A reminder: We are holding a DealBook Debrief call on Thursday as part of The Times’s special project for the 50th anniversary of the seminal Milton Friedman essay that changed the course of capitalism. Joining us are special guests Leo Strine Jr., the former Delaware chief justice, and Joey Zwillinger, the C.E.O. of the shoe company Allbirds. R.S.V.P. here for the call tomorrow at 11 a.m. Eastern.
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A promising vaccine trial hits pause
The conventional wisdom is that a coronavirus vaccine will be widely available by next summer, if not earlier. But AstraZeneca’s move to halt testing of its treatment calls that into question — and puts into doubt how quickly the global economy can recover from the pandemic.
AstraZeneca is investigating a serious suspected adverse reaction in a volunteer in a late-stage U.K. trial. It isn’t clear whether the illness is linked to the company’s vaccine, or for how long the drug maker will keep its trial on hold. The AstraZeneca vaccine, which is being developed with Oxford University, is reportedly under consideration by the Trump administration for fast-track approval.
To be clear, this isn’t necessarily a bad thing. Medical experts say the point of late-stage clinical trials is to uncover potential side effects by giving thousands of people a treatment under controlled conditions. “The perspective we need to keep in mind,“ said Dr. Faheem Younus, the chief of infectious diseases at the University of Maryland Upper Chesapeake Health, is this one potential case of a serious side effect versus the tens of thousands of Covid-19 patients currently hospitalized in the U.S.
• AstraZeneca was one of nine pharmaceutical companies to sign a public pledge not to submit their coronavirus vaccines for authorization until the treatments have been cleared in clinical trials.
Still, the move raises several issues about life without a vaccine:
• Coronavirus infections appear to be leveling off in the U.S., but at a persistently high level, and experts fear a flare-up in the fall. That could lead to more government-imposed social restrictions, something that countries like Britain are reintroducing amid a resurgence in cases.
• Treatments for coronavirus infections, such as remdesivir and antibody drugs, will assume more importance. But they’re also subject to the same questions of safety, efficacy and availability as vaccine candidates.
• Widespread coronavirus testing — at airports, schools, workplaces, restaurants and more — will become even more critical to restoring the public’s confidence. But the capacity to manufacture and use virus tests, particularly in the U.S., is limited. How quickly can that be ramped up?
• What path will the economic comeback take if a vaccine doesn’t come for a long time? Inequality created by a “K-shaped” recovery, in which circumstances for wealthy people who can afford to isolate are improving and those for everyone else are not, could worsen.
Today’s DealBook Briefing was written by Andrew Ross Sorkin in Connecticut, Lauren Hirsch in New York, and Michael J. de la Merced and Jason Karaian in London.
Breaking: LVMH wants out of Tiffany deal
The $16.2 billion deal between LVMH and Tiffany, agreed in November but recently delayed by the pandemic, looks even less certain today. LVMH said it could not complete the deal, and Tiffany has filed a lawsuit to force LVMH to go ahead with it.
There has been concern for months that LVMH would seek to renegotiate the deal, in light of the stress the pandemic has put on the jewelry business. LVMH said in a statement that it wouldn’t do the deal “as it stands,” citing a request from the French government to delay the acquisition beyond Jan. 6 because of the threat of U.S. tariffs on French goods.
Tiffany claims that LVMH is in breach of its contract. It rejects the idea that LVMH can avoid the deal by claiming that Tiffany has undergone a “material adverse effect” that would have breached its merger obligations. Its lawsuit, filed in Delaware, also says that LVMH cannot avoid completing the deal because it is “in some way inconsistent with its patriotic duties as a French corporation.”
• DealBook hears that Tiffany decided to sue LVMH over frustration that 10 months after the deal, it had not yet filed for deal approval in the European Union.
Here’s what’s happening
Markets tumbled again, with tech leading the way down. Another sharp sell-off in tech stocks yesterday led to the Nasdaq’s falling over 4 percent — reaching “correction” territory — and the S&P 500 slipping nearly 3 percent. Tesla shed a quarter of its value, in part because it wasn’t included in the S&P 500 index (more on that below). Futures are currently looking up, though, suggesting an end to the three-day slide.
Senate Republicans plan to vote on their “skinny” coronavirus aid bill. The move is meant to put pressure on Democrats to compromise on economic stimulus measures. House Democrats have rejected the $500 billion proposal as “pathetic,” and even some Senate Republicans are likely to oppose it.
JPMorgan Chase said customers and workers had misused federal relief money. The bank said it had found “instances of customers misusing Paycheck Protection Program loans, unemployment benefits and other government programs.” JPMorgan said it was cooperating with law enforcement.
New York real estate faces its biggest challenge since the financial crisis. Under 10 percent of New York’s office workers had returned as of last month, and just 54 percent of companies plan to return by July, The Times reports. Businesses have increasingly put off decisions to sign new leases, and some are holding out for steeper discounts than are now on offer.
The first day of school in the U.S. didn’t go smoothly. Website crashes and cyberattacks bedeviled many students logging on remotely. “A lot of districts are just wildly unprepared for online learning,” one expert told The Times. College students attending in-person classes aren’t faring much better: Tens of thousands have been infected with the coronavirus, and universities are resorting to lockdowns.
Deal Professor: What is Tesla worth?
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. Here, he and Panos N. Patatoukas, a professor at Berkeley’s Haas School of Business, run the numbers on Tesla and try to make sense of its volatile valuation.
It’s been a torrid time for Tesla, which has lost a third of its value over the past week or so. Yesterday alone it erased 21 percent in value, leading another down day for technology stocks. It follows an amazing bull run — for tech stocks in general and Tesla in particular.
Is the correction warranted?
Let’s look at it through the eyes of Tesla investors. What did they need to believe about its path ahead to have been willing to value Tesla at almost $500 billion in market capitalization at its recent peak?
We can apply traditional valuation techniques to see what would need to happen for this valuation to be justified. In theory, a company’s fundamental value is the capital in place plus the expected added value. Value added, the theory goes, should be based on investors’ expectations about growth and profitability. Using this basic framework, we recasted the Tesla story in terms of fundamental projections over a 10-year horizon.
There are two key aspects: sales growth and profit margins.
If Tesla is going to justify a half-trillion market capitalization, it needs to increase its sales from $24.6 billion in 2019 to approximately $140 billion by 2030. This would require an annualized growth rate of 19 percent, and end up with the company becoming as big as G.M. and Ford are today.
At the same time, Tesla also needs to expand its net profit margin, the money earned for shareholders per dollar of sales. By our calculations, its net margin will need to increase from minus 3.5 percent in 2019 to over 21.5 percent by 2030. That means that by 2030 Tesla’s margin would converge to what Apple’s is today. Toyota is among the most profitable big automakers, and its margin in its latest fiscal year was around 7 percent.
Over all, if you were willing to buy Tesla’s shares at their recent peak, then you should also be willing to believe that over the next decade Tesla will achieve the scale of Ford or G.M. with the margins of Apple. This implies that Tesla would become more than a car company: It would have to become a renewable technology company in which cars are only a small part of its business. Elon Musk’s moves into solar panels and batteries suggests that he understands this.
Eventually, expectations reflect reality and fundamental valuation drivers come into play. That said, expectations may take a long time to correct themselves if investors aren’t very focused on fundamentals. It’s possible that Tesla and other hot tech stocks will justify their recent highs, but a lot needs to go right in the long term. Perhaps investors are starting to realize this, and revising their expectations.
Exclusive: A big merger in the business of ethics
One of the best-known advisers to companies on ethics and compliance, LRN, will announce today that it is buying a rival to expand internationally. It comes as the New York-based firm capitalizes on companies’ growing interest in overhauling their corporate cultures at a time of social justice movements.
LRN plans to acquire Interactive Services, a Dublin-based provider of compliance and online learning programs. Interactive Services’ clients include Biogen, BNP Paribas, Citigroup, FedEx and Hershey. The combined company will count about 40 percent of the Fortune 500 as clients. The terms of the deal were not disclosed.
• The deal’s roots lie in a 2018 investment by Leeds Equity Partners, a capital infusion intended to help LRN increase its share in an estimated $3 billion market for ethics and compliance training.
The sorts of services that LRN provides are in high demand. “We are being asked to help companies create powerful codes of conduct that help their people genuinely live company values,” said Dov Seidman, LRN’s founder and chairman. At DealBook’s 2018 summit, Mr. Seidman was named a “Groundbreaker” for his role in changing the business world. “You will be much more effective if you earn the moral authority to lead rather than rely on the formal authority that goes with your title,” he said at the time.
The long-awaited launch of the Long-Term Stock Exchange
Eric Ries is launching the Long-Term Stock Exchange today, nine years after his book “The Lean Startup” laid the foundations of the concept and made him a mini-celebrity in Silicon Valley.
The big idea: LTSE’s pitch is that it makes it easier for companies to manage for — you guessed it — the long-term instead of obsessing about quarterly targets. The risks of short-term thinking have been called out by the likes of Jamie Dimon and Warren Buffett, and the embrace of stakeholder capitalism has questioned the wisdom of serving shareholders alone.
The exchange says it’s more than just marketing. Companies that list on the San Francisco-based exchange are required to report on and maintain a series of principles that “focus on long-term value creation.” This should appeal to institutions like pension funds that tend to take a longer-term view of returns, Mr. Ries said. He dismissed concerns that even companies with the best intentions could find themselves vulnerable to activist investors or takeover threats, forcing them to make short-term, defensive moves. “The bullying tactics only work if you’re actually afraid,” Mr. Ries said.
It doesn’t have any companies signed up — yet. Today is “the starting gun” in which LTSE can begin the solicitation process, beginning with companies that have yet to go public. Asana has explored the prospect of listing on LTSE, people familiar with the matter said, as has Airbnb, The Times has reported. “I think this is such a seismic change that to get even one company to do it is unbelievable,” Mr. Ries said.
• One of the companies that lists on LTSE may be the LTSE itself. The company would not consider exploring a sale, but would consider going public — on its own exchange, of course.
The speed read
• Berkshire Hathaway will invest $570 million in the I.P.O. of Snowflake, the cloud database company, in a rare bet by Warren Buffett on enterprise tech. (FT)
• G.M. agreed to take an 11 percent stake in the electric truck maker Nikola, valuing the start-up at nearly $19 billion. (NYT)
• The merger of the digital ad companies Outbrain and Taboola has fallen apart nearly a year after the deal was announced. (CNBC)
• Sard Verbinnen, the public relations firm, agreed to buy Oakhill Communications of Britain to bolster its U.K. practice. (Sard Verbinnen)
Politics and policy
• In an unusual move, the Justice Department is seeking to replace President Trump’s private counsel in a defamation suit. (NYT)
• Britain’s top government lawyer quit yesterday amid plans to override the country’s Brexit treaty with the E.U. (NYT)
• Uber plans to spend $800 million by 2025 to help drivers switch to electric vehicles, as part of a pledge to make all rides emissions-free by 2040. (Bloomberg)
• Apple countersued Epic Games over their App Store dispute, accusing the Fortnite developer of plotting to violate payments rules. (The Verge)
Best of the rest
• The reality TV hit “Keeping Up With the Kardashians” is calling it quits after 20 seasons. (LA Times)
• If you received a package of mystery seeds from China in the mail, would you plant them? These Americans did. (Vice)
• “Is Zoom on the road to genericide?” (Quartz)
Correction: In yesterday’s newsletter, we should have said that Deval Patrick is a former executive at Bain Capital, not a current one. He resigned last November to pursue a presidential bid; the return to politics is why some think he’s in the mix for a top post in a Biden administration.
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