It may sound churlish to discuss the outlook for mergers and acquisitions (M&As) in the post-Covid-19 world at a time when a million and counting lives and many more livelihoods are at stake as the pandemic spares no part of life, including the M&A markets leaving little room for nuance in decision-making.
But just as it is, one day, the virus threat will recede and the world has to get back to work, and life has to move on. But what the new normal will look like in the post-pandemic world is anybody’s guess.
Having said this, being an M&A professional, one thing I could say with conviction is that life is not going to be the same again in the deal street as is the case elsewhere in the post virus ravaged world as M&A professionals may no longer able to follow their tested tenets as the microbe induced disruption will change the rules of the game lock, stock, and barrel.
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For one, though 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 January-March, recording the worst ever quarter since 1992.
Though the specter of a post-Covid-19 world still looks hazy, the pandemic will surely change the rule book for the M&A professionals. And these changes will depend on the answer to a question that is capital – do we see an alternative to a globalised world based on the allocative efficiency of markets mirroring the marginal cost of assets?
In my view, in the near to medium term, rising protectionism in recent times will nudge businesses to build regional sufficiency. However, in the long-term, the pivot will revert to its most optimal globalised scale and structure-guided by the opportunity cost of capital.
Global companies with operations across multiple countries will need to think local and adapt to a new world order i.e. global ownership with a local outlook.
Undoubtedly, M&A professionals will feel a wide array of modifications that business strategists and policymakers will roll out expressly in the post-virus hit world along the following parameters. They are:
(i) Nature of new measures including technologies and protocols that border control authorities to bring modifications in scale and nature for disaster response
(ii) Modifications in supply chain
(iii) Shift in types and cost of insurance; and finally
(iv) Modification of business contracts (as force majeure clause is widely evoked by businesses in the wake of disruptions triggered by the virus outbreak)
In what follows, I illustrate the upshot of these evolving scenarios through a simple example using infrastructure business as a base case.
Under normal circumstances, contractual turnkey infrastructure Engineering, Procurement and Construction (EPC) operators are obligated for liquidated and ascertained damages.
However, a scenario similar to COVID-19 has not been foreseen, and when an unforeseen event plays out the budget of turnkey EPC operator shoots up by 5% or more of the overall cost towards contingencies.
However, post-COVID-19 these estimates will no longer hold ground. Neither will the existing contractual structures serve the purpose, nor will the existing insurance products cover the business requirements considering the idle cost hit that firms have to take.
Therefore, M&A practitioners will need to re-tool themselves to understand the changes in their functional templates in the post-COVID-19 world. They will also have to take cognizance of how these changes impact their costs, de-risk operations, enhance sustainability, and eventually how these factors could be priced in the valuation matrix.
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Global Sustainable Development Goals (SDG) frameworks will come under enhanced scrutiny and are expected to be integrated into core functioning. M&A professionals should be mindful of these measures and price in it appropriately in the post-Covid-19 scenario.
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.
However, the pressure on pricing on an immediate basis may be experienced since investors would prefer to contain liquidity and delay decision making creating pricing pressures in the short term.
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.
Businesses that will be able to identify and implement changes and address new risks in the post-COVID-19 world would have advantages and can expect value appreciation.
As practitioners, wider engagement with businesses is required so as to develop an understanding of how these strategic structural changes should be priced in going forward.
On balance, the shape of the post-Covid-19 economy is anybody’s guess. Beneath the multi-year underperformance despite decent business show will lead to immense value creation in several pockets, if not across the broader market.
Therefore, dealmakers should have to keep their ear to the ground to hear the resonance reverberating across sectors and segments to do deal-making differently in the post-pandemic world.
It is possible to do an over the curve performance if only they do things differently from others. That superior performance based on better risk assessment and management will separate men from the boys among the M&A practitioners as and when the post-pandemic world shapes up.
(The author is Founder & MD, Singhi Advisors)
