M&A during COVID-19 and its immediate beyond

Covid-19 pandemic has disrupted lives and livelihoods on a scale and spread that the world has not witnessed in the post world war era. Everyday the tally of lost lives and that of businesses going belly up is increasing. Retail, Aviation, Hospitality, Real Estate are the sectors most impacted.

The question is, all the businesses that went down had wrong business models or were badly managed loss making entities. The answer in NO, some of them might have been over leveraged due to unlimited supply of liquidity that the financial markets had witnessed over the last few years but they were not inherently bad businesses. Take the example of Virgin Australia that filed for bankruptcy administration recently but has since received 20 indicative offers from investors globally. What explains this? This is explained by a number of factors:

• Business opportunity exists with the airline having slots on the golden triangle route of Sydney-Melbourne-Brisbane considered to be one of the most profitable globally.

• Cost reductions by discontinuing some non-profitable routes and staff rationalisation.

• Infusion of some cash can get the business back on its feet.

Bank of America recently helped Carnival Cruises and Petronas raise billions of dollars last month when the end market in case of the former is virtually shut for a few months and oil prices are at historic lows in latter’s case. On the other hand India based Oil to Telecom group Reliance sealed three deals in as many weeks to raise a combined US$8 billion for its technology driven telecom, retail and entertainment platform ‘Jio’ valuing the business at a whopping US$65 billion.

Although dealmaking in 2020 year to date is at the lowest levels since 2013 but PE firms and large corporates flush with liquidity are doing cherry picking at deep discount prices and at the same time businesses with robust business models, steady and predictable cash flows are still able to command premium. As Winston Churchill once said “We should never waste a good crisis”.