New Zealand M&A operating in ‘a bubble of modified normality,’ Chapman Tripp says

The firm’s M&A experts analysed the current landscape in its M&A Matters report

New Zealand M&A operating in ‘a bubble of modified normality,’ Chapman Tripp says
Joshua Pringle

Chapman Tripp’s M&A experts have analysed the current landscape for the field in the firm’s latest M&A Matters report.

“Although the economic turmoil created by COVID-19 continues to dominate the deal landscape globally, New Zealand M&A, at least for now, seems to be operating in a bubble of modified normality,” the firm said.

The report looks at the trends in M&A in light of the impact of the COVID-19 pandemic on the economy. It identified some key issues that corporate lawyers need to consider in this environment, which include working capital adjustments, distressed sales, W&I insurance and the overseas investment regime.

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“Working capital adjustments have long been the purchase price adjustment mechanisms of choice in the New Zealand M&A market,” Chapman Tripp said. “The highly unpredictable nature of the current trading environment, however, creates challenges for buyers in determining a target’s ‘normal’ level of working capital as part of their financial due diligence.”

The firm recommended that parties consider alternative pricing mechanisms like a locked box, which partner Joshua Pringle said “delivers price certainty to both parties in circumstances where the outcome of a working capital adjustment could be difficult to predict.”

While the number of distressed sales has not risen significantly, Chapman Tripp expects such transactions to become a market feature due to the impact of the pandemic. In the process, the market could see a number of undervalued deals.

“Sellers will want to achieve as quick and clean an exit as possible,” the firm said.

Chapman Tripp said that W&I insurance underwriters have been “more prepared to continue to write policies” than the firm expected, which could be because recent M&A transactions have involved sectors that have not been strongly affected by COVID-19.

“At least in the New Zealand market, most insurers are showing a willingness to engage on whether a blanket COVID-19 exclusion from the policy is appropriate depending on the target’s exposure to COVID-19 risk, which we expect most buyers would have addressed exhaustively in the due diligence process,” the firm said.

The firm also anticipates a boost in “synthetic” W&I insurance policies, especially when it comes to “distressed M&A transactions where it may not be possible to negotiate meaningful warranties with the seller,” Chapman Tripp said.

As with jurisdictions like Australia, New Zealand has recently restricted foreign direct investment. Last month, the government implemented an emergency clearance process that “considers whether relevant transactions raise national interest concerns,” the firm said. Nonetheless, it does not apply when consent is already necessary under the Overseas Investment Act.

“As an inherently political tool, the national interest test could potentially be used in respect of transactions which are seen as opportunistic acquisitions at an undervalue,” Chapman Tripp said.

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