Impact of Covid-19 on Mergers, Acquisition
and Corporate Restructurings

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By CPA Zipporah Obonyo Nyachwaya

Covid -19 halted most corporate operations and locked most of the world’s population in their
homesteads due to health and safety checks by the government. Because many companies around the
world were unprepared to face the pandemic, organizations had to adopt new ways to handle government restrictions, supply and demand constraints, new sanitation rules and many others. This
created a new businesses environment shaped by a health crisis.

Mergers, acquisitions and corporate restructuring enabled corporations to realign their strategic plans in order to survive and compete in the business world. Regardless of the economic downturn that was triggered by the pandemic, some companies were able to make profits out of their investments while others ceased operations. Divest is the other option that was sought by other organizations that
did not get rid of the dead weight in their businesses.

Global M&A Trend Focus in year 2022.The survey by KPMG indicates that the appetite for mergers and acquisitions – M&A could be limited by both macro and microeconomic factors which include high valuations, inflations, and a rise in the cost of capital due to high interest rates, potential tax increases, fierce competition, supply chain factors and lack of attractive targets to buy.

According to a Reuters 2021 report, global deal makers laid good ground to sustain its scorching pace in the subsequent year, in the wake of a historic year for mergers and acquisition activities, supported
largely by the availability of cheap finances and prospering stock markets. Heading into 2022, corporates needed to focus on resolving the challenges of supply-chain disruptions, labor shortages, a COVID-19
spike brought on by the Omicron variant and cost inflation.

Corporates will continue using M&A to accelerate the execution of their strategic priorities. One such strategic priority highlighted by COVID-19 is the increased omnipresence of technology, in e-commerce and logistics, content delivery and consumer interface, business infrastructure and other areas. Corporates
across all sectors and especially in the industrial and consumer industries will accelerate their digital transformations through M&A to enable faster growth.

Deal-making may prove less robust in sectors still recovering from the pandemic, including travel, leisure and aerospace. Businesses have been focusing on the digital transformation of their operations over the past several years, and the pandemic has increased the speed and scale of the change. We expect the need for digital and business transformation to continue to be an important driver of deals across all sectors.

Impact of Covid-19 on Corporate M&A

M&A to stimulate inorganic growth Growth requires distinctive strategies. Progress can be either inorganic or organic. Inorganic growth comes through acquiring other companies which entails
mergers, acquisitions, alliances, joint ventures and franchising. It provides a quick way to enter new markets and product categories. It is considered a solution for changing market conditions.However, acquisitions can be risky and may not be a perfect fit. With regards to the health crisis, that was brought by COVID19.

A section of companies opted for M&A as a means of enhancing and updating their resources and capabilities in a timely manner to draw away the environmental shift which renders the current strategy
obsolete. Due to limitations brought by the pandemic, managers of organizations are persuaded to adopt strategies which are fit for M&A and the relevant capacities that can stimulate inorganic growth and
profitability in a decelerating economy.

Companies sought to acquire technology capabilities to realign their business models; this fueled the demand for M&A, which they needed to expand their market share and increase product portfolio.
For instance, Well Technology, a company listed and traded in the Toronto stock exchange during the year 2020 closed 20 M&A deals. The demand for healthcare services to cater for COVID 19 patients and other ailments during the pandemic period was higher.

This led to more M&A which aimed to grow its operations and expand direct billing services for doctors.
Circle Medical Health and Doctor Care were examples of facilities that were acquired in November 2020.
Analysis by PwC further showed that the greatest grabbing deal in the health occurred in 2021 when Oracle bought her giant Cerner for &283.3 billion and the deal brought together a legacy tech
company and a legacy health IT Company.

The merger gave Cerner and Oracle the capacity to transform healthcare delivery by providing medical professionals with better information which translates to better treatment decisions.

M&A Corporate restructuring for survival

The outbreak of COVID-19 resulted into economic slowdown, compelling organizations to transform and adopt better strategies to sustain their businesses. Divesting was one of the methods that was embraced as one of the means of raising capital for reinvestment, as a way of optimizing their portfolio and as a mechanism to focus on core and profitable operations. According to an analysis by M&A Leadership Council, 23% managers of organizations opted for divestiture with the intention of raising capital for debt service or as a future growth plan.

For instance IBM divested in 2020 by separating its core legacy operations so as to concentrate on cloud
service and Artificial Intelligence which later yielded higher returns. The divestiture by IBM resulted in the
creation of a new and separate entity by the name NewCo which would absorb the IT infrastructure services, which is one of the IBM units. IBM adopted the strategy with the intention of attaining its vision of becoming the best company in infrastructure service provision in the world. Other corporations that announced are, Daimler, General Electric, Johnson & Johnson and Toshiba among others.

Safeguards Adopted During Covid 19- healthcare sector’s response to COVID-19

Away from the containment and mitigation that was adopted worldwide, countries have embraced measures which will aid in strengthening the healthcare sector to ease pressure mounting on the system. Many of the Organizations for Economic Cooperation and Development (OECD) have come up with the appropriate measure to commission importation of low- priced medical input to fight against COVID -19.
The common measures that were taken by the majority include the temporal removal of import duty on medicine and health devices and equipment.

Additionally the exception was accompanied by other measures to expedite customs and clearance procedures. Preferential tax treatment was also considered as a way to stimulate health related services and products which included deduction of input VAT on the items that were donated by businesses. Exception of personal income tax (PIT), PAYE, bonuses and subsidies paid to medical staff working
towards fighting COVID 19 was another measure adopted by some countries.

Measures for businesses

Most corporations had liquidity challenges that affected their ability to meet business obligations like rent, wages, servicing of loans, and payment of tax among others. This escalated the laying off of workers.
Some were also unable to pay suppliers. In some cases, businesses were shut down and bankruptcy was declared. OECD, G20 and other countries came up with measures to alleviate cash flow constraints. The initiatives included tax and non-tax.

Concerning non-tax, the most common instrument in both OECD and G20 was loan guarantee schemes; where governments guarantee all or part of the value issued by banks to eligible businesses. Aside from the guarantee scheme, small interest free loans and cash grants were provided to crippled businesses. Deferral of payments of nonwage business costs such as rent or interest was another measure adopted by other countries like the Slovak Republic, Sweden, and the United States.

Tax measures that were adopted included deferrals of tax payments; this applied to monthly or quarterly tax payments, property tax payments was also waived by some countries during the crisis period. OECD and G20 countries allowed businesses to delay the filing of returns as a means of alleviating cash flow challenges. Loss carry- back for the year 2020 tax was allowed by some countries ( this one included the Czech Republic, Norway, Poland, and the United States) in this case, taxpayers could carry back the
loss incurred in 2020 against the profits earned in the previous fiscal years.

Other countries raised the carry-forward period for losses incurred in 2020 (they include China, the Slovak Republic). Tax waiver was another measure adopted. It included the waiver of property taxes, presumptive
taxes for small business, levies on tourism and airline companies, exempt of import taxes on inputs in certain sectors e.g. air transport and manufacturing.

Lessons Learned From Covid 19

  1. The need to centralize medical records for all patients became apparent; this would ease the process of tracking patients whenever they are transferred from one facility to another. In addition, it is a convenient way for medical staff to track the medical history of patients
    at any given time.
  2. Covid 19 brought about a working from home policy, where employees could execute their assignments from the comfort of their homes. Some studies have shown that many are more productive this way. The new way of life is convenient for most organizations because the only requirement is the internet.
  3. Upon the announcement of the first case of Covid 19 in Kenya, all learning institutions were shut down to avoid the spread of the virus. The education sector had to look for new techniques to ensure continuity of teaching and learning. So virtual learning was introduced. It has been proved that instructors from different environments can deliver their content to students present through a computer screen and not necessarily in
    the classroom.
  4. Some businesses blossomed because Covid 19 forced lockdowns so necessities were brought to customers’ doorsteps. Business was flourishing for those who took it online and this resulted to growth of businesses and job openings.
  5. Covid 19 proved that internet is a vital and basic tool that enables you to stay connected
    and survive a global emergency. The good network gave business owners endless
    opportunities and possibilities. During the crisis, people needed to among other things,
    reach out for online medical consultations,and to work from home to survive. This
    demanded improved internet.
  6. During the setback of Covid 19, online became the norm for most transactions. This facilitated the upgrade network system. Incidentally, hackers also had to up their game to reap during the season. Studies show that hackers succeeded because of poorly secured user devices and lack of cyber awareness. Therefore, cyber security remains critical because internet is actively utilized.

The writer is a Member of ICPAK Research & Development committee South Rift Branch- Youth Representative


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