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Today’s mergers and acquisitions industry
A law firm is nearly as central to a merger as the buyer and seller. Pulling off successful deals remains a challenge due to still-historically-high interest rates that affect deal financing, among other factors. More than ever, having a law firm equipped to execute its responsibilities skilfully is critical to getting the deal done.
If the firm is working for the buyer, lawyers run due diligence on the potential acquisition to look for red flags, such as ongoing or potential litigation or unforeseen debt obligations on the seller’s balance sheet. Lawyers advise on how best to structure the deal, minimise tax exposures, comply with the various applicable regulations, or secure valuable assets like the seller’s intellectual property.
As for sellers, their law firms work to ensure that the company sells at the highest multiple that it can get, given market conditions. They look to protect their client from onerous or too-stringent deal terms, minimise post-closing liabilities, and, if it’s important to seller ownership, ensure that seller employees will be protected or guaranteed a measure of stability post-merger.
Today’s climate
Stability has been elusive for much of this decade. The year 2023 was a rollercoaster for M&A, starting in turbulence and ending in promise. According to the 2024 State of the UK Legal Market report, in-house legal departments’ net spend anticipation (NSA) for M&A work ended last year on a high, suggesting an uptick in activity on the horizon.
So far in 2024, the global M&A market’s health appears to be returning. There were 14 “mega deals” — deals over £8 billion — posted in the first quarter of 2024, compared with only five in first-quarter 2023, according to data from the London Stock Exchange Group. While big U.S. deals accounted for a large proportion, European dealmaking was also strong, up 60% on the previous year. That said, some buyers remain wary of committing to a deal, a hesitancy that has led to a new level of reality in terms of company valuations.
“Valuations are becoming more reasonable,” says Raees Nakhuda, Senior Counsel for M&A at Thomson Reuters. “Obviously, debt is more expensive now, but at the same time, in the 2021 period, valuations for companies were through the roof. Buyers were often paying multiples of 10 times or more for business; in today’s environment, a lot of those historical multiples and valuations are viewed as significant overpays. Due to the higher cost of debt and other macroeconomic factors, buyers are valuing business based on more than just revenue — the growth-at-all-cost mentality is no longer the sole value driver. Although revenue is still important and is the key driver of valuations, buyers are now looking closer at profitability and the synergies that they can build as a result of a transaction.”
The M&A triarchy for success
A survey of over 1,200 business leaders by Eversheds Sutherland found that more than seven of 10 business leaders focused on a new “M&A triarchy”: talent, tech, and trade.
When searching for a target, many potential buyers want a company with a distinct brand and an enviable public reputation, “perhaps showing the extent to which dealmakers recognise the impact of transparency and the value of positive brand advocacy,” as Eversheds Sutherland notes.
This new M&A triarchy also presents a host of opportunities for law firms.
Talent
According to Eversheds Sutherland, 72% of business leaders see talent retention and acquisition as critical to their business strategy. Hence, there is growth in “acquihiring,” in which buyers acquire a company to bring the seller’s employees on board. Talent poaches are particularly appealing in such sectors as life sciences and energy when a company wants to buy its way into the industry via a merger.
How law firms can add value
If talent is at the heart of the deal, holding on to it post-merger is essential. Both buyers and sellers could fear a mass exodus of employees after the deal, especially if there’s a time gap due to a slowdown in negotiations or a rival bid for the seller. So, lawyers could push for such closing conditions as an agreed-upon staff retention percentage. For example, if most seller staff are no longer in place at closing, the deal could be terminated, or other options could be invoked, such as a lesser earn-out or a lower purchase price.
Trade
Supply chain disruption and trade sanctions during and post-COVID have made globalisation less appealing. Achieving greater supply chain resilience is becoming a strategic M&A priority, as supply chain dislocation makes vertical integration more critical for many companies.
How law firms can add value
If vertical integration is foundational to the buyer’s plans, the seller needs to be in shape and ready to be thoroughly absorbed. Lawyers must perform vigorous due diligence to ensure that this will happen — and on a fast timescale. What are the potential obstacles that could prevent this? Are there real estate issues? Tax obligations? Could regulators object? These scenarios should be gamed out as soon as possible during the deal process and hopefully addressed before closing.
Tech
Much like talent, acquiring technology is driving deals. For companies that have been lagging in terms of recent tech developments, they may acquire a start-up to get up to speed. Eversheds Sutherland found that 74% of surveyed business leaders say M&A is vital in bridging technology gaps in their organisation. Many also said that acquiring a new technology could increase their purchase price.
How law firms can add value
If technology is driving a deal, what is the state of that technology? Is all its related intellectual property secured? Are vendor contracts up to date? What are its maintenance costs and procedures? Are specific seller departments necessary to keep the technology running smoothly? Lawyers need to spearhead efforts to get answers to these questions and get solutions in place if there are any concerns about how the tech will perform post-merger.
Tech: How law firms can win more M&A business
The cost of doing a merger has risen so sharply that clients are looking for lower-cost legal alternatives. “Internal budgets are getting tighter and tighter on M&A deals because external law firm fees go towards transaction costs for a deal, which gets folded into the integration cost for the business,” Nakhuda says. “So, if we’re spending $1.5 million or $2 million on legal fees, that’s a big hit in terms of transaction expenses and ultimately return on investment. Of course, legal fees don’t fluctuate based on transaction value because the amount of legal work involved in an M&A deal is often the same regardless of transaction size. So, you could get a $50 million transaction or $100 million transaction where legal fees are $1.5 million, which again, if you’re looking at it as a proportion of deal value, it’s way too high.”
Winning more business in a challenging deal environment, in the face of greater amounts of low-cost competition, will take more than your firm’s prior reputation and long-standing client relationships. It’s now about what value a law firm adds to the merger process. What can lawyers do to make a deal go more smoothly? What advice can they provide before the deal negotiation even begins?
That’s why it’s crucial to offer sound, thorough processes for clients when it comes to potential mergers. Long before clients make first contact with a potential buyer or target, they should know the why’s and how’s of the potential transaction. That is, why am I pursuing this acquisition? How can it be done efficiently, quickly, and at as low a cost as possible?
Investment in technology that can change operations and workloads is the answer. Law firms can choose different priorities by using technology to winnow down the paperwork side of their business. They may try more experimentation or go more head to head with lower-cost competitors. They work to become more nimble and flexible rather than just hoping to ride out the storm.
Most of all, investing in technology allows law firms to offer clients a seamless transaction management experience from start to finish and beyond:
- The preliminaries. Offer clients more standardised processes to speed up project workflow. Preliminary agreements once required junior lawyers to print out documents and email or fax them to clients, but now they can generate them with a few mouse clicks and then get all relevant parties to e-sign.
- Due diligence. AI systems can vastly enhance due diligence efforts. Clients gain both time and accuracy via automated document identification and classification programmes, in which lawyers can easily extract essential clauses from a data room and organise them for review.
- Transaction documents. A once-laborious, paper-heavy process becomes far less of a workload for lawyers. Automated templates can generate a variety of standard documents, which lawyers tweak to suit a client’s particular needs.
- Regulatory issues. Keeping up to date on all pertinent regulatory changes — at national and global levels — is no longer a time-consuming task for lawyers. If a new regulation means a client must file updated paperwork, this can be easily generated, signed, and filed.
- The closing. Here’s where many deals still get bogged down: lawyers chasing down parties to ensure all documents were signed and other last-minute hurdles that could stall a closing. Automating most of this process, such as providing real-time updates of the sign-off status of a vital document, reduces the chances of an important piece of the puzzle getting overlooked.
- Post-closing. The deal is finalised — but is it truly complete? Lawyers play a pivotal role in supporting their clients throughout the post-closing phase of a transaction. It is imperative to provide ongoing guidance to clients as the integration of the two entities commences. This step can be achieved through visibility to management guidelines with dashboard visualisations of a project's status and automated alerts ensuring ongoing compliance with post-closing obligations and commitments.
To get there, law firms should consider implementing a complete transaction management solution.
It’s a compelling vision to present clients — to run the entire deal lifecycle on one platform. Set up secure virtual deal rooms to manage documents. Have intuitive collaboration options for clients and counterparties. Turn document verification into a faster and more thorough process. Use automation and AI-powered functions for everything, from monitoring regulatory changes to assigning tasks to lawyers.
Everyone benefits. M&A teams work smarter and no longer have to navigate multiple systems for a single transaction. Firms can provide a superior client experience while boosting profitability. “If law firms are able to use technology to reduce those costs, it’s going to be beneficial in the long run for their relationship with their client and their ability to get new business,” Nakhuda says.
The M&A blueprint framework
Law firms can research, draft, and implement an M&A blueprint for their clients. This strategic plan allows clients to determine whether doing a deal is in the buyer’s or seller’s fundamental interest. It ensures that the potential deal isn’t just an opportunistic lunge at a low-hanging asset, one which could present integration troubles down the road for a buyer.
The aim is for clients to feel confident that they know how best to proceed, whether with a specific company or sector they’re exploring. How can a law firm use this blueprint to structure its deal advisory to a client? The following are some ways to do so:
What are the deal limits?
Lawyers help define a client’s boundaries, which could be setting limits on how much the client is willing to pay or, if they’re a seller, how low of an offer they will accept. It could involve setting limits on the potential acquisition’s operations, such as a minimum or maximum number of employees, offices, or products and services, or establishing a cut-off point for the seller's debt obligations.
What are the strategic goals?
What in your client’s current operation does the potential deal improve or augment? A particular market sector? A product line? A specific type of hire — for example, if the buyer is looking for quality tech talent in an area where it’s not involved yet?
What’s the budget?
What’s the client's expectation for costs needed to assess, purchase, and integrate the seller’s operations?
What’s the timeframe?
What operational changes and capabilities are needed to integrate the new assets? Knowing this is particularly important in a deal done to acquire a particular type of technology that the buyer lacks. When can they expect to put it to work?
The end goal: Seamless transaction management workflow
To empower law firms in the dynamic world of mergers and acquisitions, Thomson Reuters has developed an end-to-end transaction management solution designed to streamline the entire deal lifecycle.
According to a recent customer survey by Thomson Reuters, some firms will juggle between five to 10 technology systems to manage a single deal. Hopping between programmes can cause disruptions to your workflow and can jeopardise the security of sensitive client information. Now, with a Thomson Reuters transaction management solution, M&A teams can work smarter, shedding the burden of administrative tasks and mitigating risks as they bid farewell to the complexities of juggling multiple systems.
Additionally, transitioning from multiple disparate transaction tools to a unified solution eliminates the cost and overhead of managing multiple tools. By streamlining and automating your entire transactional workflow, your legal team can spend less time navigating technological hurdles and more time practicing law.
Efficiency and visibility at every stage
The Thomson Reuters transaction management solution revolutionizes the way you handle your transactional work, from start to finish. With its comprehensive features, you can effortlessly automate and oversee every aspect, from initial setup and planning to due diligence, closing, and beyond. The platform streamlines document drafting and review by leveraging pre-built templates and revolutionary AI-powered data extraction, saving valuable time and effort.
Additionally, critical tasks and alerts are automatically triaged and assigned, guaranteeing that no important details slip through the cracks. Real-time dashboards and reporting are available to ensure you stay on top of your projects, enabling you to track progress and automate the closing stages of even the most complex transactions. By maintaining a single source of truth throughout the entire deal lifecycle, this solution ensures an unparalleled client experience while simultaneously reducing costs, mitigating risks, and expediting deal closures.
Ready to close deals faster?
If you're looking to streamline your transactional workflow, reduce costs, and mitigate risks, our end-to-end transaction management solution is the answer.
