Like rock shows for startups, companies that go public typically gin up interest with an extended cross-country tour for potential investors.
These initial public offering road shows are marketing events—a nearly two-week slog from city to city for senior executives to gauge demand and ultimately sell their securities. They are a “lengthy, expensive boondoggle,” wrote Carl Chiou, of the investment firm William Blair, with details that vary “depending mostly on how bad the traffic is and the time of the flight to the next city.”
The road shows often begin on the East Coast, with CEOs, CFOs and senior management teams roving through New York, Boston and Baltimore before making their way to the West Coast with a stop or two in the Midwest along the way, says Nathan Ajiashvili, a partner at Latham & Watkins and member of its corporate, capital markets and private equity finance practices.
“There was a lot of travel, racing from meeting to meeting. Group luncheons, one-on-one meetings—that’s how the IPO was conducted and executed pre-pandemic,” he says.
Not anymore, though. Indeed, even unicorns weren’t immune to COVID-19. When the coronavirus shuttered activity in the United States last spring, the road show process was forced to go virtual. As with much of the legal industry, however, the key players figured out the new environment had some benefits.
When videoconferencing replaced face-to-face meetings, companies realized they could take on more of them in a day. They were no longer limited by traffic or flight patterns—or even regional or international borders.
“It eliminates travel, and it shortens or compresses the roadshow schedule entirely,” says Ajiashvili, who guided the first virtual IPO road show as lead partner for Zentalis Pharmaceuticals, which had a $190 million public offering at the start of April 2020. He says the traditional schedule has been condensed from two weeks to more like four days.
“That eliminates a week’s worth of market volatility and market risk for the company in the deal,” he says.
No doubt the world is eager to move beyond COVID-19. But Big Law dealmakers—lawyers perhaps especially known for business trips and long hours in conference rooms—have made necessary adjustments during the pandemic, some of which might stick. For one, virtual road shows likely aren’t going anywhere, Ajiashvili says.
“In my view, and I’m sure others believe this, the virtual process of how we execute our business is here to stay,” he says.
In general, the pandemic has increased the scrutiny on corporate transactions and business models, both in the lead-up to deals and as they’re being negotiated. Karessa Cain, a mergers and acquisitions veteran and partner at Wachtell, Lipton, Rosen & Katz, said it has influenced the way clients approach due diligence.
“Understanding what the impact has been on the target’s relationship with customers, suppliers, employees and lenders, as well as cybersecurity, compliance with new regulations and other issues—it has been a running theme,” she said.
The way businesses are valued has also been disrupted. COVID created some obvious winners and losers. Think about the sudden ubiquity of Zoom, or the rapid ascension of third-party food delivery services like GrubHub and DoorDash (both of which were involved in major deals in 2020, as Grubhub was acquired by Just Eat Takeaway.com and DoorDash had a $3.4 billion IPO). Dealmakers are now asking whether COVID—or something like it—could upend a business, for better or worse.
“Different industries and businesses have been impacted in very different ways, and depending on the valuation and outlook for a business in this environment, it may or may not make sense for that deal to move forward,” Cain said.
When Simon Property Group initially purchased an 80% ownership stake in Taubman Centers, the deal between shopping mall owners was reportedly valued at $3.6 billion. But that was in February 2020, just before businesses were shuttered and routines disrupted across the U.S. Simon tried to terminate the deal last summer, but the companies ultimately agreed to a discounted price—$43 per share for Taubman versus the original $52.50.
Similarly, L Brands and Sycamore Partners agreed to call off a $525 million deal that would have given the private equity firm a majority stake in Victoria’s Secret last spring. Sycamore wanted to cancel the deal after the pandemic forced the retailer to close its stores, and after some legal posturing, the seller agreed to cancel, citing a need to focus on navigating the COVID-19 crisis rather than forcing a partnership.
Pandemic-related concerns have seeped into the way deal lawyers now think about the specific language of a deal. Glynna Christian, a partner at Holland & Knight who heads the firm’s global technology transactions practice, says there’s more of a focus on force majeure and material adverse effect stipulations in the COVID era.
Such contractual language describes when parties might be relieved of their responsibilities, or might have their obligations changed, due to forces beyond their control—such as a pandemic. Whether COVID-19 will trigger such language depends on the specifics of the contract. But parties to a deal are now much more cognizant of those pieces, Christian says.
“I see some people starting to drop in ‘pandemic’ on the list of things that might be a force majeure,” she says. “You have to be really thoughtful about how you’re drafting, and what it means that you’re living in the middle of a pandemic now.”
A recent decision in business-friendly Delaware found COVID-19 was not a material adverse effect because it fell under an exclusion for “natural disasters or calamities.” However, the court in that case, AB Stable VIII v. MAPS Hotels and Resorts ONE, also found the buyer was able to terminate the deal because the seller’s response to the pandemic—including shutdowns and layoffs—did not satisfy terms that the business be operated normally between signing and closing.
Ian Nussbaum, a partner at Cooley who focuses on mergers and acquisitions, says the pandemic has pressure-tested the types of disruption provisions in a deal that were previously more hypothetical.
“What’s interesting is how the pandemic really shined a spotlight on how that can play out in practice,” Nussbaum says.”I wouldn’t say I was surprised. I think I had an eye out on how these provisions would play out in Black Swan events. But we all naturally underestimate risks.”
He says cases like AB Stable can help in the negotiation process because they’re tangible examples of how things can shake out in the aftermath of a disaster, and generally help in “getting more recognition around the table in terms of how these provisions might play out in difficult circumstances.”
A Seat at the Virtual Table
Of course, the negotiating table itself is different now, too. Although videoconferencing and tools like electronic due diligence rooms—virtual chats where documents and other sensitive information can be shared and negotiated in real-time—were used prior to the pandemic, the event has forced more people in more walks of life to increase their fluency with their digital options, and that’s helped the transition to dealmaking in the COVID era.
But it has still been an adjustment.
“On a lot of deals, at least at some point in time, you’ll meet with your client to talk in-person, for preparatory steps or negotiation and discussion,” says Krishna Veeraraghavan, a partner at Paul, Weiss, Rifkind, Wharton & Garrison in the M&A group. “We needed to replicate those types of interactions with the same level of intimacy and feedback, and to collaborate closely without being in the same room.”
Doing so has required dealmakers to display more advanced thinking, especially when it comes to scheduling. On the other hand, the lack of travel has afforded lawyers the opportunity to use time that was once spent en route.
“We found there was a lot of time we had available where we otherwise would’ve been on a plane, in taxi cabs, or getting into a hotel late at night,” Veeraraghavan says, “so in that way people were more available.”
But while most attorneys agree there are benefits to minimizing travel, and some note that they actually see their clients more often because of the frequency of video calls, they also acknowledge there may be some nuance lost in translation. Christian, the Holland & Knight partner, says in an ideal world, she would get in the same room as the parties on about 50% of the deals she is involved in, so she can better understand their technology or business models.
“It’s easier to pay attention to those sorts of details and ask questions when you have everyone in the room together, whereas I think people lose a little bit of attention span when you have to stare at a screen for a while,” Christian says. “And I think that’s true for deals too. From an attention standpoint that just makes it a little bit harder.”
The traditional, in-person negotiation session is also more than a trope. There are real cues in those meetings, deal lawyers say, that can boost confidence and help shepherd deals along when they’re dragging. It also might be more difficult to take bigger risks without meeting in-person, Cain says.
“There are intangible factors that can make a difference, like the body language and nuances you can glean from in-person meetings and negotiations, and the momentum that can come from being huddled in a conference room for a few days to get things over the finish line,” Cain says. “That’s not to say there are no good workarounds or substitutes in a virtual setting—and if you look at the numbers, lots of deals have been getting done—but it has required a bit of a recalibration as to how the process is set up.”
Moving into the post-pandemic world, deal lawyers expect something of a mix between the way deals were done before and during the crisis. Whether transactions are orchestrated virtually or if there’s a push to meet and hammer out details around a real table again will depend on the clients. Some will be eager to connect in-person. Others will value the cost, time and even environmental savings of avoiding airplane and vehicle travel.
“I do think it will be a hybrid for the next year or two, and I do think by the same token, people are looking to connect,” Vivian de las Cuevas-Diaz, a partner at Holland & Knight who oversees the firm’s real estate section, says. “Zoom is a great thing, phones are great, but they only get us so far.”
Prior to the pandemic, de las Cuevas-Diaz says she logged more than 100,000 miles a year in air travel—a function of both her management position for the firm and meeting with clients. She has yet to make a business trip since the pandemic hit the U.S., but she thinks there will be more in-person interaction soon.
“I hope we take the best of then and now,” she says, “and put it together.”