Today’s blog comes from Prof. Samuel Thompson, Director of Penn State Law School’s Center for the Study of M&A. Prof. Thompson has written a new book titled, “The Deal Lawyer’s Weapons in the War on COVID-19.” and his blog provides an introduction to that work:
This article first introduces my recently published PLI book, The Deal Lawyer’s Weapons in the War on COVID-19 (Weapons), which is a supplement to my five-volume PLI treatise: Mergers, Acquisitions and Tender Offers (MATO). The article then briefly discusses and elaborates upon valuation issues addressed in Weapons.
After the introductory chapter, Weapons proceeds as follows. Chapter 2, Congress’s Fiscal Policy COVID-19 Initiatives: The PPP and Treasury Financial Assistance, introduces the CARES Act with a focus on the Paycheck Protection Program (PPP) and Treasury Financial Assistance provisions.
Chapter 3, The Fed’s Monetary Policy and Bank Regulatory COVID-19 Initiatives, looks at both conventional and non-conventional monetary policy responses to this crisis by the Federal Reserve Board (Fed). Many of the Fed’s non-conventional responses are similar to measures it took in the Financial Crisis of 2007-2008.
Chapter 4, Corporate, Securities and Stock Exchange COVID-19 Initiatives, addresses several state corporate law issues and SEC rules and regulations, including (1) state law fiduciary duties applicable to directors in a crisis, (2) corporate and SEC rules governing shareholder virtual meetings, (3) SEC disclosures, and (4) modifications in the NYSE’s shareholder voting rules.
Corporate and stock exchange issues are addressed in chapters 2 through 5 of MATO, and securities issues are addressed in chapters 6 through 8 of MATO.
Chapter 5, The DOJ’s and FTC’s Antitrust COVID-19 Initiatives, starts with a quick review of the applicable antitrust and pre-merger notification laws, and then addresses both procedural and substantive antitrust issues arising from this crisis. The substantive issues include merger enforcement, competitor collaborations, and the legality of price gouging.
Substantive antitrust merger enforcement is addressed in chapter 12 of MATO, and Hart-Scott-Rodino pre-merger notification is addressed in chapter 13 of MATO.
Chapter 6, Congress’s and Treasury’s Federal Income Tax COVID-19 Initiatives, discusses several tax related provisions of the CARES Act, including (1) the modification to the net operating loss (NOL) carryback and carryover rules, (2) the Employee Retention Credit for Employers, and (3) the delay in the payment of the Employer Payroll Tax.
For more general detail, chapter 9 of MATO addresses domestic federal income tax issues in M&A; chapter 21 deals with such issues in inbound cross-border M&A; and chapter 22 addresses such issues in outbound M&A. Chapter 23 of MATO addresses state tax issues in M&A. My two volume PLI treatise, The Business Taxation Deskbook, contains chapters dealing with all aspects of the federal income taxation of business transactions.
Chapter 7, Cross Border Inbound and Outbound COVID-19 Initiatives, looks at both (1) COVID-19 related issues facing foreign firms when investing in the U.S. and (2) COVID-19 issues facing U.S. firms when investing or operating abroad. The focus from an inbound perspective is on activities of the Committee on Foreign Investment in the U.S. (CFIUS), which, in certain cases, has the power to block an acquisition by a foreign firm of a U.S. target.
From an outbound perspective, the focus is principally on the European Union’s (EU’s) (1) investment restrictions, (2) State Aid rules, and (3) antitrust enforcement. While the focus is on the EU, the principles the EU employs in responding to COVID-19 could be similar to principles followed by non-EU countries.
Chapter 19 of MATO addresses corporate, securities and other issues relating to inbound M&A, and chapter 20 addresses such issues from an outbound perspective.
Chapter 8, Investment Banker’s Valuation COVID-19 Initiatives, starts with a brief review of the discounted cash flow (DCF), comparable companies, and comparable transactions valuation techniques. The chapter then illustrates how these concepts are applied by investment banking firms in valuing targets in M&A transactions. The chapter also briefly addresses issues involved in valuing companies in financial distress, such as bankruptcy.
Valuation issues are addressed generally in chapter 11 of MATO, and I am currently working on a new PLI book dealing with valuation in M&A transactions that will build on that chapter.
Immediately after this introduction to Weapons in this Section II, I turn in Section III to a brief discussion of some post-publication valuation issues presented by the COVID-19 crisis.
Chapter 9, The Deal Lawyer’s Contract Drafting COVID-19 Initiatives, focuses on one of the principal responsibilities of a deal lawyer: preparing an agreement to address the client’s needs. The focus is on the drafting of acquisition agreements in the context of the COVID-19 crisis, including issues involving the material adverse change or effect clause. This topic is generally addressed in chapter 2 of MATO.
Finally, Chapter 10, The Deal Lawyer’s Bankruptcy Law COVID-19 Initiatives, provides a brief introduction to some of the bankruptcy law concepts that are likely to be of significance in addressing the increasing number of COVID-19 generated bankruptcies, such as the bankruptcy of Hertz. Bankruptcy issues are addressed generally in chapter 16 of MATO.
Periodic updates to Weapons will be posted on the Penn State Law website beginning in January 2020.
As discussed above, Chapter 8 of Weapons addresses valuation issues presented by the COVID-19 crisis. When addressing valuation issues in M&A and related transactions, deal lawyers, investment bankers, and other professionals should be aware of the writings of Professor Aswath Damodaran, a professor of finance at the NYU Stern School of Business. I have been fortunate to use Professor Damodaran’s book entitled Investment Valuation in my Merger Finance and Economics MBA course at Penn State’s Smeal School of Business. I have also looked at several of his many other books on corporate finance and valuation, including Narrative and Numbers: The Value of Stories in Business.
Interestingly and uniquely, Professor Damodaran makes the recordings and materials for his NYU classes available on his NYU webpage: Damodaran Online at http://pages.stern.nyu.edu/~adamodar/. In addition, Professor Damodaran has a blog entitled Musings on Markets, which is available at http://aswathdamodaran.blogspot.com/2020/.
As indicated in Chapter 8 of Weapons, Professor Damodaran has published several insightful posts on his Musings and Markets blog addressing various valuation issues arising out of the COVID-19 crisis.
As of November 16, 2020, there are 14 posts, each with the introductory words A Viral Market Meltdown, and the posts were made between February 26, 2020 and November 5, 2020. The November 5 posting, which is entitled A Viral Market Update: A Wrap on the COVID Market, Premature or Not! (COVID Wrap Post) explains: “In this post, I intend to wrap up this series with a final post, reviewing how value has been reallocated across companies during the months, and providing an updated valuation of the S&P 500.” Since the COVID-19 crisis is not yet over, I hope that this is not Professor Damodaran’s last Viral Market Meltdown post.
In chapter 8 of Weapons, I discuss various aspects of Part I, February 26, 2020, through Part VII, May 13, 2020, of the Viral Market Meltdown posts. In the balance of this post, I address some of the highpoints of the Part XIV, November 5 COVID Wrap Post, as they relate to the valuation of the market generally.
This COVID Wrap Post gives the following succinct description of the way in which the stock market has moved from before the crisis in February 2020 and through early November 5, 2020:
The year began auspiciously for US equities, as stocks built on positive performance in 2019 (when it was up more than 30%) and continued to rise. In fact, on February 14, US equities were are at all-time highs, when news of the virus encroaching into Europe and then rapidly expanding across the world caused stocks to go into a tailspin that lasted just over five weeks. On March 23, 2020, amidst talk of doomsday for stocks, momentum shifted, with some credit to the Fed, and stocks went on a run that extended through the end of August, recovering almost all of the ground lost during the meltdown. In September and October, stocks were choppy with more bad days than good, as investors recalibrated.
Can you see the V-shape in these market moves: High; Dramatically Down; and Dramatically Up? Economists debate whether the recovery will be V-shaped.
In his COVID Wrap Post, Professor Damodaran has an interesting observation on the performance during the COVID-19 crisis of the FANGAM stocks (i.e., F Facebook, A Amazon, N Netflix, G Alphabet—Google, A Apple, and M Microsoft). He reports:
Updating the numbers through November 1, here is how these six companies have performed over the crisis, relative to the rest of the market: [T]he FANGAM stocks have added $1.25 trillion in aggregate market cap since February 14, while all other US equities have shed $1.32 trillion over that period. If the market has almost fully recovered from its early swoon, the credit has to go almost entirely to these six companies.
After this post, on November 5, both (1) Pfizer and its partner BioNTech, and (2) Moderna announced that they had produced coronavirus vaccines that were 90% and 94.5% effective, respectively. As explained in an article in the Wall Street Journal, as this post was written on November 16, 2020, the market had the following reaction to this vaccine news:
The Dow Jones Industrial Average hit a new all-time high on Monday after a second set of upbeat test results from a potential Covid-19 vaccine lifted shares of companies that have been walloped by the pandemic.
The index of blue-chip companies rose about 315 points, or 1.1%, to 29795 in recent trading, after touching an intraday record of 29,942.88. The climb put the Dow within striking distance of the 30000 mark—a milestone that the index has neared but never reached.
Gains were wide-ranging. Shares of several tech stocks rallied alongside banks, retailers, oil companies and travel stocks. The S&P 500 rose 0.6% after settling Friday at a new record high. The Nasdaq Composite rose 0.3%.
Professor Damodaran provides the following three “Lessons Learned, Unlearned, and Relearned” during the COVID-19 crisis:
- Respect markets, even if you disagree with them: Markets are not all knowing and they are definitely not efficient, but they are extraordinary platforms for conveying a consensus view of the future. While you and I may disagree with the market view, and markets can be wrong, it behooves us all to at least try and understand the message that it delivers.
- Time to move on: For many managers and investors, the COVID crisis is a reminder, sometimes in painful terms, that we are now well into the 21st century and continuing to use tools, techniques and metrics that were developed and tested on 20th century data is a recipe for disaster. That was the underlying message in my posts on value investing from last month.
- Importance of Flexibility: If you look across what companies that have done well during this crisis share in common, it is flexibility, with companies that can adapt quickly to new circumstances improving their odds of winning. In the same vein, it seems self-defeating for companies to borrow too much or lock themselves into paying large dividends, since both reduce their capacity to respond quickly to changed circumstances.
Let’s hope that Professor Damodaran keeps the COVID-19 Lessons coming!
 Ngu Huu Truong, a May 2020 LLM graduate and current SJD candidate at Penn State Law, is my co-author of chapters 9 and 10.
 Aswath Damodaran, A Viral Market Update: A Wrap on the COVID Market, Premature or Not! [hereinafter COVID Wrap Post].
 Caitlin McCabe, Mischa Frankl-Duval, and Frances Yoon, Dow Hits New High After Positive Moderna Vaccine Results, Wall St. J. (Nov. 16, 2020).
 COVID Wrap Post, supra.
An excerpt from Prof. Thompson’s new book will appear in the next issue of our Deal Lawyers print newsletter.
– John Jenkins