Financial Markets

Individual Assignment

Submitted By: - Submitted To: -

Harshita Sethiya Prof. Kamran Quddus
M146-22
Overview

The social and economic effects of the pandemic have affected businesses in India and
around the world. It may be helpful to focus on a few strategic themes to facilitate a successful
transition to the new normal.

No one anticipated the economic shocks that would be brought on by the advent of a
pandemic, even though many people were speculating on an economic collapse occurring in
2020 (after a bull market). Most business operations were interrupted by the COVID-19
pandemic, and most people were forced to stay inside their houses for their own health and
protection. Organization-environment fit/misfits have been caused by the absence of
precedent and preparedness of firms (large or small) to handle such exogenous shocks. Firms'
ability to adapt to the changing business climate brought about by the health crisis has been
revealed by the juggling act of complying with new sanitary standards, governmental
prohibitions, and supply and demand restraints. Mergers and acquisitions have emerged as
critical factors for businesses attempting to realign their strategic objectives in this fresh
climate in order to better compete, let alone survive.

India’s M&A
Despite a global slowdown in mergers and acquisitions, the number of deals never became
zero in volume. Compared to 2019, the value of deals made by Indian companies in the first
seven months of 2020 fell sharply by 36%. In the period between January and July of 2019,
India Inc. closed transactions totaling $88.88 billion, but in 2020, the total transactions total
$56.73 billion, primarily driven by RIL-Jio transactions. There were 865 deals during that time,
which is more than halved from the previous period. There were a number of transactions in
the energy and power, telecommunications, and financial sectors, as well as some activity in
the pharmaceutical sector. Carlyle, for example, acquired a 20% stake in Piramal's
pharmaceutical company for $490 million. During the first half, inbound activity increased by
1.6% due to Jio deals. Despite the ongoing lockdown, US companies were very active in
India's deal market in 2020, holding over 50% of the market.

Indian businesses, however, held back on foreign investments. As a result of the decline,
outbound deals declined by nearly 74%. Over 50% of deals were conducted in the US. Sunil
Mittal's Bharti Global purchased a 50% stake in the bankrupt UK satellite operator One Web
for $500 million. For the same price, the British government will purchase the remaining equity
in One Web.
Mergers and Acquisitions (M&As)
As a general term, "mergers and acquisitions" (M&As) covers a wide range of financial
transactions that consolidate the businesses or assets, including mergers, acquisitions,
consolidations, tender offers, asset purchases, and management acquisitions.

Basic terminologies related to M&As

Mergers: The combination of two businesses of similar sizes with the intention of forming a
new entity

Acquisitions: The act of a company being absorbed by a (usually) larger one is referred to as
an "acquisition."

Vertical integration: The process of acquiring business operations within the same production
vertical.

Horizontal Integration: Merging of companies in the same lines of business. Usually, to

achieve synergies.

Leveraged Buyouts: Acquisition of another business that involves incurring a big debt to cover
the acquisition costs

Hostile Takeovers: An acquisition is considered hostile if the current board of directors and
the majority of the company's shareholders do not approve of it.

Consolidation: Through the merger of key businesses and the removal of outmoded
organizational structures, the consolidation creates a new company.

Backward Integration: A type of acquisition when the target business produces the raw
materials or other supplies needed by the buyer to run its business.

Effects of COVID-19 on M&A activity

All previous financial crises and the ones that began in late 2019 and early 2020 have caused
unheard-of financial turmoil. In contrast to previous financial crises, the COVID-19 crisis did
not solely result from economic factors being downgraded. In terms of economics and the
environment, it was more of a synthesis. Due to this, unlike other downturns, the industry was
forced to change its strategies, processes, and conventional methodologies overnight to adapt
to the new reality, which was beyond financial constraints.

Impact on the Deal

As long as there is significant economic or other uncertainty, leverage moves toward buyers
and away from sellers. There is no doubt that deal-making during both the Great Recession
and the dot-com bubble was evidence of this.

Due to this, not all sellers will be affected the same way by the pandemic on deal pricing; those
in sectors like retail, hospitality, and automobiles that have been more severely affected will
be worse off than those in sectors that have experienced less or even thrived (such as online
technologies, biotechnology, and food delivery).
Impact on strategic focus
In a changing competitive environment, businesses have been forced to re-examine their
"essential nature," how they deliver their goods or services, and where they fit into the value
chain, due to the pandemic. Consequently, the virus exposed flaws in corporate structures,
allowing firms to innovate, transform, and realign their strategic trajectories in response to the
mismatch between their value propositions and their changing business environment.

1. Inorganic growth to be promoted by mergers and acquisitions

A number of businesses have turned to M&A as a response to the health crisis in order to
upgrade and update resources and capabilities in a timely manner to avoid environmental
shifts, making the current strategy obsolete." Due to the unpredictable limitations of the
pandemic, corporate executives had to take a closer look at how M&A fit strategically and
whether it could stimulate inorganic growth and profitability in a slowing economy.

2. Strategic M&A to address upcoming issues

The COVID-19 pandemic led to a digital transformation across all industries that would
otherwise have taken about 10 years. To comply with the new social segregation laws,
businesses had to adopt new business models overnight. This situation offered
organizations insight into their current weaknesses and the gaps they needed to fill to
adapt to the state of their businesses in the future. Taking advantage of low-interest rates
and lower valuations, opportunistic companies like Accenture bought businesses to
acquire innovative technologies or hire talent to meet clients' and employees' upcoming
demands. Among the most acquisitive companies, Accenture acquired many
cybersecurity firms and firms that specialized in cutting-edge technologies such as
blockchain and artificial intelligence to acquire the skills and knowledge their clients would
need.

Effects of COVID-19 on the M&A Process

Timing and Delay in M&A Deals

Deal deadlines for both ongoing M&A transactions that survive the pandemic and brand-new
transactions entered into during the pandemic will be significantly extended. Preliminary
discussions between the parties, the negotiating of a letter of intent or term sheet, the
negotiating of a definitive acquisition agreement, and the pre-closing phase are all stages of
a typical transaction that typically take longer. These delays will be brought on by several
pandemic-related factors, such as the following:

• Negotiations will take longer: It is currently not possible to "get everyone in the room"
to agree on a settlement, which is probably the most frequently repeated cliche.

• It will take longer to complete due diligence, and there will be more M&A due diligence
problems to resolve.

• As a result of the instability of the debt markets and lack of liquidity, M&A lenders may
request more onerous closing conditions than buyers, increasing the likelihood that
both buyers and sellers will fail to close the transaction.
Financing
M&A acquisitions have traditionally been funded largely with debt, especially in the private
equity industry. The Coronavirus epidemic poses a substantial amount of uncertainty as to the
availability and terms of third-party debt financing, which can cause problems for transactions
that require such financing. The following are some new questions and difficulties buyers and
borrowers might encounter related to financing:

▪ Will lenders provide new underwriting for financial commitments?

▪ What additional due diligence would a lender require, and how long will that add to
the wait time?
▪ How somewhat risk-averse will lenders be in deals involving sectors that have been
struck hard by the crisis?

Change in FDI policy

Introduction and Intent of Press Note 3

Covid-19 was causing businesses to lose value, and the government was worried that foreign
groups would take advantage of this.

In Note 3, the government aimed to restrict foreign investment from nearby countries. The
objective was to prevent opportunistic acquisitions and takeovers of Indian businesses due to
the Covid-19 pandemic value decline. The greatest influence was exerted by China on
organizations from nations bordering India on land.

Banning of Applications

A number of apps were blocked by the government because of the short-term nature of
threats. In addition to protecting Indian mobile and internet users' interests, the plan also
sought to preserve Indian cyberspace's safety and sovereignty.

As a result of the suspension of several of these apps, as well as Press Note 3, foreign
investment in India has already been delayed, and the M&A transaction landscape has already
begun to adapt in order to cope with current conditions and ongoing uncertainties.

Positive Impact
Despite the global COVID-19 pandemic in 2020, Indian M&A activity still flourished.

The total deal value in 2019 exceeded $82 billion, a 22.9 percent increase from 2018. Over a
quarter of this sum, however, is accounted for by numerous large-ticket investments in Jio
Platforms, the holding company for Jio, India's largest mobile network provider, and other
digital businesses owned by the Reliance group, while the number of deals fell by 17.1%. The
number of transactions decreased significantly in the second quarter of 2020.

Despite the economic downturn, the Indian technology sector remained resilient in 2020, in
line with global trends. In 2013, Facebook invested $5.7 billion in Jio Platforms. Nearly $20
billion was raised for Jio Platforms in the midst of the worldwide blackout with Google investing
$4.5 billion.
One of the biggest domestic transactions of 2020 was Reliance Industries' acquisition of
Future Group's retail, wholesale, logistics, and storage divisions for $3.38 billion.

A recovery in the M&A market was evident in the second half of 2020, which suggests that
2021 will be another good year for the market.

Conclusion
COVID-19 has had significant repercussions. The virus's impact on M&A activity is anticipated
to evolve over time as it spreads throughout the globe. There will be continuing effects of the
Coronavirus (COVID19) crisis on mergers and acquisitions ("M&A"). The result has been the
shutdown or drastic reduction of thousands of businesses, disruption of supply chains, and a
reduction in the demand for oil and other energy sources. Spending by consumers has also
fallen sharply. A number of past economic crises, including the Great Recession of 2007-2009
and the burst of the dot-com bubble in 2000-2002, have been survived and recovered by M&A
companies. Buyers have already postponed or scaled back their acquisition plans due to
uncertainty in the capital and business markets, similar to previous financial and economic
crises. This time, things are different because the pandemic affects more than just sellers'
valuations, buyers' eagerness to close deals, and the financial system as a whole.

There are many factors to consider, including the deal terms themselves, newly discovered
due diligence issues, the manner in which due diligence is conducted, the availability, cost,
and terms of deal financing, as well as the time required to obtain regulatory approvals and
other third-party approvals. A fundamental change has also been made in how M&A
transactions are developed and negotiated this time around, unlike previous crises that
affected M&A activity and deals. The effective use of new and innovative collaborative tools,
technologies, and techniques has become even more crucial as buyers, sellers, M&A
financing providers, and all their respective legal and financial advisors adapt to the new
environment. Businesses benefit from continuously tracking global trends to inform potential
actions during that uncertain time and will grow in the future too.