Posted on / by Emergence Partners

M&A and Capital Raising in times of the Coronavirus pandemic

The global stock markets are today facing one of the most challenging events in history. The spread of COVID-19 has shaken the financial markets which capped off a quarter of major losses unrivaled since 2008. Although a resilience shown throughout January and February, the transaction markets slid over the past month wiping out their gains for the year and the hopes of a dealmaking-full 2020. The sizable fallout from COVID-19 is now being priced in on the global economy as more and more countries are taking strict measures to combat the pandemic. 

In these times of uncertainty, as corporations are focusing their efforts on maintaining their businesses and keeping their employees, the current situation will weight high on M&A and Capital Raising activity. Since it is directly affected by what goes on with capital markets and the real economy, we will probably see significant trend changes in the country and region this year. 

Considerations on M&A and Capital Raising activity post COVID-19 in Tunisia 

Since 2018, M&A and CR activity have been growing in a regular pace following a consolidation dynamic. From this perspective not much will be changing post COVID as the crisis showed that SMEs in Tunisia were struggling to survive in these hard times. Business owners will seek financial partners to help them establish stronger foundations for their companies and navigate a more complex and riskier environment. The current situation would push them to look beyond their core business in the aim of risk mitigation. If their industries are being hit strong by the crisis, establishing strategic alliances and partnerships can resolve some of their short-term problems.

This general turmoil will also be creating opportunities for investors who are able to execute under challenging market conditions. Private equity funds either cannot or will not want to, return the cash to their investors. As such, they have money they will need to invest in the coming years. So the crisis generated by the coronavirus outbreak will not stop the buying and selling of companies. This is only one of the factors that will help companies to recover.

On operational side, as the measures taken by the Tunisian government are slowing down the economy, value chains are being dislocated and companies are finding hard times keeping up. Some of them will be turning to the spin off solution while others, solid and well positioned, will want to integrate part of their supply chains. What might also be observable is a horizontal expansion dynamic to create stronger pure players especially in sectors that have proven their importance during the crisis. 

In these pandemic times, Tunisian companies were not ready for a habits’ shift but the  migration of several activities towards online solutions will be the next move for them. The health sector will also continue its consolidation and expansion as the shortage in medical supplies and devices have proven the fragility of the sector. Education and distribution are sectors, among others, that might create momentum in the M&A activity benefitting from the needs created in the times of COVID. 

COVID-19’s impact on M&A processes 

Deal completion process in such circumstances finds itself to be a series of complex tasks to carry out. Starting with the hindrance to deal origination which normally is the result of face to face meetings. Then, there’s the bottleneck this general outage is creating for due diligence processes becoming a real challenge to execute. Additionally, when looking at the financing side, there will for certain be an effect on the cost of capital and the ability to access capital markets for some acquirers and issuers. Lastly, negotiations around the deals’ conditions will become more challenging particularly when it comes to valuation. The crux of every negotiation will be to strike a proper balance between prices expected by sellers and prices proposed by buyers. Negotiating will be, at least for the next few years, all about Material Adverse Change terms and how to well round prices around them.