If any more evidence was needed that China was the engine powering the regional – not to mention the global – economy, it has arrived in the form of the fallout from the 2019 coronavirus outbreak.
As the number of cases continues to rise across Asia, China is in a veritable state of lockdown, with factories yet to resume production and employees working from home. Add to this the fact that several countries and regions have imposed travel restrictions, and the overall business and investment sentiment is jittery indeed. All this makes it a less-than-conducive climate for dealmaking.
This is reflected in the early data this year. A recent Financial Times article cited Dealogic data showing that number of M&A deals involving Chinese companies year-to-date had fallen by a third from the same period in 2019 to 356, with total deal value having shrunk almost 70 percent to $18 billion.
And a recent Reuters report found that bankers were bracing for a deal drought as efforts to limit the spread of the coronavirus epidemic had put key meetings and roadshows on hold.
“Asia M&A hasn't hit a precipice yet, but you can certainly hear the brakes screeching loudly,” says Robert Ashworth, partner and co-head of global M&A at Freshfields Bruckhaus Deringer. “Some auctions, especially those involving Chinese assets or buyers, have been postponed while others have seen timetables lengthened.”
The timing of the outbreak, coming as it did around the time of China’s lunar new year holiday, has dealt a hammer blow. The long annual holiday is often accompanied by a dip in deal-making, but this time the numbers are said to be staggering.
“Any deal that involves Chinese assets, a significant China supply chain or has participation from Chinese buyers is vulnerable right now, regardless of where in Asia it is taking place. The shadow that casts is huge,” says Ashworth.
In this climate, there is little that companies can do now but try and reduce as much of the risk as they can. As Ashworth notes: “Whilst all deal-making involves some degree of uncertainty, the current dynamic is at a different level.”
“And that requires greater focus on key areas of deal protection: pricing mechanics, closing adjustments, material adverse change (MAC) provisions and other walk-away rights and termination provisions,” he adds.
That said, it’s not all doom and gloom at the moment. Ashworth notes that bilateral transactions and public market deals seem less affected. “We are seeing new opportunities in both areas, as well as in the distressed space. It will require a strong stomach, but the market is certainly still open for the right deals,” he says.
While no one can predict how long the outbreak – and its resulting impact – will last, lawyers like Ashworth are optimistic that things will improve soon, and the outbreak might actually throw up more opportunities in the future.
“There is no doubt that investment activity, deal-making and operations will be significantly affected in the short term,” he says. “However, pent-up demand is likely to create significant forward momentum as soon as conditions start to improve. Nobody wants to be caught napping when that happens.”
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