In just a matter of months, the COVID-19 crisis has upended many social, economic and business trends — including a surge in demand for corporate lawyers.
At the beginning of 2020, corporate lawyers were poised for continued growth in mergers and acquisitions (M&A), particularly for complex deals related to technology, healthcare and finance. Now that has given way to a new boom: restructuring.
While it’s still early, restructuring experts are “finding themselves in demand, anticipating that companies will not be able to make good on their commitments on time and may seek to negotiate new terms with lenders, vendors, employees and other parties,” according to the New York Times.
Meanwhile, corporate lawyers could see M&A business pick up again when companies and private equity firms are better positioned to assess the damage of the current slowdown — and in some instances, start to think opportunistically. Historically, M&A activity slows down during and immediately after a recession, according to a PwC analysis, but deal-making still gets done.
Whether through restructuring or M&A, one trend that’s likely to continue is that transactions are getting larger and more complicated. This could translate to an ongoing demand for legal services, both via inside counsel and outside firms, but with an important caveat: With cost containment more important than ever, companies are counting on their legal teams to help drive value.
The law professionals and practices best positioned to do this have specific expertise in key sectors as well as an understanding of how to use technology and efficient processes to help get deals done in a timely manner.
In many respects, this is uncharted territory. It’s impossible to predict what the restructuring and M&A landscape will look like in the near future. However, recent history offers some insight into what corporate lawyers might expect.
Value was key before COVID-19
Heading into 2020, there was a common theme across all industries: Companies and private equity investors were looking to M&A to drive value.
In Deloitte’s 2020 M&A Trends survey of 1,000 executives (prior to the crisis), nearly two-thirds of respondents said they expected deal activity to increase, but with an emphasis on divestitures. In fact, 75% of respondents said they planned to pursue divestitures in 2020 in an effort to change strategy, answer financing needs or divest in technology that no longer fits their corporate models.
Key trends, size and sector
The previous several years were marked by a notable increase in mega-deals, with healthcare deals leading the way. Consider this analysis by Wachtell, Lipton, Rosen & Katz, published by Columbia Law School: Out of the total $4 trillion in global M&A deals in 2019, 15 of the 20 largest involved U.S. companies, with U.S. targets accounting for nearly half the total.
Meanwhile, more than 20 deals done globally were worth more than $25 billion, with many mega-deals in healthcare leading the way, including Celgene’s $93 billion sale to Bristol-Myers Squibb, AbbVie’s pending $83 billion acquisition of Allergan and the pending $48 billion merger of Pfizer’s Upjohn business and Mylan, according to the analysis.
Technology was also at the table — with tech companies participating in five of the top 20 global deals in 2019. Notables included the $21.5 billion Global Payments merger with TSYS, Salesforce’s $15.7 billion acquisition of Tableau Software and Broadcom’s $10.7 billion acquisition of Symantec’s enterprise security business.
Prior to COVID-19, technology was expected to play a prominent role for companies both inside and outside the sector looking to improve efficiency, scale and innovation. Again, it’s too early to say how things will shake out, but given the relative strength of many areas in technology, corporate law teams should keep an eye on this sector.
Complex deals, longer timelines
Every deal is different, but a common thread across all sectors and regions prior to COVID-19 was that deals had become more complex and, consequently, were taking longer to close. The average time to finalize a merger or acquisition was 38 days after its announcement, according to a Gartner, Inc., report published late last year. That’s a full 31% longer than in 2010.
Closing timelines had become even more stretched for midsize deals ($500 million to $5 billion) and large deals (more than $25 billion). These transactions now take an average of 106 and 279 days to close, respectively.
While multiple factors are contributing to this trend, Gartner’s analysis noted that digitally driven deals and cross-border deals are part of the issue, as is growing scrutiny from governments, regulators and investors.
Further, post-acquisition complexities have also been a factor. Nine out of 10 technology deals are seeking to combine companies and assets post acquisition, according to Financier Worldwide magazine. The upshot: The role of commercial, legal and financial due diligence becomes more complex.
What this means for corporate law
Whether they need to restructure or plan to pursue M&A, many companies will require more legal expertise — while also keeping a close eye on value.
Heading into 2020, most respondents to an HBR Consulting law department survey said that they expected their legal needs to increase in 2020 but that in-house hiring would likely slow, with 37% of respondents indicating that they will increase in-house legal staff, down from 52% the year prior.
Even before the COVID-19 crisis put a halt to business as usual, corporate legal teams reported that a top priority would be improving their processes and redistributing work to more appropriate resources. “Companies are shifting their focus from new hiring to maximizing their existing staff through process improvements and technology investment,” says Lauren Chung, Managing Director at HBR. “At the same time, they continue to refine their use of external resources to address the growing legal demand.”
To be sure, with more professionals working remotely and cost containment a top concern, process, efficiency and specialized knowledge are arguably more important today. While companies look to in-house legal professionals to provide a nuanced view of their businesses and sectors, they’re turning to outside legal experts to help them navigate a new era of uncertainty and complexity.