U.S. deal lawyers are not as valuable as they may think. Financial markets are largely indifferent to the legal terms of agreed public company mergers, new research shows. That may be because most transactions close regardless of the fine print. M&A attorneys have their uses, but agonizing over detailed wording isn’t the best way to serve clients.
Big deals have enriched many large law firms, with Merger Monday announcements typically leading to multi-million dollar attorneys’ fees. Though things have slowed recently, clients still pay dearly for carefully crafted “material adverse change” clauses, deal protection provisions and other terms.
But according to a new study, many of the legal minutiae are not worth it. After reviewing almost 500 public company mergers between 2002 and 2011, two law professors found that, while target company stock prices rise upon a deal’s announcement, they remain essentially unchanged when contract details are disclosed a few days later. The markets, the professors concluded, simply don’t care.
There are several possible explanations. Investors may not understand the legal terms or may take time to digest them. The agreements may also be so similar that they come as no surprise. It’s unlikely, however, that Wall Street doesn’t know how to evaluate legal contracts quickly or that all the lawyering never results in meaningful differences.
The best explanation, say the study’s authors, is that the company bosses involved do everything possible to close a merger, no matter their rights to walk away. Only 5 percent of the transactions reviewed failed. Time spent haggling over contract terms, it seems, is time mostly wasted.
Lawyers, of course, play useful roles in structuring deals, clearing regulatory hurdles and guiding clients through transactional risks. But the study suggests they could target their efforts better. One possibility the authors raise is designing so-called contingent consideration, in which part of a deal’s price depends on how well it turns out. Money held in escrow or rights to additional stock are examples.
Such structures can turn off investors who prefer simple deals, and they raise complex legal issues. Even so, it turns out considering them could be a better use of M&A lawyers’ time than quite a bit of what they do now.