A deal is a deal, except for a growing number of companies that agreed to buy assets before the Covid-19 pandemic sent markets plunging.
Panicked executives already have launched a handful of legal battles that could blow up billions of dollars’ worth of merger and acquisition agreements. And litigators predict at least a dozen more limping deals will crash land in courts over the next few months, while many others will be quietly renegotiated.
Among the high-profile transactions that have become feuds are Mirae Asset Global Investments Co.’s $5.8 billion purchase of a U.S. luxury hotel portfolio from Anbang Insurance Group Co., SoftBank Group Corp.’s $3 billion acquisition of We Cos. stock, and Sycamore Partners’s $1.1 billion bid for a controlling stake in L Brands Inc., owner of the Victoria’s Secret lingerie chain. Another involves Kohlberg & Co. backing out of a deal with Snow Phipps Group LLC.
“The cases are just the tip of the iceberg,” said Larry Hamermesh, a University of Pennsylvania law professor who specializes in Delaware corporate law. “There’s going to be a lot more deals that just get quietly renegotiated and never wind up in court.”
Already, half a dozen cases of virus-related challenges to transactions are before judges in Delaware Chancery Court, records show. The state is the corporate home to more than half of U.S. public companies and more than 60% of Fortune 500 firms.
Values Plunge
The main reason some big deals are ending up in court is that the value of assets companies agreed to buy have plummeted since the onset of the coronavirus pandemic.
With shutdowns of most retail businesses including stores, movie theaters and restaurants, the U.S. economy will contract a record 37% in the second quarter and have its worst recession since World War II, Bloomberg Industries estimates. More than 26 million Americans filed unemployment claims after losing their jobs.
Mergers and acquisitions worldwide are down 31% to $751 billion this year compared with the same period in 2019, according to data compiled by Bloomberg. In the U.S., deals including investments for U.S.-based companies has fallen 48% to $273 billion, the data show.
Some lawmakers have called for a temporary ban on mergers and acquisitions during the pandemic.
Buyers and sellers are looking for the nearest exit because many assets simply aren’t worth what they were a few months ago, said Eleanor Tyler, a legal analyst with Bloomberg Industries.