Preparing Your Business for the

COVID-19 World Webinar Series

Forecasting, Negotiating and

Closing M&A Transactions
During and After COVID-19

May 19, 2020

 April Miller Boise Benjamin Marks
612.710.5020
benjamin.marks@
bmo.com

William M. Henry Tony Kuhel Emily A. Farinacci

216.566.7077 216.566.5574 216.566.5863
William.Henry@ Tony.Kuhel@ Emily.Farinacci@
ThompsonHine.com ThompsonHine.com ThompsonHine.com
BMO Middle Market M&A
Current M&A Market Perspectives
May 19, 2020
 Public Equities Markets . . . Shock, Awe and Plenty of Stimulus/”Relief”…
S&P 500 total return

7,000
1. 3/15/20 – Fed cuts rate target to 0%;
pledges $700 bn in asset purchases

2. 3/23/20 – Fed announces unlimited QE

6,000
3. 3/25/20 – Senate approves $2 tn stimulus package

4. 4/21/20 – Senate approves $480 bn extra stimulus

5. …. more to come … just this week …

5,000
• Largest Set of Bond Issuances in History at the
Lowest Interest Rates in History…

• Another $3 tn in stimulus on the docket …

4,000

10/3/08 – TARP 7,000

signed into law
3,000 6,500

3
6,000

2,000
5,500
12/16/08 – Fed cuts
rate target to 0%
5,000
1,000
1 4
11/25/08 – Fed 4,500
announces QE1
2
-- 4,000
2006 2008 2010 2012 2014 2016 2018 2020 January February March April

4 Source: FactSet
 … Widely Varying Impacts by Sector… All or Nothing…

YTD STOCK PERFORMANCE BY SECTOR

 S&P 500% down less than
15% since beginning of year /
Basic Consumer Consumer Health seeing much less volatility in
Energy Financials Industrials Materials REITs S&P 500 Utilities Goods Services Tech Care Telecom
markets over last 2-3 weeks
 However, many companies

(4%) (4%)
(3%)
are withdrawing full year
guidance / suspending
dividend payments
(11%)
(13%) (13%) (13%)
 Pain from crisis is not being
(18%)
felt evenly across sectors
(19%)
 Oil has been the more
(21%)
severely affected – down
>40% YTD / followed by
(26%)
financials / industrials
 Tech, healthcare and
telecom – down <5% YTD

(42%)

Source: FactSet
5 Note: Data as of 01-May-2020.
 … Acute Near-Term Impact on M&A Markets …
WEEKLY ANNOUNCED M&A TRANSACTIONS(1,2)
Transaction Volume Disclosed Transaction Value ($bn)  Already seeing substantial
impact on M&A
288
environment… a few
263
269 highlights…
260
$26

 Week of April 20th had the

209 lowest weekly quantity of
188 195 transactions announced in
over 10 years and was ~65%
169
162 $17 lower than the 10-year weekly
$15
average
138
$14
$13 125
118
$12 $12
$11 $11 $11
106  Week of April 13th was the
86
91 first week since 2004 without
70 71 a $1bn+ transaction
$7 announced

$4
$3
$2 $2
$1 $1

10-Jan 17-Jan 24-Jan 31-Jan 07-Feb 14-Feb 21-Feb 28-Feb 06-Mar 13-Mar 20-Mar 27-Mar 03-Apr 10-Apr 17-Apr 24-Apr 01-May

Source: FactSet
1. As of 6
24-Apr-2020.
2. Includes all complete and pending announced M&A transactions with U.S. targets.
 … Let’s Be Honest… No One Knows Where We’re Going…
Quarterly U.S. real GDP growth (annual rate) Low forecast
High forecast Median forecast
60%
 Q1 GDP contracted by (4.8%)
 Substantial portion
attributable to the
40%
healthcare sector (i.e., no
“non-essential” care)

20%  Range of estimated GDP

growth rates for 2020 is
6.2% enormous, representing the
extreme uncertainty the
-- economy is currently facing…
(4.8%)
(8.4%)

 Since we’re all interested in

(20%) (25.3%) letters…
 BMO’s economists are
predicting a “V” shaped
recovery – with 40% GDP
(40%)
contraction in Q2’20,
followed by 43% and 5%
growth in Q3’20 / Q4’20,
respectively
(60%)
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

7 1. Wall Street Journal Economic Forecasting Survey

 … Most Corporates Remain Internally-Focused / on the Sidelines …
WEEKLY ANNOUNCED M&A TRANSACTIONS(1,2)
 Corporate debt levels are
Net Debt / EBITDA 10-yr Treasury Yield AAA-A YTM
30%-40% higher on average
BBB YTM High Yield YTM
1.9x 2.5% now vs. 08/09

1.8x
1.7x
 Liquidity is at a huge premium
2.0% for most corporates –
1.7x
resulting strain is going to
prohibit M&A (especially large
1.6x transactions), in severely
1.5% affected industries (outside of
1.5x stock-for-stock transactions
possibly)
1.4x
1.0%
8.6%
1.3x

1.2x
0.5%
3.7%
1.1x
2.3%

0.6%
1.0x --
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: BMO Estimates, FactSet

8 1. As of 24-Apr-2020.
2. Includes all complete and pending announced M&A transactions with U.S. targets.
 … Private Equity Beginning to Refocus on Investments with “Dry Powder”…
$800

$740  Private equity “dry powder”

$700
remains at or near all-time
highs
 Expect that private equity will
$600 +89% be relatively more involved in
M&A transactions than
corporates over the next 12-
$500 24 months
 Huge premiums will be
ascribed to “recession-
Billions

$400 $392
resistant” + “pandemic-
resistant”/”essential”
businesses (and the
$300
opposite for businesses
with the opposite
$200
characteristics)
 In some instances, funds may
recap struggling portfolio
$100 companies / amend
investment parameters to
include structured / minority
-- equity transactions
(1)
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: Pitchbook
9 1. As of Q2 2019.
What Are Overarching Implications on the M&A Process?
 Transaction volume is likely to continue to trend downward; however, we expect there to be an abundance of supply when the outlook improves, as sale
processes that were put on hold due to Coronavirus and numerous other companies rush to be in the market
 Potential for increased activity with sellers that have near-term liquidity concerns
 Distressed M&A may increase as time passes and more companies are impacted by the demand headwinds, supply chain disruptions, and efficiency /
Key Takeaways
productivity decreases
 Buyers still want to deploy capital – view this as investing in companies that fundamentally still work, but just might have liquidity problems in the short-
term
 Carve-out / asset sales may increase as companies seek different ways to obtain liquidity

 Decreased / delayed access to financing sources

 Companies may be more hesitant to deploy balance sheet cash for M&A given the uncertainty of their future cash needs and the need to “weather the
Financing / Funding storm”
 Contrarian funds are investing resources seeking opportunities to invest in and / or buy undervalued businesses in the current market, while many other
sponsors are focusing their efforts on portfolio company performance and liquidity

 Stock consideration will carry additional risk for both sellers and buyers in this volatile market environment
 Buyers risk “overpaying” due to depressed valuations / trading levels
Consideration  Sellers take on additional risk driven by uncertainty of the long-term financial impacts on the Buyer’s stock
 Cash likely carries the least risk; however, may not be as readily available
 Public to public stock deals may increase given both companies will likely be impacted similarly by market swings

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 What Are Overarching Implications on the M&A Process?
 Active M&A processes are experiencing slowing timelines
 Delayed due diligence and lack of in-person meetings / site visits
 Funding concerns / uncertainty
Timeline
 Sellside processes that were planning to launch in the near-term are postponing
 Closing timelines likely to be extended as governmental agencies focus on the Coronavirus (e.g., HSR early termination will not be granted, CFIUS
approval likely to be delayed, etc.)
 A buyer faces a heavy burden to enforce an MAE clause in order to avoid the obligation to close
 Only one time in the past has Delaware court ruled in favor of a buyer attempting to enforce the MAE clause(1)
 In that case, the court noted that the effect on the business would have to be durationally-significant, meaning the effect would have to substantially
threaten the overall earnings potential of the target over years, rather than months
 Beginning to see buyers invoke an MAE claim (e.g., Sycamore Partners / Victoria’s Secret)
Legal / Contractual  “Ordinary-course” qualifiers in covenants likely to be negotiated heavily given extraordinary measures that many companies may take in response to
Coronavirus
 Additional buyer scrutiny of force majeure clauses in key supplier and customer contracts
 Additional focus on "drop dead" dates to account for potential delays in regulatory approval
 R&W policies are likely to include explicit Coronavirus exclusions as well as other exclusions to the extent physical due diligence is unfeasible (e.g., Phase I
reviews, site visits, etc.)

 Underwriting a forecast, particularly near-term budgets, will be difficult for buyers and sellers

Valuation / Marketing  Risk exists of price re-negotiation given the change in performance and outlook
Challenges  Market valuation declines are generally expected to be temporary, but will likely weigh heavily on valuations in an active sale process
 Many publicly announced deals are trading well below the offer values, signifying market skepticism that such transactions will close

Source: Vinson & Elkins

11 1. Akorn, Inc. v. Fresenius KABI AG, etc. (DE Chancery Court, Oct-18).
Potential CARES Act Implications in M&A Transactions
POTENTIAL TRANSACTION / CONTRACTUAL / FINANCIAL
PROVISION CONSIDERATIONS
STATEMENT IMPACTS

 NOLs generated in 2018-2020 can now be carried back five

Net Operating years; previously they were unable to be carried back  Potential for increased NOL usage (decreased cash taxes)
Losses
 80% limitation of losses has been deferred until 2022

Income Tax  Interest deductibility for corporations has increased from

Provisions Interest Limitation  Potential for increased deductibility (decreased cash taxes)
30% of EBITDA to 50% of EBITDA for 2019 and 2020

Qualified  The applicable life for qualified leasehold improvements is

Improvement now 15 years (down from 39 years) and they are now  Potential for increased depreciation (decreased cash taxes)
Property eligible for 100% bonus depreciation in year-one

Delay of Payment of
 Employers can now defer its matching portion of FICA from  Deferred employer payroll taxes should be considered for
Employer Payroll
2020 to 2021 / 2022 inclusion in indebtedness and removal from working capital
Payroll Tax Taxes
Provisions  Credit of 50% of qualified wages to employers that  These credits should be reviewed for potential impact on
Employee Retention
suspended operations or had significant drop in gross earnings and for contractual treatment (i.e., split between
Credits
receipts parties based on straddle period)

 Federal loan for up to 2.5x average monthly payroll cost  Buyers will want to assume the debt is not forgivable until
Paycheck Protection
(capped at $10mm), forgivable if the borrower maintains / confirmed otherwise, and should consider implementing an
Program
restores payrolls during the crisis escrow until final determination is known
Liquidity
 Buyers should determine whether businesses have received
Other Federal Loans loans from the Main Street Business Lending Facility and the  These loans should be included within indebtedness
Economic Injury Disaster Loan Assurance

12 Source: Coronavirus Aid, Relief, and Economic Security Act, U.S. Congress; RSM
 Potential Coronavirus-Related EBITDA Adjustments
 Management teams should consider normalizing adjustments as businesses return to normal course operations
 Adjustments will vary depending on the business / industry
 In order to provide credit for these adjustments, buyers and lenders will likely require analytics before, during, and after the crisis
 Examples include: headcount analysis, cash flow analysis, industry impact analysis, and expense / KPI analysis

 One-time demand increases / decreases  Business interruption

Revenue Impacts
 Price increases / concessions

 Decreased discretionary spend (e.g., trade shows)  Inventory write-offs

 Reduced compensation / reduction in force  Increased bad debt expense
expenses (e.g., severance)  Hiring / recruiting costs
Expense Impacts  Supply chain issues
 Overtime rates, bonuses, and benefits
 Nonrecurring expenses to support remote work
 Increased cybersecurity spend
 Increased sanitation / safety costs

Liquidity / Cash  Government incentives, loans, and bailouts  Payroll tax credits
Management Impacts  Extending vendor / supplier payments  Insurance settlements

 Foreign customer exposure

Other Impacts
 Foreign exchange rates

13 Source: RSM
Challenges to Deal-Making
A general counsel’s perspective

 “Wait and see” versus “opportunistic” approaches to M&A

 Deal pipelines and pushing deals forward in the near-term

 Key/novel issues arising given COVID-19s increase to deal

uncertainty/risk

 Advising clients with regard to the uncertainties and

evolving legal and regulatory landscapes
 “Material Adverse Effect” Walk Rights

 It comes down to buyer’s remorse—deals that are already signed,

buyers are asking, what to do now?

 The idea of the MAE-as-walk-right versus the actual practice.

– It may sound like you can walk away from the deal, but it’s still true that
only one MAE has been found.

– Maybe a leverage point?

– Or do the parties (buyer and seller) mutually recognize that the world has
changed?

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 “Material Adverse Effect” Terminations
Will the Delaware landscape change?

 What is the impact of COVID-19 on pending transactions (deals

that have not yet closed)?

 In the public deal landscape, the number of deals reportedly

delayed, renegotiated or terminated have increased.

– Reasons cited: a decline in value of the Target’s assets, inability to

secure favorable terms for financing, lack of pre-closing access to
Target facilities, etc.
 “Material Adverse Effect” Terminations
Will the Delaware landscape change?

 What is a Buyer’s basis for termination or delay?

– Occurrence of a Material Adverse Effect (MAE)

– Failure to operate in the ordinary course consistent with past practice

– Breach of interim covenants

– Doctrine of impossibility

– Lack of sufficient information or resources to close

– Failure to meet closing conditions prior to termination date

– Mutual agreement of the parties and / or unilateral termination

 “Material Adverse Effect” Terminations
Will the Delaware landscape change?

 Out of 15 publicly announced deals pending closing . . .

– Occurrence of a Material Adverse Effect (MAE) (3)

– Failure to operate in the ordinary course consistent with past practice (1)

– Breach of interim covenants (2)

– Doctrine of impossibility (1)

– Lack of sufficient information or resources to close (1)

– Failure to meet closing conditions prior to termination date (3)

– Mutual agreement of the parties and / or unilateral termination (4)

 1-800-Flowers.Com / Bed Bath & Beyond

 Signed: February 14, 2020

 March 24, 2020: 1-800-Flowers postponed the closing

(originally schedule for March 30) until April 30 citing lack of
sufficient resources to attend to the transaction (and that it
needed more time to “assess” whether an MAE has
occurred)

 Target filed a complaint in the Delaware Court of Chancery

on April 1, 2020 seeking an order to close.
 Sycamore Partners / L Brands, Inc.

 Signed: February 20, 2020

 April 22, 2020: Buyer asserted termination, citing breach of the agreement for
taking certain actions (related to COVID-19, such as failure to pay rent and
furloughing employees) without the permission of the Buyer that have
irreparably damaged the Target, and for failing to act in the ordinary course of
business consistent with past practices

 Target filed a complaint in the Delaware Court of Chancery on April 23, 2020
seeking an order to close

 Terminated: May 5, 2020

 L Brands: “Material Adverse Effect”

“[A]ny state of facts, circumstance, condition, event, change, development, occurrence,

result or effect (i) that would prevent, materially delay or materially impede the performance
by Parent of its obligations under this Agreement or Parent’s consummation of the
transactions contemplated by this Agreement; or (ii) that has a material adverse effect on the
financial condition, business, assets, or results of operations of the Business, excluding, in
the case of clause (ii), any state of facts, circumstance, condition, event, change,
development, occurrence, result or effect to the extent directly or indirectly resulting from . . .
(E) changes or conditions generally affecting the industry of the Business . . . [or] (H)
the existence, occurrence or continuation of any pandemics, tsunamis, typhoons, hail
storms, blizzards, tornadoes, droughts, cyclones, earthquakes, floods, hurricanes,
tropical storms, fires or other natural or manmade disasters or acts of God or any
national, international or regional calamity . . . except . . . to the extent (and only to the
extent) that the Business is materially and disproportionately adversely affected
thereby as compared to similarly situated businesses in the industry of the Business.”
 Purchase Agreement Provisions

 Interim Covenants
– Reasonable Access to Facilities
During the Interim Period, the Seller shall permit representatives of the Buyer to
have full access at all reasonable times, upon reasonable prior notice, during
regular business hours, to all premises, properties, personnel, books, records,
contracts, and documents of the Seller.
– Fulfillment of Third Party Deliveries (consents, notices and regulatory
filings)
• Consents
• Notices
• Regulatory Filings (HSR, FTC, medical boards)
22
 Purchase Agreement Provisions

 Closing Conditions
– Need employment agreements/option surrenders?
– Move more items to signing—control what you can
 Outside Dates/Tolling
– Set a later outside date compared to what you normally would
– Tolling for COVID? What are the implications? Would you agree as
the seller?
– If you’re the buyer, consider:
• Avoiding break-up fees tied to failure to close by the outside date
• Making the outside date termination right unilateral
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 Unintended Consequences

 R&W Insurance

– For deals that are signed: expect more pushback

– For deals that aren’t signed: expect an exclusion

– Increase in premiums? Higher scrutiny?

 Access to/Use of Records

– What if you can’t get into the facility after closing? Or have to do in shifts?

– Incentive to automate/make electronic/move to a third party admin control of records

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 Other Post-Closing Considerations

 Post-Closing Transition/Transition Services

– Will need to:
• Provide for a longer transition period
• Consider additional expenses
• Are there workarounds instead of incurring time and expenses?
 Benefit Plans
– COVID-19-specific benefits (potential increase in costs and related premiums)
– Likelihood of COBRA usage changing due to inability of laid off workers to find
employment upon termination
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CLE CREDIT NUMBER
 QUESTIONS?

For updates on business and legal issues related to the coronavirus please
visit Thompson Hine’s COVID-19 Task Force webpage.
www.thompsonhine.com/services/covid-19-task-force
 Disclaimer
These materials are confidential and proprietary to, and may not be reproduced, disseminated or referred to, in whole or in part without the prior consent of
BMO Capital Markets. These materials have been prepared exclusively by BMO Capital Markets' Investment and Corporate Banking Department for the individual
to whom such materials are delivered and may not be used for any purpose other than as authorized in writing by BMO Capital Markets. These materials are not a
product of BMO Capital Markets' Research Department. The views of the Investment Banking and Corporate Banking Department may differ from those of the
Research Department. BMO Capital Markets assumes no responsibility for verification of the information in these materials, and no representation or warranty is
made as to the accuracy or completeness of such information. BMO Capital Markets assumes no obligation to correct or update these materials. These materials
do not contain all information that may be required to evaluate, and do not constitute a recommendation with respect to, any transaction or matter. Any recipient of
these materials should conduct its own independent analysis of the matters referred to herein.

If these materials contain a summary of indicative financing terms and conditions, they should be viewed as an outline intended for discussion purposes only and
are subject to the completion of due diligence by, and internal credit and other committee approvals of, BMO Capital Markets. It should not in any way be viewed
or relied upon as a commitment by BMO Capital Markets or any other entity to extend credit. If provided, (a) the information provided in such materials is for the
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subject to there being no material disruption of the banking and capital markets that, in BMO Capital Market's reasonable opinion, adversely impacts in any
material respect pricing or availability of credit, and (c) BMO Capital Markets shall be entitled, in consultation with the borrower, to change the structure, terms and
pricing (both fees and spreads) of the proposed financing described herein.

BMO Capital Markets does not provide tax, accounting or legal advice. Any discussion of tax matters in these materials (i) is not intended to be used, and cannot
be used or relied upon, for the purposes of avoiding any tax penalties and (ii) may have been written in connection with the “promotion or marketing” of the
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BMO Capital Markets is a trade name used by BMO Financial Group for the wholesale banking businesses of Bank of Montreal, BMO Harris Bank N.A. (member
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All values in this document are in US$ unless otherwise specified.

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