OPPORTUNISTIC ACQUISITION OF COMPANIES IN COVID- 19- An Unhealthy practice?

From celebrities to common people, from artists to businessmen, from politicians to religious institution, the
covid-19 has impacted people from all walks of life. It has caused unprecedented challenges for everyone. The
pandemic has pushed everyone to live in scarcity, and the people every kind of discipline to survive in these
times.

Whether covid-19 has made any impact on companies, especially when it comes to their functioning, profiting
or when it comes to the restructuring of companies.

The Covid-19 has impacted the livelihood of companies. Due to the pandemic, hundreds of business have
shuttered, millions of workers were affected, and the demand and supply of the company’s goods were also
disrupted. For instance, the employers are being unemployed by the companies, which depicts that the
companies are going through unprofitable periods. In fact, as per the survey, more than 82% of businesses have
suffered a negative impact on account of COVID-19 and 70% expect it will take almost a year for demand to
recover to pre-pandemic levels1. In these times, the business that thrives on public travel is the first bearer of
huge losses such as Thomas Cook (India) Ltd., Make My Trip etc. There are several players in the market
which faced this impact such as2:

1. Federation of Hotel & Restaurant Associations of India estimated that the Indian hotel industry has taken a hit
of over Rs. 1.30 lakh crore in revenue for the fiscal year 2020-21.

2. PSU insurers are expected to report high underwriting losses of Rs. 12,400 crore to Rs. 13,500 crore.

3. ICICI Lombard General Insurance reported an underwriting loss of Rs. 31.29 crore in the fourth quarter
against a loss of Rs. 29.42 crore a year earlier

4. New India Assurance, which is the country’s largest general insurer, reported an underwriting loss of Rs.
1,721.26 crore in the fourth quarter was Rs. 1,044.7 crore.

Acquisition: The only way forward

Due to no other path left, and as the companies have suffered from huge losses, their profits are less or in many
cases, these profits are in negative, their market capitalization is facing a hit daily- in all the above
circumstances the best option left for the companies in the acquisition with the profitable company.

1
[The Hindu, https://www.thehindu.com/business/Industry/covid-impacts-82-of-small-businesses-shows-survey/article34387819.ece
(last visited 11 June, 2021]
2
[Money Control, https://www.moneycontrol.com/news/business/companies/covid-19-impact-underwriting-losses-set-to-rise-in-fy22-
for-general-insurers-7008821.html, (last visited 11 June, 2021]
In pandemic the acquisition will take place by stronger companies, the companies which occupy the large
market position and seek to capitalise on distressed companies or competitors facing distress in sectors such as
retail, transport, hospitality, energy, and oil & gas industry.

Some of the acquisition that takes place in the year 20203:

Acquiring company Acquired Company

Infosys Kaleidoscope Innovation

Reliance Retail Future Group’s Retail Business

Ola Etergo

ITC Sunrise Foods

Zomato Uber Eats

HUL GSK Consumer

Why companies (Acquiring Company as well as acquired company) chose acquisition?

The acquisition is a term often used with Merger. These two terms have diverse meaning and have different
applications on companies when practised. The merger of the companies implies that two companies join
together to make a new or third company and on the other hand, acquisition of a company means that its shares
or assets are purchased by another company. Under the acquisition, the acquiring company take control, build
on, and capture synergies of the acquired company.

The companies practice acquisition due to the following reasons:

Synergies

The cooperation of companies make a positive impact on overall performance, the company reach the larger
market, and also acquire strength to take new profitable policies that require funds.

Growth

The acquiring company acquire more growth in terms of profit since the acquired company’s profit is subjected
to acquiring company. With these takeovers, the acquiring company usually increases its market share. For
example- A fruit juice company ‘A’ acquiring another fruit juice company ‘B’, now though the name,

3
[BYJUS, https://byjus.com/govt-exams/mergers-acquisitions-india/, (Last visited 11 June, 2021)]
employees and the founder of company B hasn’t been replaced or changed but the profit made will be
transferred to the company A.

Increase Supply-Chain Pricing Power

A company acquiring another company in the same business or another business can increase the supply chain
by many margins, if not in the same field than in another.

Eliminate Competition

Many M&A deals with the acquirer to eliminate future competition and gain a larger market share. On the
downside, a larger premium is usually required to convince the target company’s shareholder.

Protection from Bankruptcy

Though Insolvency and Bankruptcy Code was extended till 31st March 2021, the companies faced a lot of losses
and high chances of bankruptcy are probable once the extended period is over. In such a situation, acquisition
becomes necessary for the companies which faced huge losses with no other way left.

Opportunistic acquisition of companies during COVID-19

The opportunistic acquisition means that the company takes advantage of the situation to take over or acquire
the company. This acquisition is done with the self-interested motives where the company take over the
company with little regard to principles or consequences, the only reward the company gets from such
acquisition is the power to exploit the acquired company.

People’s Bank of China acquired a 1.01% stake in HDFC4

When the world was suffering from Covid-19, the medical departments, policy-makers, economists, and
executives were not prepared for such a situation, in this kind of situation People’s Bank of China acquired the
stakes in HDFC. And later, the People’s Bank of China also invested in ICICI Bank and emerged as one of the
investors in the bank.

Opportunistic acquisition- healthy or an unhealthy practice?

The opportunistic acquisition is an unhealthy practice, not just for the acquiring company but also for the
acquired company. The following reasons justify that why this is an unhealthy practice:

1. Due diligence
4
[NDTV, https://www.ndtv.com/business/peoples-bank-of-china-acquires-1-per-cent-stake-in-hdfc-amid-rout-in-stock-market-
2210384, (Last visited 11 June, 2021)]
Social distancing, restriction of movement from one place to another, and in cases where the movement
becomes extremely necessary the permission to travel is a must, considering this situation the execution of due
diligence is almost impractical. The acquiring company or buyer will face restrictions while conducting the site
visits, and the only alternative solution is left is to seek due diligence through the specialist provider.

The parties concerned will practice due diligence through online mode, though is an alternate method to
investigate the company but it is not efficient as physical due diligence.

2. Negotiations

Negotiation is the foremost and most important element of the acquisition of companies. The parties concerned
negotiate the price, representation and warranties of the company, representation and warranties related to
intellectual property, intellectual property infringement, company’s liabilities, regarding contracts and also the
conditions for termination. Due to this unprecedented time, the major companies are only surviving or close to
become insolvent. The negotiation between the parties is risky and can also lead to failure for both companies.

2. Forward-looking statements

Forward-looking statements are the statements of plans and intention for acquiring companies. These
statements are not legally bound by the acquiring company but they are taken seriously by the market. Since the
pandemic has caused unprecedented challenges, it develops an unforeseeable condition for the acquiring
company.

3. Time Delay

The acquisition of companies is complex work and it takes time and trust between the companies. Due to
pandemic, the decisions for acquisition take a longer time. This will affect the proper functioning of both
companies.

4. National security and government intervention

Overseas companies always seek to acquire companies from other countries. The government considers this
situation always had tactics for it. Since the pandemic started, the foreign companies started investing,
acquiring the companies of the other countries and the governments started to intervene in the process and
started taking short term measures with the concern to protect national security.

INDIA

The Government of Indian amended the FDI policy for curbing opportunistic takeover of Indian companies due
to the pandemic. The revised policy amended by the Indian government are5:

5
[OUTLOOK INDIA, https://www.outlookindia.com/website/story/business-news-govt-tightens-fdi-policy-to-check-opportunistic-
takeover-of-indian-firms-amid-corona-crisis/351010, (last visited 11 June, 2021)]
a) A non-resident entity can invest in India only in those sectors which are not prohibited. An entity of a
country that shares a land border with India can invest only under the Government route. Further, citizen a
citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in
sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign
investment.

b) In the transfer of ownership the existing or future FDCI, directly or indirectly, resulting in the beneficial
ownership falling within the restriction and it shall also require government approval.

Europe

In March 2020, the European Commission published guidelines to the EU Member States calling on them to
adopt or strenuously enforce their foreign investment screening mechanisms to protect sensitive assets from
foreign takeover during the crisis. Whilst many cross-border transactions will still have a high likelihood of
being approved, those in sectors- and not just those where national security may be at issue- may encounter
greater scrutiny and face a prolonged approval process6.

Spain

The Spanish government suspended the liberalized regime for certain foreign direct investments, which now
require ex-ante authorization.

Australia

The Australian government introduced temporary changes to its foreign investment review framework in
response to the COVID-19 pandemic.

German

The German government is considering measures to protect German companies in economic distress from a
hostile takeover by providing support, by taking participations, or by full takeovers7.

France

The French FDI regime also requires prior approval for foreign investments in activities related to equipment,
products, and services that are “essential to guarantee the French national interests” including “protection of
public health”

6. Pipelines

6
[BAKERMCKENZIE, https://www.bakermckenzie.com/-/media/files/insight/publications/2020/06/distressed-ma_2020_190620.pdf,
(last visited 11 June, 2021)]
7
[CONCURRENCES, https://www.concurrences.com/en/bulletin/news-issues/march-2020/the-eu-commission-issues-guidance-on-
the-screening-of-foreign-direct, (last visited 11 June, 2021}}
A pipeline means the progress towards a long-term goal that involves a series of discrete stages. Under
opportunistic acquisitions, many business owners operate acquisition of the company with quick thinking and
not considering the long term plan.

7. Insolvency during the offer period

When the distressed company is under the insolvency process, the acquiring company may want to take action
to mitigate the risk of insolvency and protect the deal. Such a takeover of the company can also lead to the
failure of both companies.

8. Leverage

A misguided opportunistic acquisition can potentially have a crippling effect on the company. The business
owners should consider that the more leverage it has, the more likely it will result in happiness.

Although history shows that at least of all cases, after the deal closes the acquiring company is dissatisfied with
their return on investment.

9. Efficiency

Acquiring a company is a complex process and acquiring a company in Covid-19 where due diligence,
negotiation is not as efficient as it used to be, the business owners or CEOs shall not take their eyes off
company operations as it can harm the efficiency of the company.

Conclusion

The distressed companies are the ones that are first bearers of the losses in Covid-19. As the practice of
opportunistic acquisition can lead to exploitation of distressed companies and it is also unhealthy and risky for
acquiring a company.

The distressed companies have no other path left just to request support and leniency in-laws & regulation.
Although the government has introduced many changes for the company like- extension of Insolvency &
Bankruptcy till 31st March 20218, an extension of FDI Trade Policy 2015-2020 for one year9, and many other
policies.

The countries have a firm stand against opportunistic acquisition as governments understand such acquisition
can affect the national interest of the country and also understand that it is an unhealthy practice in the market
for the distressed company especially.

8
[ECONOMICS TIMES, https://economictimes.indiatimes.com/news/economy/policy/insolvency-and-bankruptcy-code-ibc-
suspension-extended-till-march-31/articleshow/79843895.cms?from=mdr, (Last visited 11 June, 2021)]
9
[INVEST INDIA, https://www.investindia.gov.in/bip/resources/measures-taken-government-india-aid-businesses-during-covid-19-
lockdown, (last visited 11 June, 2021)]