Think Deal Lawyers Are Adding Value to Mergers? Think Again, Law Profs Say
The markets react to the complex legal provisions of merger agreements with a big yawn, according to a study by two law professors.
The scholarly literature has long promoted the view that M&A lawyering adds value to transactions, but the markets don’t agree, according to a study by law professors Jeffrey Manns of George Washington University and Robert Anderson of Pepperdine University. They came to their conclusion after studying nearly 500 public company mergers between 2002 and 2011, Reuters Breakingviews reports.
Manns and Anderson found that stock prices of the target company rise with a merger announcement laying out financial terms, but they remain about the same when legal terms of the agreements are revealed.
“This finding implies that the extensive legal negotiations over deal terms add little to no value to mergers beyond the financial bargain,” they write in a paper for Cornell Law Review.
The law profs argue that the markets put little value on deal terms giving the acquirer the right to walk away from the merger because of the realization that it is unlikely to happen. The potential for profits due to the combination is just too great.
Lawyers could learn from the study by changing their legal drafting, the authors say. Rather than focusing on breakup fees and provisions that allow clients to call off deals, they should instead craft provisions that compensate clients for closing deals that are less advantageous than expected.
“At a minimum,” they write, “the results suggest that M&A lawyers should consider innovations that will protect corporate clients against the clients’ own hubris in over-paying for mergers.”
Reuters Breakingviews derives this conclusion from the findings: “U.S. deal lawyers are not as valuable as they may think.”