The future of M&A beyond the COVID-19 pandemic remains fiercely debated and quite unclear. We've already seen transactions and their underlying agreements change in a number of ways, including more scrutinized structures, and more detailed negotiations regarding contractual carve-outs, such as material adverse change and force majeure clauses. As previously noted, this will undoubtedly lead to significant changes to M&A transactions in the near future. In addition, the COVID-19 pandemic has shown to have a macro-level impact on M&A transactions. Indeed, EY's recent M&A report "Global Capital Confidence Barometer" (the Report) has analyzed COVID-19's influence on M&A to-date, and what to expect moving forward.

Highlights of the Report

  • Key takeaways: The Report found that 56% of businesses indicated they are "actively planning to pursue acquisitions in the next 12 months". Along the same lines, 72% of companies are "undergoing a significant transformation program" and "are conducting more frequent strategic and portfolio reviews". The Report indicated that reducing valuations (39%), focusing on a targets' resilience when evaluating businesses or transactions (38%), and seeing opportunity to gain market share (23%) are some of the main impacts on M&A strategy and outlook caused by COVID-19.
  • Predictions: The Report takes a rather optimistic approach to its predictions regarding what's to come. Most notably, the Report predicts a significant increase in deal flow (in Canada and globally) as part of a great resurgence in the second half of 2020. Hopeful forecasts like this are spawning across the industry, and are almost all predicated on opportunistic low share prices, distressed assets becoming available for sale, PE companies with excess funds, and targets becoming easily preyed upon as their vulnerabilities increase. The Report links this "addressing the now [.] but anticipating the next and beyond" phenomenon to the lessons learned from the 2008-2012 M&A downturn: over 50% of companies surveyed were intending to pursue acquisitions to boost growth opportunities before the crisis hit, making this downturn (as was the case in 2008) a prime opportunity to make such "acquisitions of high-quality assets that would have fueled faster growth in a recovering market".

Spotlight: the manufacturing sector

One of the most significantly impacted sectors of this market decline is manufacturing. A recent survey completed by the National Association of Manufacturers of its member organizations showed that more than 78% of manufacturers expect the pandemic to have a "negative financial impact on their business", which is significantly higher than the 48% of cross-industry companies that are concerned about the same impacts, as polled in PwC's recent COVID-19 CFO Pulse Survey. Similarly, the Report found an overwhelming consensus that businesses reliant on supply chains and production, like the automotive and advanced manufacturing industries, will be the most affected.

Common business characteristics typically found in this sector, including extremely high overhead, reliance on human capital (i.e. factory/line workers that cannot carry out their roles remotely), reduced demand for industrial products globally, and supplier-friendly contract terms have radically accelerated the impacts of this economic downturn. Similarly, the Report finds that the two factors linked to lowered profit margins (for all types businesses) are higher labour costs and higher material input costs (32% and 26%, respectively). Both of these expenses form the manufacturing sector's backbone. However, experts continue to reinforce the silver-lining for acquirers: these extraordinarily susceptible industries are poised to become leading targets for M&A activity upon the market's upswing.

Conclusion

As was the case after the 2008 financial crisis, there is persistent confidence that the Canadian M&A market will too overcome this current recession. As we continue to navigate the post-pandemic future, it will be interesting to see whether the unwavering strength that has defined the Canadian M&A market throughout the years will continue.

The author would like to thank Daniel Lupinacci, Articling Student, for his contribution to this legal update.

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