel restrictions, office closures and quarantine requirements raise questions regarding the time required to close an M&A transaction. Both the buyer and the seller should take into account that because of Covid-19, the provision of key information (such as audited or interim financial statements, financial models or projections, etc.), due diligence process, third party consents and governmental approvals may take longer to finalize. If the purchase agreement sets an “outside date” when the closing conditions must be met or the deal may be terminated, the parties should agree to a longer interim period than they otherwise would. Timelines and expectations should be adjusted accordingly.

Ordinarily, deals have been negotiated and finalised through in-persons discussions between the parties. An alternate to physical travel for negotiating a transaction has been virtual interactions. However, experts disagree about the extent to which video conferencing can replace face-to-face meetings in all situations, but there is consensus around the usefulness of virtual tools. Data reviews, conference calls, negotiations, information exchanges and many other things can be done virtually a transaction of size will need a meeting of the principals in person. Some people will want to look a CEO in the eye and discuss a transaction. Previous relationships between companies or individuals involved in a deal can also help overcome distances, by way of trust. The ability to communicate with potential buyers has its unique importance. It is incredibly powerful to have a sense of who the other players are. With more time and experience, perhaps video conferencing will begin to enable the kind of chemistry and trust that seems to come easier with face-to-face meetings. 

As a key element of dealmaking go and no-go decisions, manufacturing capabilities represent a distinctive challenge. Buyers need a level of comfort and need to know where the manufacturing sites are located, if they are up to standards, and whether they can be transitioned internally. A remedy and an alternate to physical travel, it is suggested that handheld cameras and manufacturing site walkthroughs could be put to use.

Innovation in contracting and deal structure are other tools dealmakers are using to de-risk transactions. There can be a specific carve-out language in the typical covenant between signing and closing, about conducting the business in the ordinary course, for things related to Covid-19. This will allow the target seller to take certain actions if it deems it is necessary to respond to the health and safety of its employees, because there may be deals that were signed before the pandemic, and certain buyers are trying to get out of these deals by saying the seller is not acting in the ordinary course. COVID-19 may also lead to more research and collaboration agreements that give buyers a look at the technology before deciding how far in they want to go. In an option structure, for example, a buyer typically pays an upfront payment as consideration for the option, with the ability to decide down the road if they want to go through and purchase the entire company.

From a practical standpoint, as far as on-going deals are concerned, it is imperative to recognise that most investors, even those that have ‘better than most’ reputations, are facing increased strain to re-evaluate underlying valuations, even as the sellers, particularly family owned/managed are likely to yet assert that this slowdown is but a blip. For transactions currently in early stages, the impact of COVID-19 on their underlying valuation assumptions will need to be re-assessed and further in deals where valuation is based on projections, they may require re-examination.

With respect to due diligence exercises currently underway, data privacy will require special attention. With almost a third of the world working from home in some form, time and attention should be spent to educate all participants on the use and distribution of sensitive data, ethical walls and clean teams, particularly if the deal involves a listed entity. Written information should also be collected, stored and protected appropriately. It is also prudent to undertake additional stress-testing as part of the diligence exercise to ensure that statutory obligations and contractual terms have been honoured.

Integrity diligences will increase, as white-collar delinquency is expected to be an under-reported consequence of any slow-down. Diligence teams should spend more time and effort in ensuring that such risks are identified, and suitably mitigated. Special attention is also warranted on ‘force majeure’ provisions in contracts, especially if such contracts impact key business indices.

For the most part in latestage deals, it has been noticed that parties reach commercially reasonable conclusions including valuation adjustments benefitting all participants involved. Tranched investments, particularly in the start-up space, will now need to reexamine fund sources and potentially re-align to the government’s recent left jab at opportunistic neighbours.

Revisiting concluded deal negotiations should be from a position of awareness and strength,  ergo, contracts should be fully reviewed to identify any triggers or pain points. This information can then be the foundation to have meaningful discussions with counterparties. In case of long-term shared management constructs, current circumstances will also visibly demonstrate the appetite and resourcefulness of the investor/strategic partners as to whether they would leverage this crisis as an opportunity to earn goodwill and trust all-around by complying with the terms of the agreement, or avail themselves of the crisis as an opportunity to squeeze an extra pound of flesh.

Examples of recent deals during the present crisis

Despite the challenges being faced, it is safe to state that India has performed fairly well during these unprecedented and challenging times. Reliance Industries Limited has topped the charts and contributed to nearly half the deal values. During April and June, Reliance sold approximately 25% of its telecom arm Jio Platforms to several investors, including Facebook, Silver Lake Partners, General Atlantic, KKR, etc. Vide these deals Reliance raised approximately INR 1.2 lac crores. Recently, US based technology giant Google invested INR 33,737 crores for a 7.7% stake in Jio Platforms.

Earlier this year in February 2020, Dr. Reddy’s Laboratories signed a transfer agreement with Wockhardt Limited’s branded generics business in India, Nepal, Sri Lanka, Bhutan, and Maldives. Initially, it was agreed that an upfront consideration of the acquisition would be INR 1,850 crores. However, in view of COVID-19 and several restrictions levied by the government, the revenue from sales saw a dip during March and April. As a result of which, Dr. Reddy’s Laboratories and Wockhardt Limited amended the business transfer agreement and settled on an amount of INR 1,483 crores to be paid on the date of closing.

Several deals and acquisitions were in the pipeline of Adani Enterprise Limited, however, due to Covid-19 and the rapidly changing global and domestic economic scenario, the deals are either being re-negotiated or delayed. On 3 January 2020, Adani Ports and Special Economic Zone (APSEZ) announced buying 75% stake in Krishnapatanam Port Company Limited promoted by CVR Group for INR 13,500 crores. Pursuant to Covid-19, APSEZ is making an attempt to renegotiate the deal by about 30%. APSEZ was declared the highest bidder for acquiring the Dighi Port in Maharashtra, after it underwent the corporate insolvency resolution process. Since cargo movement at the major Indian ports has dropped to 21%, and with the economy contracting, investments are being re-considered. Meanwhile, Adani Green Energy and Essel Infrastructure, signed an agreement in 2019 to buy out the latter’s solar power portfolio, few reports suggest that due to Covid-19, execution of the Agreement is yet to be completed.

Various reports suggest that although the in-bound deals dipped down by 28.8% to 89, the deal value increased to USD 26.9 billion, as compared to the year 2019, where the number of transactions were 125 valued at USD 21.38 billion. At the same time, the out-bound deals dropped to 37.6% to USD 881 million across 21 deals, from USD 1.42 billion from 34 transactions in 2019. Domestic Mergers and Acquisitions have raised USD 16.64 billion, which is at par with the previous year, but the number of deals shrank to 20.3% to 94.

Few international companies, such as Google Cloud, Nestle SA, BlackRock, Boohoo, have publicly announced that they are open to acquisitions despite these uncertain times. However, Boeing, has abandoned a USD 4 billion deal to acquire 80% of Embraer’s commercial jet business and 49% stake in a joint venture producing a military cargo jet. Therefore, companies across the globe have responded to the pandemic in a different manner.

Harvard Business Review published results of a survey conducted by M&A Leadership Council, wherein 50 C-level executives and senior corporate development leaders were questioned about their plans. 51% of people indicated that there is a temporary pause in current deal activities to delay the anticipated deals, which are still at an early phase or buying some time to assess the recovery timeline of the potential market—14% of the people respondent that stopped all the deals on an immediate basis. Approximately 12% said they were expediting latestage deals to a quick transaction closing, and another 12% of respondents mentioned that they intend to close the deals pursuant to successful re-negotiation of valuation or terms. Remaining 11% were unsure and responded, ‘not applicable.’ The same survey also suggested that 51% of the acquirers anticipate remaining on temporary pause, and 26% acknowledged that their anticipated future deal volume is expected to be reduced substantially.

Anticipations of a post-COVID-19 scenario for deal-making

Covid-19 has introduced new challenges into the dealmaking environment, but experts say the fundamentals for deal activity point toward a rebound. Businesses that adapt quickly to changes – in communication, due diligence and deal structure – will make successful connections in a time of social distancing.

Though the post-COVID-19 world cannot be authentically anticipated and looks hazy, experts predict that the pandemic will surely change the rule book for the deal making. Experts opine that the changes will depend on the answer to a question – “do we see an alternative to a globalised world based on the allocative efficiency of markets mirroring the marginal cost of assets?”.

Businesses, undoubtedly, will feel a wide array of modifications that will affect business strategies and policymaking that are rolled out in the post-Covid-19 world along the lines of the following parameters:


Covid-19 and its impact are unique and unprecedented on almost all scales – in size, magnitude, speed, scale, coverage and global impact.  Therefore, it is only natural that this will affect deal making dynamics in a way nothing has before this.  However, it is worthwhile to note that all actors involved are taking necessary measures to ensure that this is a temporary setback to the global economy.  For the time being, however, it does require a certain re-calibration to deal making strategy.  Having said that, there is a chance for deal activity to pick up towards the end of the year, it said, adding this would be possible if business operations regain some normalcy once the spread of the disease is adequately contained.

On the mergers and acquisition front, domestic deals continue to lead with a 53% contribution, indicating consolidation, followed by inbound deals at 39% and 2% from outbound transactions and the remaining classified as “others”. Private Equity exits stood at USD 1.90 billion in H1 2020, witnessing a 47 per cent decline as compared to the same period last year and a 69% decline as compared to the second half of 2019.

The Covid-19 pandemic has affected deal-making activity in India and outlook for the remainder of 2020 also appears uncertain. It is anticipated that investors and buyers in the near-term will be cautious and evaluate opportunities on a wider scale. It is difficult to ascertain the advantages for the investing community or for the selling community since the economic impact of the virus is yet to be gauged.

Investors may also have to wait for new policy formulations once Covid-19 is contained which will further impact pricing adversely in the short term. The long term impact on pricing and advantages will depend on the changes that current businesses will make in the post-pandemic period.

Ajay Bhargava (Senior Partner) and Shivank Diddi (Associate) are part of the Dispute Resolution practice of Khaitan & Co, New Delhi.