By Reynolds Holding
NEW YORK, Nov 8 (Reuters Breakingviews) - 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.
CONTEXT NEWS
- The details of acquisition agreements in public company
mergers have little effect on financial markets, new research
shows. The study by law professors Jeffrey Manns and Robert
Anderson of George Washington and Pepperdine universities,
respectively, found that target company stock prices generally
don't move upon the disclosure of such agreements, which
typically occurs within four days after the announcement of
broad financial terms.
- The authors concluded that markets recognize that
incentives to close transactions far outweigh any inclination to
back away after the failure to satisfy legal conditions. The
study is due to be published in the summer 2013 edition of the
Cornell Law Review.
(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
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