Responding to changing transaction landscape amidst COVID-19: Key considerations for investors

Investors and board members need to ask a new set of questions before approving the next investment, merger, acquisition or divestiture.

The spread and impact of COVID-19 is an unprecedent event in modern history, the full ramifications of which are still unknown and new implications being discovered every day. The dynamic situation along with its simultaneous impact on demand and supply, is affecting all industry ecosystems and consumer behaviours at many different levels.

Markets stand disrupted in the short term and this impact is likely to continue over the medium and long term as well. This has led to a significant impact on the transactions landscape, though, the impact is varied on various sectors.

Investors will need to consider the following as they assess the impact of Covid-19 on the business and consequently understand their businesses’ response to the situation:

1. Changing business models and evolving product portfolios: Decline in demand is expected in the near term with the exception of ‘essential’ items. Evolution of the product portfolio mix due to (i) restriction on non-essential products and movement, (ii) increase in demand for health-related products (sanitizers, masks), and (iii) shift from sachets to bulk pack sizes, will need to be understood.
2. Operating costs and fixed overheads: Increase in cost of doing business with better hygiene and safety norms, and the ability of the business to recover these costs will need to be assessed.
3. Technology deployment: Assess the investment required in technology to improve supply chain efficiencies and deal with last-mile distribution constraints. Further, with ‘work-from-home’ environment, further investment might be required in current technology infrastructure to manage cyber security and data privacy concerns.
4. Working capital and cash flows: With collection and payment cycles impacted, the working capital disruption and the consequent cash deficit will need to be assessed.

While these are only few of the key matters, a detailed impact assessment needs to be made basis the industry/sector of the company to critically evaluate the investment opportunity.

As in previous crisis cycles, investors who have the right focus and risk management framework for deal evaluations often possess the opportunity to make significant returns and build large and impactful businesses.

This report - Transaction considerations arising due to Covid-19, aims to address some of the key emerging themes and the consequent investment considerations that need to be evaluated in this rapidly evolving transaction landscape.