Trouble Ahead: More Deals Are Falling Apart

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Here come the busted deals

L Brands had a seemingly airtight case for selling a majority stake in Victoria’s Secret, even after the buyer, Sycamore Partners, got cold feet. But its sudden surrender might foreshadow a wave of broken deals.

L Brands agreed to let Sycamore walk away, even though experts said it had a strong argument to enforce the agreement made in February. Sycamore had argued that the coronavirus outbreak led to irreparable damage to Victoria’s Secret, but the merger agreement excluded pandemics as a reason for scrapping the deal.

• According to L Brands’s incoming chairwoman, Sarah Nash, it is better to focus on dealing with the coronavirus “rather than engaging in costly and distracting litigation.” Neither side will pay termination fees.

Two other deals collapsed yesterday:

• Amherst Holdings called off a $2.3 billion takeover of Front Yard Residential, saying that the pandemic had made the integration “too operationally complex and uncertain.” (As consolation, Amherst will pay a $25 million break fee and buy $55 million worth of Front Yard stock.)

• The college textbook publishers McGraw-Hill and Cengage Learning agreed to call off their merger, citing the onerousness of regulator-mandated divestitures.

More broken deals may be on the way. Don’t say we didn’t warn you.

Adam Neumann takes on SoftBank

Speaking of busted deals, the WeWork founder plans to sue SoftBank, his onetime ally, over the Japanese conglomerate’s decision to call off a $3 billion share repurchase.

Mr. Neumann was in line to sell up to $970 million in shares in the deal, which was part of SoftBank’s rescue of WeWork last fall. In his complaint, Mr. Neumann argued that SoftBank had been “secretly taking actions to undermine” that agreement, out of a desire to shore up its own financial health.

SoftBank called the claims “meritless” and argued that it was under “no obligation” to go through with the repurchase.

The office may never be the same

When white-collar workers return to the office, it won’t be business as usual.

Goodbye, hot-desking and open-plan offices. Plexiglass barriers between desks, or a return to private cubicles and (gasp!) full offices, are under discussion, according to Matt Richtel of The Times. Some workplaces may require employees to wear masks all day.

Financial firms are taking different approaches.

• At the investment bank Jefferies, “We will not be bringing anyone ‘back’ to work because, as best as we can tell, none of us has stopped working,” the firm’s C.E.O., Rich Handler, and president, Brian Friedman, wrote in a memo to staff. Employees will “make the final determination based on your own personal assessments.”

• CBOE, the exchange operator, is moving to new headquarters in Chicago. Although the bulk of its trades are made electronically, the company plans to reopen its trading floor on June 1, and traders will have to follow social distancing requirements. The C.E.O., Edward Tilly, said that he would close the trading floor for good if customers expressed complete satisfaction with online-only trading.

📞 Today at 2:30 p.m. Eastern, join The Times’s Corner Office columnist, David Gelles, for a group call about navigating the markets with Penny Pennington, the managing partner of Edward Jones, and Keith Mestrich, the C.E.O. of Amalgamated Bank. R.S.V.P. here.

Deal Professor: Airlines’ day of reckoning

Steven Davidoff Solomon, a.k.a. the Deal Professor, is a professor at the U.C. Berkeley School of Law and the faculty co-director at the Berkeley Center for Law, Business and the Economy. He wonders whether Warren Buffett sees a problem with airlines that others might be missing.

Airline stocks tumbled yesterday after Warren Buffett said that he had sold Berkshire Hathaway’s stakes in major carriers. Are the airlines doomed?

It depends on whether the companies are insolvent — or illiquid.

In a traditional financial crisis, like 2008, the issue is uncertainty. Banks fail during a panic when all they might have needed to ride it out was liquidity. In this scenario, the central bank serves as a liquidity provider of last resort, bridging the bad times for solvent institutions.

This has been the Fed’s approach. By pumping liquidity into the market — far more than during the 2008 crisis — the Fed has ensured that even airlines and cruise lines can secure ample funding in private markets. In addition, the carriers are getting $50 billion in federal grants and loans.

But that federal aid is not a bailout; it is an employment program. With the airlines flying at 10 percent capacity, the funds will keep some 750,000 workers employed through October, when the restrictions on layoffs expire. Essentially, the package is structured to sustain a pre-pandemic level of service.

But the aid does not take into account longer-lasting changes that threaten the industry’s solvency. That was Mr. Buffett’s point: “The world changed for airlines,” he said. But who knows? I suspect that many people are planning trips for the fall. Tickets over Thanksgiving are still expensive (I checked). An uptick in flights within China provides some hope.

If air travel does not return to something approaching normal by October, then Mr. Buffett’s decision to sell will have saved him more losses. It will also mean that the government merely postponed airlines’ day of reckoning — at a price of $50 billion. In other words, what people now see as a liquidity problem would in fact be a solvency crisis. At that point, carrier valuations may fall far enough that Mr. Buffett decides to pick up the phone again.

‘A remarkable indication of Econ 101’s demise’

Peter Orszag, the head of Lazard’s financial advisory practice and a former Obama administration budget chief, has written a punchy op-ed for Bloomberg about how the pandemic will upend long-held businesses practices. It is worth your time.

Stakeholder capitalism is coming. Stimulus packages could see the Fed own a significant share of corporate debt and the government take equity stakes in companies that receive aid (like the airlines). “The result will be a capitalism that would be familiar to Americans in the 1950s, with norms that balance shareholder interests with broader social concerns and a more interventionist regulatory state,” Mr. Orszag writes.

Putting shareholders above all others is passé, he argues. Activist investors who often push for greater shareholder payouts are in retreat. And a Republican administration is urging big companies that took rescue loans meant for small businesses against the spirit (though not the letter) of the law to return the money.

Why a top Amazon coder quit

Tim Bray was a prominent engineer in Amazon’s cloud computing division until Friday, when he resigned “in dismay” over the recent firings of warehouse workers who complained about their safety.

Staying meant “signing off on actions I despised,” he wrote yesterday on his personal blog.

• “Amazon is exceptionally well-managed and has demonstrated great skill at spotting opportunities and building repeatable processes for exploiting them,” he wrote. “It has a corresponding lack of vision about the human costs of the relentless growth and accumulation of wealth and power.”

The speed read

Deals

• Intel agreed to buy Moovit, a traffic data company, for $900 million to bolster its automotive division. (TechCrunch)

• The stock-trading start-up Robinhood raised $280 million at a valuation of more than $8 billion. The online bank N26 raised $100 million at its existing $3.5 billion valuation. (Robinhood, CNBC)

Politics and policy

• The Treasury Department plans to borrow nearly $3 trillion this quarter for coronavirus aid measures. (Business Insider)

• Steve Case argues that Congress should provide more aid to start-ups to juice economic growth. (CNBC)

Tech

• Google reportedly considered buying Zoom two years ago, after employees used it far more often than its own videoconferencing tools. (The Information)

Best of the rest

• Americans without internet access are sitting outside closed cafes and libraries to get connected. (NYT)

• The New York Times won three Pulitzers. Read the winning work. (NYT)

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