Legal Advisors: Popularity versus Economic Performance in Acquisitions
Law firms provide extensive intermediation in corporate acquisitions, including negotiation, certification, and drafting of contracts and agreements. Using a broad sample of U.S. acquisition offers during 1994-2000, we find that large-market-share law firms are regularly called upon to facilitate completion of large, legally-complex offers. Complex offers are often withdrawn but, controlling for complexity, large-share law firms are associated with enhanced deal completion. Further, we document that some law firms are consistently associated with deal completion over time, and that acquirers with good deal completion experience use fewer different law firms. Acquirers’ risk-adjusted returns, though, are smaller around announcements of offers advised by large-share law firms. Post-offer long-run returns of the acquirers’ are also lower and often negative following offers advised by large-share law firms. We find no evidence of firms being consistently associated over time with strong returns. Our conclusion is that large law firms enhance deal completion in difficult situations, consistent with the aims of acquirer management. However, we find no systematic evidence that the more-popular legal advisors enhance the value created in acquisitions.