M&A – between the Covid pandemic and the war in Ukraine
Executive Education / 18 May 2022
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Prof. Dr. Christoph Schalast lehrt Rechtswissenschaften, insbesondere Mergers & Acquisitions und Europarecht, an der Frankfurt School. Er ist zudem Mitbegründer und Direktor des Frankfurt Institute for Private Equity and M&A (FIPEMA).

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Over the last couple of years, two events in particular – the coronavirus pandemic, and the war in Ukraine – have had a profound impact on the M&A market, and indeed on the economy and society in general. The opening salvo was delivered by the first Covid lockdown, initiated in March 2020. The corporate acquisitions market, which had previously enjoyed years of stability, ground to a halt. Deals were suspended, valuations challenged – and as companies strove to draw up corporate purchase agreements, clauses involving concepts like “earn-out” and “rescission” (= material adverse change clauses) suddenly started to materialise on the negotiating table.

The Covid pandemic also forced companies to review their business models. To everyone’s surprise, some of the online business models that emerged as a result of the pandemic actually worked better than their predecessors. The resulting innovatory surge spurred dynamic corporate growth. In Germany, for example, the number of unicorns rose sharply, in turn delivering an impressive boost to the market for IPOs over the last 12 months.

All this happened in the fourth quarter (Q4) of 2021. In fact, there were enough approaches to encourage speculation that the pandemic might unleash a wave of M&A activity. The prospects for 2022 were outstanding. But then, on 24 February 2022, Russia attacked Ukraine, starting what is effectively a war. From a historical perspective, protracted wars have rarely had a significant impact on M&A activities. This has now changed, not least because two distinct levels are involved: M&A business related to Russia, and the global M&A market during the Russian invasion.

Despite Russia’s impressive foreign-exchange reserves, cross-border corporate acquisitions involving Russian counterparties have been negligible since 2014. Russia’s annexation of Crimea and the resulting sanctions have made most deals relatively unattractive for international players.

Tighter controls

Furthermore, for EU member states, the controls on external business deals were tightened up in 2014 and became even more stringent in early 2020. This factor has also played a role in making transactions increasingly complicated and costly, hence improbable. Announcements by all the major international law firms stating that they are closing their offices in Moscow and Saint Petersburg have further compounded the situation: Even if investors did wish to negotiate a deal that was (in principle) not subject to international sanctions, they would have great difficulty finding suitable legal advisers. Yet another complicating factor: In view of the tight controls on money laundering, ultimate beneficial ownership and so forth, not to mention the strong and informal state influence on businesses, it is often very hard to obtain complete legal clarity on whether a given company or entrepreneur might or might not be subject to a given sanctions regime. To top it off, there is the – currently incalculable – reputational risk to companies involved in business activities in or with Russia.

As a result of all this, transactions involving Russian counterparties are likely to experience yet another sharp decline, and may even cease to play any kind of role in the international M&A market. In principle, any form of business activity in Russia – such as, for instance, a branch office, subsidiary, or joint venture – could jeopardise non-Russian M&A transactions. Technically, there are ways to solve this problem: The business in Russia could be spun off, essentially removed from the transaction, in turn taking the whole issue of approvals by the – currently somewhat unpredictable – domestic or EU antitrust and international trade authorities off the board. In the past, this tactic has proved effective in dealing with “problematic jurisdictions”. But in truth, the major problem for the M&A market over the next few months is how best to respond to this overwhelming multiplicity of “negative” external influences. The rate of inflation started to climb even before the outbreak of war, and is now being exacerbated by supply chain disruptions, huge increases in the prices of, for example, energy and grain, and rising interest rates.

Just a pause? Or something more profound?

In view of all this complex, wide-ranging uncertainty, we should perhaps ask ourselves whether – and if so, exactly how – corporate acquisitions, mergers and IPOs are the right way to go? Clearly the many economically and politically driven IPOs that took place in 2021, from SPACs to major strategists like Daimler Trucks through to exciting new unicorns, accounted for a large proportion of M&A market activity. At present, however, it remains unclear whether the market is simply having a quiet moment, or whether we are in fact facing an inflection point – a moment of profound transformation. So just how do innovation and external growth work during a major war? There is much to suggest that the M&A marketplace has changed fundamentally during the first half of 2022.