Unexpected consequences of M&A during the CV-19 crisis

By Alistair Kellie

As we start to consider what the post-COVID-19 world will look like, it’s clear that there will be significant corporate activity, though sadly much of it distressed and involving the administrators.  The scale and frequency that we are seeing companies succumb to the perils of CV-19 is so great that it has led to speculation that we could see a post CV-19 wave of consolidation, especially in the worst hit sectors and companies at the coal face of the crisis.  Therefore, it is worth considering the unexpected regulatory and ethical issues associated with M&A in this environment.

But before we expect a flurry of transactions, it’s worth noting some of the latest statistics.  Unsurprisingly, deal making is down with global M&A activity currently at $697.6bn in the year to date, down 28%, while the number of transactions dropped 16%, compared with the same period last year.  Only back in January of this year there were suggestions that private equity firms were sitting on a wall of cash and that this would trigger a flurry of buyouts. Just three months later and many of these same players are more focused on managing their portfolio companies than deal doing.

At the same time company executives are focused on saving their own business rather than considering any strategic acquisitions.  They recognise that they need to ensure the integrity of their balance sheets which means that cash is king again.

Indeed, Brooke Masters yesterday reported in the Financial Times (‘Looking for M&A deals is risky now for both buyers and sellers’) that global deal-making is locked down and last week there was no merger or acquisition worth more than $1 billion announced anywhere in the world…for the first time since 2004.

However, it’s not as black and white as that and there are two issues worth considering:

• If M&A transactions are proposed involving companies that will otherwise collapse, will they be welcomed or dismissed by the regulators?

• What are the ethics regarding a company making a move on a target which has furloughed a significant proportion of its workforce?

First the regulatory question.  Our contact on the Takeover Panel tells us that on the one hand M&A in a shrinking market would appear to lessen market competition.  However, the lawyers will surely argue, without these company saving deals, the market may disappear altogether, or contract significantly. It appears to be a genuine conundrum that will keep lawyers and regulators busy for the time being. That said, we can expect regulators to be more sympathetic to these arguments than they have been in the past.  That will be news to a senior corporate lawyer we spoke to who said that the Panel are ‘notorious for being sticklers for rules and fairly inflexible.  They do not see themselves as facilitating commercial activity but rather as a rules based policeman’.

It appears that the issue is less one for the Panel and more for the Competition and Markets Authority (CMA).  The CMA has the power to block anti-competitive acquisitions and it is unlikely that they are reviewing their practices and released a statement this week stating as much. Ultimately, the test of what is deemed anti-competitive will not change, but as the wider market context changes, so will the view of the regulator as it seeks to maintain competition. Consider the case of a bid for a company that would otherwise fail. If the CMA refuse to allow the bid - which in normal times may be deemed anti-competitive - the effect is to enhance the dominance of surviving companies and result in a similar outcome to what would have happened if the deal had been allowed in the first place.

Just last week we saw the effect of the virus on the CMA’s decision making process as the regulator provisionally cleared Amazon’s investment in Deliveroo, citing the “deterioration of Deliveroo’s financial position as a result of coronavirus” as the deciding factor (CMA, 17.04.20). Whilst the regulator will not change its practices, it certainly seems to be cognisant and receptive to arguments claiming exceptional circumstances as a result of CV-19.  

So then to the matter of acquiring a business which has furloughed a high proportion of its employees.  It appears that there is nothing to prevent this from taking place.  However, the reputational fall-out could be considerable.  Given the reaction to well-known and wealthy individuals furloughing staff, the media and wider public would probably not take too kindly to what would effectively be a bid for a company’s brand, IP or future recovery without the burden of one of the biggest costs, salaries.

But given the scale of the market contraction there could be some opportunistic (some might say exploitative) moves made on distressed companies with furloughed staff.  It will be a communications challenge to say the least.

Alistair Kellie heads the Corporate Reputation team