Global Deal Landscape: A Shift in Focus

There is nothing permanent except change

– Heraclitus

COVID-19 that locked the entire world down has massively impacted all the businesses across the globe. The enormous economic changes due to the COVID-19 crisis has taken a toll over business valuations. It has completely distorted the forecasts in terms of business planning, government measures, etc. which has made cash flow, terminal valuation, and growth rate forecasting quite uncertain. Investors have suddenly become more cautious and critical when it comes to the leverage ratios, the WACC calculations, and growth assumptions.

The global M&A deals have declined, even in sectors such as Oil & Gas that should ideally witness a rise in deals during crises indicating a possible shift in the perception of the M&A players. It is also obvious that many businesses would need capital and restructuring to survive paving way for Private Equity players. However, unlike other crises, COVID-19 may bring about a broader functional change among businesses, M&A players, and PE investors. This article aims to explore this functional shift and how it changes the global deal landscape.

Due to the pandemic, M&A players and PE investors are rapidly focusing on solutions-driven businesses, business continuity, resilience, and stability. The businesses seeking capital for survival or expansion would undergo rigorous due diligence along with periodic and robust solvency reviews. Another shift that M&A players and PE investors demand is regarding the COVID-19 impact disclosure and the subsequent effect on valuation and expansion/growth plans. Probably, disclosing a contingency plan to deal with any pandemic or unforeseen event impact would become a “normal” in the coming years.

The concepts of Sustainable Development Goals (SDGs), Environmental, Social, and Governance (ESG) disclosures, and Clean Energy have been in the talks for quite some time now. However, the COVID-19 crisis and the current Oil crisis have accelerated the pace at which businesses and investors are shifting towards SDGs and Clean Energy. And with Climate Change becoming more and more evident each day, it won’t be long before every company would be obliged to disclose the environmental impact of their operations and hence, resort to ESG disclosure. Though COVID-19 has not brought this change per se, it has definitely alarmed the importance of these concepts.

Almost all deal activity reports by global investment banks show that deal activity in IT, Telecom, and Healthcare segments has boomed whereas deal activity in Energy, Industrials, etc. has suffered. This slowdown in deals is temporary. However, what is changing is how businesses and investors allocate and manage their monies in the coming years. With the chance of bankruptcies high in the near future, a cautious approach will be adopted. However, the shift to SDG, ESG, clean energy, resilience, stability, and solutions-driven model will help procure higher valuations and help survive the pandemic and its after-effects smoothly.