COVID-19 and New Hampshire’s M&A Environment

Photo of Patrick Closson
Patrick C. Closson
Director and Chair, Corporate Department and Chair, Healthcare Group
Published: New Hampshire Business Review
November 20, 2020

The pandemic has had a noticeable impact on how transactions are done.

The COVID-19 pandemic has had a significant impact on New Hampshire’s economic environment including mergers and acquisitions of privately held companies.  The pandemic has impacted industries differently.  For example, the retail and hospitality industries and industries tied to these two sectors of the economy have been significantly impacted by the pandemic, whereas industrial manufacturing and many professional services have fared well.  As the pandemic continues to progress with no certainty regarding when we may see an end, other industries will inevitably be impacted, including healthcare and commercial real estate.  Because there are a number of industries that are facing financial hardship, one of the trends in the mergers and acquisitions environment is an effort to identify opportunities to acquire distressed businesses at a discount.  This phenomenon is not unique to the pandemic, as opportunistic buyers regularly appear during times when there is economic strain.  As the pandemic continues and with the absence of stimulus to support businesses on the brink, there will likely be more distressed asset acquisitions and sales.

On the other side of this spectrum, in those industries that have not been adversely impacted by the pandemic, there continues to be a significant amount of mergers and acquisitions activity.  At the beginning of the pandemic, the uncertainty surrounding how the pandemic and the corresponding stimulus programs would impact businesses caused the transactional environment to slow down.  Buyers reevaluated existing transactions and sellers focused their attention on dealing with operational uncertainties that they had never seen before.  However, as the situation stabilized and buyers were able to assess and quantify the risk associated with completing a transaction, in industries that have been less impacted by the pandemic the transaction activity has resumed, and in many cases activity is at least back to pre-pandemic levels.  There are a number of factors that are currently driving this activity.  The cost of capital continues to remain low as interest rates continue to be low.  This environment allows buyers to borrow money at low interest rates which it can then use to acquire businesses.  A significant amount of cash continues to be held by private equity companies who are looking to utilize these funds to acquire businesses.  We are also seeing sellers who for various reasons including timing, concerns about the long-term economic climate, and concerns about the political climate have decided that it is time to pursue a transaction.

While there continues to be mergers and acquisition activity, the pandemic and the infusion of capital into the economy through various stimulus packages has created a new set of issues that buyers and sellers need to address as part of their transactions.  As a result of the pandemic, buyers are needing to evaluate the impact of the pandemic on the seller’s customers, vendors, and supply chain to ensure that there is no weakness in these areas.  Buyers are looking to expand the representations that sellers are required to provide in the transaction documents to address issues related to the pandemic and the impact of the pandemic on the seller and are looking for increased indemnification protection from sellers.  Buyers are also demanding that sellers accept a portion of the purchase price through deferred payments or an earn out arrangement (a payment tied to the future performance of the company) which helps to insulate the buyer and shifts some of the risk of future poor performance onto the seller.

With more employees working from home, companies are seeing increased cyberattacks and data breaches.  As a result, buyers are looking closer at a the seller’s technology infrastructure and security protocols and procedures, particularly relating to personal data.  Buyers are also evaluating the sellers’ cyber liability insurance to determine the scope of coverage under these policies.

Businesses that have received a loan under the Paycheck Protection Program (PPP) that are looking to sell their business are finding it difficult to deal with these loans in this scenario.  Most sellers want to receive the full benefit of the forgiveness of the PPP loan, but most buyers do not want to wait while the seller waits for the loan to be forgiven by the United States Small Business Administration (SBA).  On October 2nd the SBA released guidance on this topic that clarified when consent to a transaction must be obtained.  The guidance provides that (1) in connection with asset and equity transactions where less than 50 percent of the business is being conveyed will require the lender’s consent but not the SBA’s consent; (2) in transaction conveying more than 50 percent of a seller’s assets or equity will require the consent of the SBA, unless the seller has (a) used all of the PPP loan proceeds, (b) submitted a complete loan forgiveness application, and (c) established an escrow account with the PPP lender to hold the PPP loan proceeds until such time as the forgiveness application is decided upon.  Despite these requirements, many buyers are insisting that the PPP loan be repaid in full prior to or at the closing.  In addition, buyers are concerned by the SBA’s ability to subsequently audit the PPP loans, which results in this liability remaining outstanding for an extended period of time following the proposed transaction.

While mergers and acquisitions activity is continuing despite the pandemic, like all sectors of the economy, the pandemic is impacting how transactions are done.