Unprecedented deal making = unprecedented workloads, especially for Legal

2021 was a big year for deal making with global mergers and acquisitions activity surging past $5.8tn for the first time ever. This represents the highest level of activity since records began more than four decades ago, whilst also reflecting 64% and 54% increases on 2020 and 2019 levels, respectively. This trend also isn’t a flash in the pan. Despite 2021 being the busiest year on record analysts are predicting a similarly productive 2022.[1], [2] 

The collateral impact of this surplus of deal making is that there has been a significant uptick in the demands on corporate legal departments. Although the core elements of an M&A deal are exactly where the legal department should expect to focus its efforts – think term sheets, input into the initial deal structuring, legal due diligence, deal execution and closing – it also typically falls on Legal to provide pre- through to post-deal administration, coordination, and management. As an ever-good corporate citizen Legal often happily obliges.

Although a turbulent time for all business units and functions across the organisation(s), the result is often an intensification of the burden on corporate legal teams relative to other parts of the business. Take post transaction close as an example: as the ripples from the transaction subside other teams are able to begin inwardly focussing on establishing their new BAU operating models and rhythms. Legal, meanwhile, tends to suffer from the transactional hangover for longer. By way of examples lawyers are left to handle the residual corporate and legal obligations such as the managing and monitoring of transitional arrangements and agreements, the handling of any changes to legal structures and entities, and the processing of any filings and/or regulatory submissions.

The net result of all of this is that Legal tends to focus all its attention on delivering the transaction itself. This would be fine, were it not for the fact that this is often to Legal’s own detriment. Whilst I am of course incredibly reluctant to liken legal departments to pre-schoolers playing football, there is a risk that collectively the team is too eager to chase the ball and in so doing takes its eyes off what is happening elsewhere on the pitch.

Resisting the urge to chase the ball

Of course, successfully navigating and delivering the transaction from a legal standpoint is, and should remain, the top priority for Legal departments and their law firms. However, it should not be the only focus, and nor should it be seen as job done.

Why should it not be the only focus? A simple answer: securing business as usual operations is also highly important. In chasing the ball Legal risks losing focus on what has historically made it successful. Business as usual operations won’t considerately wait on the touchline whilst Legal focuses its attention on the transaction.

Why should it not be seen as job done? Again, a simple answer: the game isn’t over at half time. In other words, the transaction was not completed for its own sake but rather in the pursuit of broader strategic and financial objectives which will cascade into different business units and functions including Legal. With these in mind Legal should consider how to assess and, if necessary, reorganise itself to deliver services for the new organisation whilst playing its part in delivering those strategic and financial objectives, into extra-time and beyond.

With this in mind, Legal should be asking itself two key questions:

• Ahead of the transaction, how do we ensure that Legal is set up to navigate what is by its very nature a turbulent period in a way that minimises business disruption and maximises continuity?
  
• Following the transaction, how do we ensure that Legal is set up in the best possible way to deliver a likely altered blend of legal services to the new organisation whilst at the same time meeting the strategic, operational, and financial objectives that drove the transaction in the first place?

 Avoiding own goals - things Legal should be doing

In order to put itself in the best possible position to answer these two questions, Legal can take a number of early actions:

• Estimating commensurate temporary support. Whilst you can lean strongly on your law firms to provide heavy lifting support, there will inevitably be a collateral impact on your teams. The gravitational pull of the transaction often proves too strong to resist. Ensuring you have contemplated, budgeted, and communicated the need for temporary support – with some contingency – is key to ensuring operations continue in such a way to minimise disruption. The ripple effects are also likely further than just those M&A lawyers directly involved in the deal: for example the need to (re)negotiate major contracts will likely result in a ‘business as usual plus’ strain on commercial lawyers not originally envisaged as part of the transactional work.
• Input into transactional expectations early: Whilst it is not in Legal’s gift to determine the strategic, financial, or operational objectives of a corporate transaction, organisations will perform robust internal analysis and calculations on what those objectives should be. Synergy targets are a key example of this. Where consultative analysis is taking place Legal needs to engage early to stress-test calculations and associated working assumptions (e.g. headcount numbers, baseline cost of internal and external spend) used in the formulation of transaction objectives or targets. Doing so will reduce the chance that a centrally driven, top-down target is thrust onto Legal with little chance to input.
• Baseline your teams: One of the biggest challenges associated with materially expanding or downsizing your organisation is ensuring right-sized teams. How to know, for example, whether the team being taken on / disposed of is over- or under-weighted? One of the very first things Legal should be doing therefore – regardless of the nature of the transaction – is to baseline some key pre-deal metrics and extrapolate these to post-deal to ensure proportionality. Although crude, a metric as basic as number of lawyers per $X revenue will help you to calculate the rough number of lawyers needed to maintain similar service levels in the future organisation once the revenue of the business being acquired, divested, or otherwise has been appropriately added or subtracted.
• Have a structured view of the work Legal is doing and consider how this may change: Transaction or otherwise, every more mature Legal department should have a clear understanding of what its people are working on. This need only becomes more acute where corporate transactions are concerned. Going into any kind of deal, Legal leadership teams should be able to articulate who does what in their function to make informed decisions about how individuals may map to a future organisation with an altered blend or volume of activity. Short of the trauma of timesheets, the most effective way of doing this is by running periodic surveys within your legal department which ask teams or individuals to assign their activity to a service catalogue or activity taxonomy tailored to your organisation.
• Deal with your contracts and templates early: Rightfully so, contracts and contract templates rarely come away untouched in any transaction. For live contracts, it is highly likely that there will be some level of remediation, as well as a migration exercise in some form. Early identification of the affected contracting portfolio both from a migration and remediation perspective is key to avoiding any last minute rushes ahead of transitional services agreements ending. Contract templates will also likely need some level of amendment. Having a clear index of your latest contract templates will enable you to perform this amendment exercise much more quickly and efficiently.
• Map out your core current and future state processes: Contracting is always a key process for Legal, as is intake and triage of both contracting but also non-contracting requests from the business. You would be amazed at how few legal departments have actually mapped and documented these business-critical processes. Doing so pre-deal will enable you to take a number of important actions dependent on the transaction type. Being able to simply and cleanly articulate core legal processes to stakeholders is the obvious upside, but this extends to enabling you to compare your processes with another organisation, potentially port these across to any new organisation, scale those processes up or down, and understand how touchpoints or IT system interactions may change in a new operating environment.

Make sure you win the match… and the league

Reflecting on the long-term set up of the legal department may be at the bottom of a legal department’s priorities whilst a significant corporate transaction looms, however not doing so risks both the short-term security and long-term prosperity of Legal and its ability to effectively serve the business.

Ensuring the ‘substitutes bench’ is appropriately stocked, inputting early into post-transaction objectives and clarifying expectations on Legal, understanding what your teams do, how they do it, the tools they use, and ultimately how any and all of this may change are all critical to delivering not just the transaction, but the objectives that underpinned the transaction in the first place. Winning the match is obviously important. But in doing so don’t abandon the bigger picture items that will enable you to win the league.

[1] Stock Market: Investors Should Prepare for Another Big Year of M&A Deals in 2022 - Bloomberg

[2] Dealmaking surges past $5.8tn to highest levels on record | Financial Times (ft.com)