How to Think About Mergers Now

It’s still unclear how the global health crisis will affect ongoing merger negotiations, but the vastly changed environment will no doubt have an impact. Lawyers from Pillsbury Shaw in a memo identify fundamental and practical challenges to the deal-making process and analyze how the global pandemic may play out in merger negotiations. Changes have likely occurred in the fundamental aspects of a merger transaction such as pricing, valuation, due diligence, control and governance. With respect to valuation of the deal, the lawyers pose questions such as: Do the financial projections and their underlying assumptions still make sense? And with respect to due diligence they urge participants to consider whether extra time will be needed to perform due diligence on a target’s supply chain, IT systems, the coverage of any insurance products that may be relevant to the target business, or the target’s response from an employment law perspective. The lawyers also analyze material adverse change provisions, the area of negotiation and risk allocation most likely to be affected in the current environment. A key function of the material adverse change provision “is to allocate between the buyer and the seller the risk of negative changes in the target business between signing and closing.” The lawyers write that both parties should be paying special attending to the wording of the material adverse change provision. “Parties should think through risk allocation—including the MAC clause—and how a target’s risk profile may change over time as the outbreak itself develops.”