Investment Transactions in India, Opportunities and Key Considerations
The economic slowdown brought on by the COVID-19 outbreak has forced businesses globally to pause and reflect on their sustainability as well as growth plans. Various sectors have responded differently to the pandemic and identified a need for businesses to increase access to funding and generation of cash flows. In such times, structuring a transaction is of utmost importance,which takes into consideration business, legal, and tax aspects.
The disruptions caused by the pandemic have led the consumers to be more cautious aboutwhat, where, and how to buy.Various sectors have responded differently to this crisis.The highest degree of impact in terms of duration for returning to normalcy is expectedin tourism, hospitability, and aviation. The financial services sector also experienced a brunt as the government curbed policies in favor of the citizens, whichcouldlead to rising non-performing assets in their balance sheets.
Restrictions on travel and physical proximity emerged as a result of the pandemic are creating a need for technological advancements to aid people in continuing with activities remotely. While there was a nascent market for these technologies, the current scenario has accelerated the immediate potential, paving the way for online education, healthcare technology (such as telemedicine through videos and phone), and an increase in the use of online payments. Emerging segments, which have and are further expected to spark, are online retail and insurance. Since a large portion of India's population is withoutadequate insurance, a crisis of this proportion and nature is likely to underline the need for obtaining insurance, especially health insurance. While store closures and declines in discretionary consumer spending have hamperednon-essential retail (other non-food, apparel, fashion, and luxury products), the prevailing constraints are likely to boost online purchasing.
Despite the economic slowdown being immensely challenging, these times present companies with an opportunity to reinvent their strategies and tap into new growth avenues through alliances,acquisitions, and divestitures. During this unprecedented situation, there is scope for technological collaborations, restructuring of businesses, optimization of product mix portfolio, and cash consolidations to survive successfully. The inorganic route, however, makes it imperative to first assess the market dynamics and the intricacies involved in successfully executing a transaction.
Due to uncertainty in the economy, investors are skeptical and vigilant before investing and lending money to the potential targets. In deal-making, a deeper emphasis is being laid on several deal facets, such as assessment of the targetcompany's cashflow management, solvency risk, working capital normalization, and closing working capital. Investors are expected to look for more aggressive price reduction mechanisms, broader representation and warranty coverage, more favorable indemnity arrangements. They are likely to employ the'wait and watch'model, to prevent pumping the money all at once.
Carrying out a transaction during such times may mean longer execution timelines owing to the difficulty in on-site evaluation of the target, physical verification of inventory and fixed assets, maintaining the confidentiality of documents due to remote working conditions, and obtaining non-digitized documents.
With the increased uncertainty, there would be valuation gaps emerging between the transacting parties leading to long-drawn and challenging pricing negotiations. It is difficult to assess the complete impact of COVID-19 on the Target business'svaluations in the medium-term.Though the investors would want to validate the Valuation applying the discounted cash-flow methodology for price determination, both the parties would be looking for transaction structures that facilitate addressing valuation uncertainties. The investor would look for a structure that helps in limiting his downside if the Target does not deliver as per the projections, and the seller would prefer a structure that allows him to tap the upside if it is delivered.While the pandemic may have temporarily set back the growth plans of companies, investors would gradually reinitiate activities to achieve their investment objectives. As is the case in every other aspect of business, companies would need to evaluate and reinvent theirstrategies to overcome the unique challenges in deal execution emerging in the current scenario, potentially creating new trends and practices for the long term.