M&A in the age of coronavirus – market at a turning point

Krzysztof Pytel | Piotr Miszczyk | Alicja Kukla-Kowalska | Dorota Wójtowicz

Mergers and acquisitions, Reports

The situation on the Polish mergers and acquisitions market today resembles a controlled lottery. Some investors and entities are withdrawing or suspending operations waiting for stabilization, while declining company valuations and the need for restructuring have encouraged shopping seekers.

In the quarterly report on the M&A market in Poland, which we published on April 7, everything seems to be in place. Although the financial sector has overtaken the long-term leader, TMT sector, on buy side, this is the only conspicuous change. There are no signs of pandemic whatsoever. The end of the analyzed period, however, already indicates some stir among investors.

Transaction traffic observed from the perspective of our VDR system indicates that new transactions are moved forward 1-2 months. A consistent forecast, which results from market moods and stock market results, is the expected struggle for survival for many companies in sensitive sectors and the shift of classic M&A towards restructuring and distressed M&A. We expect more deals of this type in the perspective of 1 month to half a year.

This is already wide range, but we will probably observe the market effects of the pandemic next year, too. Minister of Health Łukasz Szumowski announced on April 13th a “slow defrosting of the economy”, which is meant to help Polish companies overcome the crisis caused by the lockdown. This, according to some estimates, may extend over time to 2021. Investment caution in this situation is not surprising.

Regrouping on the merger and acquisition market

In the short term, many companies will face the dilemma of closing ongoing transactions. This is prompted by the assessment of forecast synergies of costs and revenues as well as immediate liquidity needs. It will be necessary to reset transaction priorities to reflect a new view of the competitive market – including re-checking the paths and options for completing the transaction.

In this situation, companies should continue to focus on a solid approach to scenarios and forecasts, taking into account each estimated probability, to ensure that they manage value creation. People involved in transactions should also adapt to a significant change in access to resources, as travel restrictions and closed facilities make it difficult to assess and evaluate the final valuation of the objectives. In the long run, buyers may need to rethink financing costs in a difficult market and consider alternative sources of financing to conclude a contract.

Withdrawal of investors from ongoing projects is noticeable, although this applies almost exclusively to industries that have suffered the most in closing of the market, such as gastronomy, tourism and the beauty sector. Affected industries also indirectly affect providers of broadly understood e-commerce services. An example would be the Booksy app. In September last year, the company raised PLN 115 million in funding as a thriving startup that allows making convenient appointments at beauty and hair salons. Because of the lockdown, the company recently decided to dismiss most of the team. There are more similar examples. COVID-19 pandemic will reduce the number of startups, and those that survive the storm will be partly taken over by larger players in the near future.

Attempts to resuscitate in uncertain times

Until Easter, no one really knew what to expect. At this point, we can already see the effects of businesses getting used to the situation as market movement is starting to grow. Although the economic situation is still alarming, April is a month of momentum. Investment advisers from the “big four” indicate that we can expect a boom in the Life Science industry in the near future. According to Deloitte, “gene therapies, identification and development of new drugs, wearable devices and telemedicine will be the main trends on the market.” Record low interest rates are added to this. This will encourage investments, rather than, for example, deposits. This trend is also strengthening outside Poland. According to information from our clients, the life science sector is also rising in the Czech Republic and Romania.

In a situation where investment attractiveness of the real estate market is facing gigantic loses, the first distressed M&A forerunners are emerging. Money.pl reports that the repayable rental offer of the INWI fund has been activated, which buys out real estate mainly from large and stable enterprises affected by the pandemic. “We are currently talking with more than 10 large companies that were previously not interested but are now considering this option. Leading companies want to focus on their core business and are beginning to realize that owning property is less and less profitable – says fund president Daniel Radkiewicz.

The supply of restructured enterprises or parts thereof will increase in the short and medium term. In the current situation, however, restructuring processes are difficult.

The need for restructuring support tools

Lockdown has forced accelerated digitization in many companies. It applies to both remote work and transactional and restructuring processes, and its goal is greater control of document flow and acceleration of proceedings. Our clients from the Czech Republic and Romania agree that some of their transactions have been suspended due to the lack of direct contact with an advisor and impeded selection of documents for Due Diligence.

Companies affected by coronavirus restrictions may benefit from a government support program, but some will not be able to provide themselves with the right tools to run remote processes, such as audit processes, seeking investment, personnel change, or working with a trustee. In a situation where both companies as well as lawyers or investment advisors work remotely, the VDR system is able to secure the organization of ongoing processes.

As part of helping companies, we launched a campaign thanks to which, by donating any amount to any fundraiser aimed at COVID-19, entrepreneurs will receive from us a voucher for a free month with VDR, valid until the end of the year. We hope that in this way companies will be able to secure the flow of confidential documentation outside the company’s headquarters, and fundraisers will gain additional support in the fight against a pandemic.

Corporate social responsibility

The COVID-19 pandemic has undoubtedly had a negative impact on business sentiment and the merger and acquisition market. It caused chaos on the planned path of acquisitions and new investments on both the Polish, European and global markets. There will certainly be winners among the chaos, but in the near future most companies will probably escape to security. This entails a restriction on access to capital markets and greater control of the terms of the transaction. The private equity sector may be one of the beneficiaries of a drastic downgrade in global markets, but will also be busy working on controlling companies in existing portfolios.

However, enterprises are definitely in the worst position. By offering a tool that is able to facilitate the conduct of some necessary restructuring processes in the current situation, we try to support companies in this unexpected and difficult challenge.

Restructuring online faster than you think

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Main picture: Unsplash.com