Happy Diwali !

Wish you and your families a very happy Deepavali or Diwali as it has been known in most parts of the world. This year indeed has been bitter-sweet for all of us. We are the generation of humans experiencing one of the most dangerous pandemics in the history that has essentially threatened our way of life. When we look at the news today – as well as events and incidents in our own lives – we often find darkness surrounding us. But the human race has endured far worse pandemics; Nazism, British Rule, Plagues and Flu to name a few but never lost hope and came out of each one of them even stronger.

We may be going through difficulties in our relationships, we may be having financial difficulties, or we may be dealing with an illness that seems insurmountable. In life, we are faced with numerous challenges. We may experience some dark patches. But we do not have to be blinded by the darkness. It is at these times that we turn to the teachings of saints and mystics to find answers and solace.

These teachings are not meant for the world and humanity to just magically prevail over darkness but give strength to endure. It is important to understand that “Darkness is inevitable; to accept the dark days calmly self-dependence is the only way in darkness. One has to keep walking to cross the dark times.”

           

This is where the true spirit of Diwali teaches us to symbolically light the lamps on our own to fight the darkness. It is said that when Lord Rama returned to Ayodhya after defeating Ravana all the people in Ayodhya came together to light the darkness in the society. They had lit the lamps outside their homes, to ensure that cumulative light quashes darkness from all sides, thus conveying lord Rama that they, his people, have learnt the way to be together in tough times, irrespective of their individual differences. The society as a whole had learnt to identify the dark spots that lied within and take necessary actions to nullify that darkness which was symbolized through lighting of lamps.

Whatever you may hear or see, Diwali the festival is not religious from any perspective. It is that time of that year when you celebrate each and every part of your life and don't have to resort to any religious teachings or regulations. It depends on what part of the country you come from as interpretations and observances differ slightly but, in my state, and community, we celebrate Diwali over 4 days.

1st day (called Narak Chaturdashi) symbolizes prevalence of light over darkness and the importance of self. You are expected to start the day in the early hours of the morning before sunrise, by treating yourself to a relaxing massage followed by luxurious bath. The whole day is nothing but fun and quality time with your family and friends accompanied by various delicious foods and drinks.

2nd day (called Laxmi Poojan) symbolizes meaning of ‘money’ and ‘wealth’ in your life. It teaches us that although money is not everything it certainly has its place and deserves due importance in your life.

3rd day (called Paadava or Govardhan Pooja) celebrates one of the most important relationship between husband and wife. This day also celebrates the relationship of man and the nature. Each person is expected to never forget the partners in his/her life i.e. the spouse and nature.  

4th day (called Bhaubeej or Bhaidooj) celebrates the loving relationship of brother and sister. It is on this day every brother renews his vow to love and protect his sister for rest of his life. This day is not only the celebration of brother-sister relationship but of the womanhood; the sacred feminine.

I wish you all a very happy Diwali and a prosperous and healthy year ahead!!

M&A Deal making and the “New Normal” in post COVID era

Nothing in recent history has changed the business landscape as drastically or as quickly as the COVID-19 pandemic, which presents a real challenge for mergers or acquisitions. The Covid-19 pandemic has wrought havoc worldwide and ushered in a new era of uncertainty, leaving almost no sector of the economy untouched. The disruption caused by the COVID-19 pandemic will be far-reaching and profound. Market multiples, past cash flow generation, and other measures based on performance formed the foundation of due diligence. But is it safe to rely only on historical data if the future is dramatically different from the past?

M&A transactions just like any other human activity have slowed down dramatically. At the point of the novel coronavirus outbreak, we were in what was predominantly a sellers’ market. Deal activity was strong — more than 52,000 deals were completed in 2018, compared with 27,000 in 2002. PwC’s “Creating value beyond the deal” research found that just 61 percent of acquiring companies believed that their previous acquisition created value, and just 21 percent believed it created significant value, a reflection of the high multiples. Some of the largest deals of all time were announced during 2019 — such as the $74 billion pharma sector merger between Bristol- Myers Squibb and Celgene — and total deal value rose by 23 percent year on year to $407.5 billion. The first half of 2020 recorded the lowest deal volume in seven years and showed a 35.5 percent decrease in year-on-year volume.

Deal-making and Negotiations

Transaction agreements typically have a MAC clause that permits the purchaser to terminate the transaction when an event has materially and adversely affected the target company. Depending on the construction and context of the clause, purchasers may look to argue that the COVID-19 pandemic qualifies as such an event and attempt to terminate the transaction on that basis.

As the COVID-19 pandemic continues to evolve, so too does the M&A landscape regarding buyers’ attempts to back out of a transaction between signing and closing. In response to buyers’ efforts to avoid deals pre-closing due to changed economic conditions, there has been a noticeable uptick in Delaware court filings in recent weeks in which sellers are trying to hold buyers’ and lenders’ collective feet to the fire. Though not all of the buy-side players in these cases explicitly invoked a material adverse effect (or MAE), as their justification for nonperformance, the creative ways in which they have essentially sought to achieve the same result suggest that M&A litigation stemming from the pandemic will have a meaningful impact not just on the interpretation and drafting of future MAE provisions and carve-outs, but also on the use of other formerly less prominent potential escape hatches in purchase agreements. Below I’d like to discuss some recent cases where the transactions were significantly impacted by the pandemic.

1. WeCompany and SoftBankGroup

On October 22, 2019, The We Company (We), SoftBank Group Corp. (SBG), and Softbank Vision Fund signed a transaction that included a debt financing agreement, accelerated funding of an existing $1.5 billion warrant, and a tender offer for $3 billion of We’s stock. The transaction was set to close on April 1, 2020. Although MAE provision was absent from the transaction agreement, SBG invoked the adverse effects of COVID-19 to backout from the deal.

2. 1-800-Flowers and BedBath&Beyond

1-800-Flowers had previously agreed to buy PersonalizationMall.com from Bed Bath & Beyond for $252 million. The deal was supposed to close by March 30, but after the COVID-19 outbreak 1-800-Flowers, buyer, unilaterally declared it was delaying the closing until at least April 30, 2020 due to the uncertainties created by the COVID-19 pandemic and its own limited resources. Interestingly, 1-800-Flowers did not invoke a MAE not did they indicate they wanted to terminate the agreement. Per Bed Bath & Beyond, buyer has no authority under the agreement to unilaterally delay the closing.

3. LBrands and SycamorePartners

Sycamore Partners agreed to acquire a 55% interest in Victoria’s Secret for $525 million and take the company private. Between signing and closing, L Brands instituted wide- scale closures of Victoria’s Secret stores and employee furloughs in response to the COVID-19 pandemic – a decision Buyer claimed (i) was not presented to it beforehand for approval as required by the terms of the transaction agreement, and (ii) ultimately resulted in a MAE on the target justifying termination.

What’s the New Normal?

The question of whether a given business practice is “in the ordinary course” can be a contentious one in the age of COVID-19. Recent disputes have also shown how buyers will attempt to use the breach of an ordinary course of business covenant as a “backdoor MAC” because the definition of a MAC often also covers the occurrence of an event that would cause the seller to be unable to fulfill its obligations under the acquisition agreement.

The above cases serve to highlight an issue that predated the pandemic: even when certain adverse events are expressly or arguably excluded from an agreement’s MAE definition, their

impact may still affect compliance with the seller’s covenants, representations, and closing conditions.

No court has issued a substantive ruling to date, but how the courts will deal with these “alt- MAE” theories may decide the fate of deals at risk due to the COVID-19 pandemic – and have a lasting effect on “busted-deal” litigation.

In Dollar We Trust

Global finance refers to the financial system consisting of regulators and various financial institutions that conduct their business on an international level. To be able to foresee the future of global finance it is important to understand how the global financial systems evolved through the ages and how technology helped shape this evolution. Also, what is the future of the Dollar and more importantly where is Fed heading. Discussing these three questions together will help us understand the future of global finance. 

What is the role of technology in the evolution of global finance?

‘It’s hard to see the forest with all those trees in the way’. We’re currently going through a revolution that’s larger, arguably, than the industrial revolution. The technological revolution has transformed the way we live — how we talk, how we work, how we go about our daily business, and, yes, how we manage our finances on a global and individual level.

For decades, banks and insurers have employed the same relatively static, highly profitable business models. In fact, the financial services industry has been remarkably impervious to past assaults by innovators, partially due to the importance that scale, trust and regulatory know-how have traditionally played in this space. But today they find themselves confronted on all sides by innovators seeking to disrupt their businesses. 

It all started with various financial technologies such as alternative payment systems and lending systems, application program interfaces, robo-advisors and chatbots, big data, blockchain, cryptography and artificial intelligence, etc. being developed at the level of startups and non-financial companies, which used the recent developments to provide better financial services. However, their effectiveness, the speed and real time processing of information, the relevance and personalization of information forced the traditional participants of the world financial system mainly banks, investment companies, exchanges and insurance companies, to actively modernize their activities in order to remain competitive.

A lot of work has been done by economists, market analysts and regulatory institutions on exploring financial technologies and their impact on various sectors of the economy. The IMF representatives constantly monitor financial technologies and the dangers related to their introduction (Dong He, 2017). Neng Lai and Van Order (2017) reviewed both positive and negative effects of financial technology on the banking system in China and proposed a ring-fencing method to mitigate risks. Abadi and Brunnermeier (2018) emphasize the competitive preference of the blockchain, but they believe that it can cause instability and incorrect coordination between the participants. 

Financial technologies play crucial role in the modern transformation of the financial system, they also help improve financial activity and increase its profitability. The main characteristic of financial technologies is their ability to create innovations in the financial system. Financial assets trading, primarily securities trading, is strongly influenced by financial technology. The emergence of Internet technology has caused virtualization of exchange trading. Based on big data analytics technology, which processes huge volumes of both unstructured and structured data, passive and quantum strategies for the purchase/sale of financial assets are developed. With the help of passive strategies, more than 1,700 exchange traded funds (ETFs) with assets of over USD 3.5 trillion are managed globally. According to Bloomberg News, over the next 10 years, the passive giants Vanguard and Blackrock will manage more than USD 20 trillion.

Technology has been a major factor in the global financial system transformation. It has increased operating speed of the financial industry and its profitability, open access to the capital market for new entrants. However, the adoption of technology results in the increased complexity and unpredictability of development, as there are nonlinear correlations in the development of complex systems, which complicates the projected growth and ends up disrupting the foundations of financial systems. This does not mean disruptors will devour the old economy. incumbents are realizing that collaborating with new entrants can help them get a new perspective on their industry, better understand their strategic advantages, and even externalize aspects of their research and development. As a result, we’re seeing a growing number of collaborations between innovators and incumbents. ApplePay, the most lauded financial innovation of the past year, doesn’t attempt to disrupt payment networks like Visa and MasterCard, but instead works with them. Clearly, there is more to this story than simple disruption. How it will play out is still to be seen, although we can safely say that innovators will force incumbents to change, which should ultimately benefit the consumer.   

Currency issues (including digital)? What will happen to the dollar, and why? 

In the past 25 years over 21 countries have suffered incidents of severe inflation. In these cases, as the national currency became increasingly devalued, either due to government over-printing or large injections of counterfeit bills, citizens have privileged foreign currency in order to maintain the import of goods.

The U.S dollar, as the world’s leading reserve currency, has been that money of choice. 

Approximately 65% of all U.S. dollars are currently being used outside the United States, 80% of trade finance was conducted in dollars and close to 85% of forex trade volume involved the dollar. Globalization has intensified the financial integration of the world economy, but the dollar remains the currency of choice, whether that be for cross-border transactions, debt, or financial and foreign exchange trading. This means developments in the US that influence the dollar’s exchange rate end up having a greater impact on the rest of the world, and that’s why the US Federal Reserve (Fed) leads other central banks when it comes to monetary policy. In a nutshell, the world is far too reliant on one country’s currency and this very fact is responsible in spreading financial crises to others quickly.

Naturally, this leads to the governments having to hoard huge amounts of dollars to protect themselves against swings in the US economy. This has become more prominent during the US President Donald Trump’s trade war with China, as part of his wider overhaul of the country’s economic policy.

The increased stockpiling of dollars means borrowing costs have increased and that is why the world has suffered from lackluster inflation over the past decade. Clearly, the global currency markets need rebalancing. So, the question is ‘can Cryptocurrencies replace the U.S. dollar as the global reserve currency?’ Answer is yes, it’s possible. But for any currency to achieve that status, it needs to pass a 3-pronged test per say!

1. Medium of Exchange

For something to function as a currency, it must be an effective medium of exchange. In other words, individuals, companies and other organizations must be able to trade it for goods and services. The U.S. dollar has certainly established itself in this respect, because it's one of the most widely traded fiat currencies in the world.

The U.S. dollar loses a small amount of its buying power every year due to inflation. However, this takes place so slowly that market participants do not notice the difference. But cryptocurrencies have been extremely volatile, and this Intense volatility is a big challenge. 

Another issue is due to the very nature of the technology most of the crypto currencies are not designed to handle the traffic of a high number of users however as the technology advances this problem will subside. Further, the regulatory environment is highly complex because many nations have separate sets of rules, which means that global regulations are greatly fractured.

2. Store of Value

Another key requirement of a currency is that it must function as a store of value i.e. the cryptocurrencies must hold value over time.

Crypto currencies can be a great store of value in parts of the world that suffer from significant geopolitical turmoil, as these regions can see their native currencies experience substantial changes in value overnight. However, one of the concerns is that the digital currency's basic rules could change significantly as a result of a permanent alteration in code known as a hard fork. And even if they don't change the formula, the fact that they could? That's enough to say it's not a long-term store of value.

3. Unit of Measure

The third requirement that cryptocurrencies need to meet in order to function as a currency and possibly replace the U.S. dollar as the world's reserve currency is to function as a unit of account. At this moment, this ability is widely debated. Crypto currencies’ intense volatility is a concern and certainly undermines their use as a store of value. And to this, I think the overall generalized lack of adoption of the cryptocurrencies exacerbates the situation.

In a summary, cryptocurrencies could potentially replace the U.S. dollar as the world's reserve currency, but for this to happen, they would need to make progress in several important areas.

Longer term impact of Fed and fiscal activism?

COVID-19 pandemic and the financial shock that followed has reaffirmed that the central banks are the first responders of economic policy. They hold the reins of the global economy. But unlike national Treasuries that act from above by way of taxing and government spending, the central banks are in the market. Whereas the Treasuries have budgets limited by parliamentary or congressional vote, the firepower of the central bank is essentially limitless. Money created by central banks only shows up on their balance sheets, not in the debt of the state. Central banks don’t need to raise taxes or find buyers of their debt. This gives them huge power. How this power is wielded and under what regime of justification defines the limits of economic policy. 

The Federal Reserve has been at the center of the health crisis by actively using its full toolkit on monetary policy measures that will maintain the economy afloat while injecting enough liquidity in the financial markets. However, the harm from an inadequate response to the pandemic and the sharp economic contraction could be far more serious than in other recessions the country has faced in recent decades. The mainstream economic view now is that debt worries should not inhibit the response to the recession and that the United States has sufficient fiscal space to do so. 

The Fed has not walked away from the challenge but there is only so much it can accomplish with traditional monetary policy. The Fed must continue to act as an independent central bank from the Government, however its role needs to be “upgraded” and perhaps re-established. It can leverage technology to implement completely independent, unbiased monetary policy. Only then can we truly understand the role of the Fed in the new world of digital currency.