Legal Advisors: Popularity versus Economic Performance in Acquisitions

Law …rms provide extensive intermediation in corporate acquisitions, including negotiation, certi…cation, and drafting of contracts and agreements. Using a broad sample of U.S. acquisition o¤ers, we …nd that large-market-share law …rms are regularly called upon to facilitate completion of large, legally-complex o¤ers. Complex o¤ers are often withdrawn but, controlling for complexity, large-share law …rms are associated with enhanced deal completion. Further, we document that some law …rms are consistently associated with deal completion over time, and that acquirers with good deal completion experience use fewer di¤erent law …rms. Acquirers’ risk-adjusted returns, though, are smaller around announcements of o¤ers advised by large-share law …rms. Post-o¤er long-run returns of the acquirers’are also lower and often negative following o¤ers advised by large-share law …rms. We …nd no evidence that particular law …rms are consistently associated over time with strong returns. Our conclusion is that large law …rms enhance deal completion in di¢ cult situations, consistent with the aims of acquirer management. However, we …nd no systematic evidence that these popular law …rms act as “gatekeepers” in the sense of not wanting to be associated with value-destroying deals. Keywords: Law …rms, Market-share, M&A deal completion, Post-merger Returns JEL Classi…cation Code: G24 Krishnan is from the Department of Banking and Finance, Weatherhead School of Management, Case Western Reserve University. Laux is from the Department of Finance, Lerner College of Business and Economics, University of Delaware. For helpful comments, we thank George Dent, Stephen Fraidin, Douglas Lichtman, Jonathan Macey, Andrew Morriss, Maureen O’Hara, the Honorable Leo Strine, David Wilkins, and seminar participants at the Harvard University Law School Program on the Legal Profession, and the Finance Department at the University of Delaware. Parties to mergers and acquisitions often engage law …rms to advise on the structure of the deal, on the negotiation and drafting of contracts, and on corporate law, regulatory and antitrust issues. Such work supports an industry with more than 2000 …rms and around 14,000 lawyers as of 2002, according to specialties listed in a standard legal directory. Due to extensive information asymmetries, skilled intermediaries are expected to be important in deal situations, so the prominence of the merger and acquisition (M&A) legal advisory industry is not surprising. What is more surprising is that little work focuses on transactions microstructure, and very little statistical evidence has been brought to bear on the role played by legal advisors. The lack of research into the importance of lawyers in M&A deals stands in contrast to a large body of research on investment bankers acting as …nancial advisors. Of particular relevance here is the …nding that deal characteristics have been found to be material to the engagement of investment bankers (Servaes and Zenner (1996)), and bankers’ incentives have been found to be material to deal outcomes (Rau (2000)). Lawyers activities also seem likely to be material. For example, given their central role in negotiation protocol, due diligence, and contract drafting, the intermediation activities of lawyers seem likely to be material to the process of closing or failing to close an acquisition. Some have suggested that M&A lawyers’activities are material even beyond deal completion, to the value created or destroyed in an acquisition. Observers have long noted that a substantial part of the work of lawyers grows out of e¤orts to economize on transactions costs, or at least to exploit their presence. For example, George Stigler, after commenting on the topic in many ways over his career, sums up in his memoir, claiming that lawyers would not exist without transactions costs (Stigler (1988)). Generally, in the presence of transactions costs, the Coase theorem implies that processes for the allocation of property rights can a¤ect real-valued outcomes. With M&A services speci…cally in mind, Gilson (1984) draws on this Coasian tradition to propose that lawyers are (or can be) “transaction costs engineers”, adding to the value created in a transaction by virtue of their central role in crafting acquisition agreements. In contrast, others have suggested that lawyers themselves are a signi…cant source of transactions costs. Thus, we address the following questions as well: do the lawyers play a more important and positive role as “transaction costs engineers” and use their expertise to enhance the value for their clients? Indeed, do the large well-known and well-respected law …rms act as “gatekeepers”in the sense of avoiding engagements on value-destroying deals? In this article, we study the statistical in‡uences of M&A legal advisors on deal completion