A Tale of Two Years
While we continue to absorb and understand the worldwide pandemic shockwaves of 2020, trying to encapsulate the vicissitudes of the past year in an annual recap is daunting. Early weeks of the pandemic created an almost inconceivable shift in dealmaking – lawyers and advisors conditioned to stand shoulder-to-shoulder in the trenches with clients were suddenly staring at each other’s faces on (interminable) Zoom calls. As pandemic life realities set in, the much anticipated drop-off in dealmaking was surprisingly fleeting. While initial deal flow was merely a trickle (although notably included Alexion’s $1.4 billion acquisition of Portola and Sunrun’s $3.2 billion combination with Vivint Solar), the remainder of the year played host to a steady stream of acquisitions, with many $10+ billion acquisitions in the second half of the year. Although global deal value was a subdued $966 billion in the first half of 2020 (down nearly 50% compared to the first half of 2019), momentum skyrocketed in the second half of the year to nearly $2.2 trillion in global deal value (the highest half-year figure on record). The robust momentum in the second half of the year nearly made up for early pandemic effects as 2020 deal value was down only 6.6% compared to 2019.
COVID-19: The New Normal
The tech sector demonstrated particular resilience over the course of 2020. Demand for technology offerings intensified as consumers and employees increasingly relied on connectivity and software solutions for work and leisure. Despite dealmaking anxieties in the first half of the year, valuations remained strong, and discount opportunities were few and far between. A series of blockbuster deals rallied the NASDAQ 100 Technology Index to trade more than 20% higher than 2019, and Q3 2020 recorded the highest global M&A deal value in the technology sector this decade. Global deal value in the technology sector was up 47.3% compared to 2019, and up even higher (57%) when looking solely at US deal value.
Pandemic realities required (or afforded) dealmakers across industries to throw out traditional playbooks. Parties grappled with (or rejoiced in) creative solutions for remote deal team deployment and renewed views of deal terms and risk allocation. We all learned valuable lessons from disputes involving deals that signed pre-pandemic and struggled to close amid pandemic claims around MAEs and conduct of business covenants. Delaware analyzed relevant claims in the noteworthy AB Stable decision, finding that a buyer was permitted to walk away from a $5.8 billion hotel deal because the seller’s actions in response to the pandemic materially breached the interim operating covenants (which of course required the seller to operate in the “ordinary course of business”). The court declined to find that the target business had suffered an MAE – despite the significant pandemic impact on its hotel business – due to a carve-out in the MAE definition for calamities. While the decision was case-specific, we were all reminded of (i) the high bar of the MAE, particularly when changes are attributable to a systemic risk and (ii) the increasingly important role that covenants play with respect to deal certainty, particularly in periods of market and economic uncertainty. Similar disputes remain pending in Delaware, but given the cost of litigation, the complexity of issues and the binary outcome of an adjudication, many cases have settled before trial. Renegotiation of deal terms to address issues raised in litigation was a popular resolution for those seeking to avoid the courthouse in 2020, with several sellers agreeing to a reduced purchase price in exchange for greater deal certainty. M&A transactions have always been a balancing act of allocating burdens and risks. 2020, in all its variety, was no different.
The US government implemented a number of economic stimulus measures that rippled across the M&A landscape. While intended to provide relief at the height of the pandemic, the Small Business Administration’s (SBA) Paycheck Protection Program (PPP) was a potential deal pitfall wrapped up as a present: As the market rebounded in the second half of the year, parties queried whether the SBA would have to provide consent to transactions resulting in a change of ownership of the PPP borrower. Inviting the scrutiny and review of the SBA into a deal – particularly one needing to be done on a tight timeframe for the reasons that necessitated the PPP loan in the first place – was an unwelcome side effect of accepting PPP funds. Unclear whether SBA consent could be obtained in a timely manner, many buyers required borrowers to pay off any PPP loans in advance of the change of ownership, thereby foregoing the opportunity to have the loan forgiven. Helpfully, the SBA issued a procedural notice in October 2020 outlining what constitutes a “change of ownership,” allowing deal parties to structure a transaction to eliminate the need for SBA consent by submitting a loan forgiveness application and placing the loan proceeds into an escrow account established by the PPP lender in advance of closing. Nonetheless, it would behoove PPP borrowers undergoing a change of ownership to notify their PPP lender of the intended transaction as early as possible, as lenders have yet to adopt any type of uniform escrow process and it may take time to satisfy a lender’s requirements for establishing an escrow for this purpose.
A SPAC-tacular Year
2020 was also a blockbuster year for special purpose acquisition company (SPAC) activity, as 247 SPAC IPOs raised more than $75 billion (a 525% increase compared to the amount raised by SPAC IPOs in 2019). SPACs are designed to find a private target to acquire, so it comes as no surprise that unprecedented levels of SPAC IPOs meant record-breaking numbers of SPAC mergers, with 100 private companies announcing their intent to go public by way of a SPAC business combination in 2020 – a more than 150% increase from the 39 SPAC business combinations announced in 2019. In the third quarter alone, SPAC business combinations totaled $50.9 billion, representing 17% of the US Q3 M&A deal value. SPACs are neither shiny nor new, but many have argued that the pricing certainty afforded by SPACs contributed to their boom during an unpredictable market. Creative deal terms and financing arrangements were also attractive aspects of SPAC deals as compared to their IPO cousin. Time will tell whether SPACs are a fad, and what the impact on the deal market and pending transactions may be if the demand generated by new SPACs begins to outpace the supply of targets who view a SPAC as a compelling source of capital or avenue to the public markets relative to alternatives. But given the number of SPACs that went public in 2020 and have yet to announce a business combination (204 of 247), expect to see many more SPAC business combinations in 2021. (Apologies in advance to our capital markets colleagues – it looks like we’re not done with you just yet!).
A Different Prescription for Poison Pills
As stock prices tumbled at the start of the pandemic, a cascade of companies adopted poison pills in an effort to stave off anticipated shareholder activism. Advisors cautiously counselled through initial concerns that pandemic-fueled market dynamics would lead to increased opportunism, but sustained upticks in hostile and activist playbooks never materialized (conversely, hostile deals were scuttled and shareholder activism was suppressed in 2020, with 24% fewer campaigns in the first three quarters of 2020 compared to the same period in 2019). Even so, the market uncertainty created by COVID-19 caused many companies to adopt a more long-term focus in preparing for activism, which we expect to ramp back up in 2021.
Code Green: ESG Activism
While the frequency of environmental, social, and corporate governance (ESG) activism has been on the rise in recent years, 2020 represented a quantum leap. Social and civil tumult thrust ESG into the spotlight, with activists stepping up demands to prioritize issues centered on diversity and climate change. For example, four proposals regarding employee diversity were passed during the 2020 proxy season, including a proposal at Genuine Parts Company that received a resounding 75% support vote. During the 2020 proxy season, BlackRock was vocal with its commitment on environmental sustainability by voting against 53 companies on the premise of inadequate climate risk disclosure. BlackRock also placed an additional 191 companies “on watch” for possible voting action in 2021, if no demonstrated environmental improvements are made. With increasing pressure for companies to assume leadership roles in the charge on environmental responsibility and social change, we should expect ESG issues to pressure test business models and be a part of board discussions as companies take a more active role in monitoring and addressing ESG matters.
Going Public, for the Public
Insurer Lemonade and pasture-raised egg brand Vital Farms each debuted from their respective 2020 IPOs as a “public benefit corporation” (PBC), which is a corporation that places dual consideration on its contributions to social good and the maximization of shareholder profits. PBCs are relatively new creatures of state law, and continue to gain in interest, in a trend that is consistent with the increased ESG activism we discussed above. Notably, during the summer of 2020, legislation addressing gaps in the Delaware PBC statutes was passed, which, among other things, eases the process for a traditional Delaware corporation to convert to a PBC (and vice versa). The legislation also eliminated shareholder appraisal rights in connection with a conversion, while preserving appraisal rights in the context of a merger. In a business culture increasingly focused on ESG initiatives, the IPOs by Lemonade and Vital Farms, together with this new legislation, have raised questions about whether other companies will follow suit and complete IPOs as PBCs or convert into PBCs. Regardless of whether a wave of publicly traded PBCs emerges in 2021, it remains to be seen how PBC directors will balance the pursuit of socially responsible objectives and the duty to maximize traditional profit. But 2021 is certainly off to a strong start, as Veeva Systems announced on January 13 that it would become the first publicly traded corporation to convert to a PBC, after receiving overwhelming shareholder support for the conversion.
A Look Ahead
2020 brought dealmakers into a vortex of uncertainty like no other, even by standards of those most seasoned by past economic turbulence. The pandemic had a significant impact on tech, accelerating demands for digital offerings and more nimble talent teams. As global lockdowns remain in place and vaccine distribution ramps up, we expect organizations to provide extended opportunities for remote working, making tech companies increasingly attractive M&A targets for buyers looking to supplement existing capabilities. Dealmakers balance many factors as we move into the first quarter of 2021, including burgeoning crackdowns on foreign direct investment and ever-increasing scrutiny from antitrust authorities, particularly in the tech space. While it is impossible to perfectly predict what lies ahead for tech M&A in 2021, third and fourth quarter deal value signal gathering momentum for dealmaking, and we expect many of our teammates to harness the evolving deal environment, actively engage with the pressure to innovate with technology and talent and strengthen long-term strategic positions. We remain, as ever, committed to being the very best teammates in the bright horizons available in this new year.
 Mergermarket Global & Regional M&A Report 2020
 West Monroe Partners and Mergermarket. (December 2020). High Tech M&A Defies the Odds. Retrieved from https://www.westmonroepartners.com/perspectives/signature-research/high-tech-mergers-and-acquisitions-defies-the-odds
 SPAC data has been generated from Deal Point Data
 Lazard’s Shareholder Advisory Group. (October 2020). Review of Shareholder Activism – Q3 2020.