Law Firms See M&A Transactions as a Driver for 2019: A Look into the Numbers

Topics: Business Development & Marketing Blog Posts, Client Relations, Corporate Legal, Law Firm Profitability, Law Firms, Litigation, M&A/Transactions, Midsize Law Firms Blog Posts, Practice Engineering, Small Law Firms

M&A

In the 2019 Citi-Hildebrant Report, law firm leaders identified Merger & Acquisition (M&A) and Transactional work as the primary driver of practice matters for this year. As with many things, it is wise to dig behind this general statement to understand more completely what the landscape looks like for M&A and the legal work that comes out of it.

From January 2017 through December 2018, Thomson Reuters found that U.S. companies saw a decrease of the overall number of recorded M&A transactions. In 2018, there were 11,538 recorded M&A transactions, a decrease of 6% from the 12,248 recorded M&A transactions in 2017. Indeed, this decrease was seen across the board, as almost all industries saw fewer M&A transactions.

Companies in Industrial Manufacturing saw one of the largest decreases, around 11% (with 862 transactions in 2018, compared to 962 in 2017); along with Technology, which had an 8% decrease (1,336 transactions in 2018, compared to 1,452 in 2017). Financial Services, one of the most stable industries for M&A transactions, had a small decrease of about 1% in the number of transactions.

Most companies involved in M&A transactions had offices in California, New York, and Texas in 2017 and 2018. In fact, California and New York had a slight increase in the number of transactions recorded. This suggests that law firms practicing in those states may have more opportunities to handle M&A transactions or may be able to lend state-specific advice to transactions. This also gives law firms the chance to be local counsel or pursue office openings in those locations.

While the overall number of M&A transactions has dropped, the value range of M&A transactions saw a sharp 20% increase in 2018, reaching about $2.3 trillion in deal value, compared to the $1.8 trillion recorded in 2017. Large-dollar deals — those valued in the $2.5 billion or greater range — saw the biggest increase in 2018, with 176 such deals recorded. By contrast, there were 127 large-dollar deals recorded in 2017. This situation suggests that those deals that are worth more money — and would potentially be worth more in fee value to law firms — are seeing the biggest increase despite the overall number of deals declining.

When we look at which industries saw more higher-value transactions, there is a much more mixed data. For example, the Industrial Manufacturing sector saw the overall number of deals fall in 2018, the overall value of the deals fell as well. Last year, there were $224 billion worth of deals in the Industrial Manufacturing sector, down from $320 billion in recorded M&A transactions in 2017.

The largest decrease in deal value occurred in the Radio and Television Broadcasting sector, which saw total value of recorded M&A deals fall to $90 billion in 2018, down almost 40% from $147 billion in 2017.

The Technology industry saw the largest increase in the value of deals, growing more than four-fold to $411 billion in 2018, compared to around $97 billion in 2017. The biggest increases occurred in prepackaged software, computer, and computerized office equipment sub-sectors. Not surprisingly, most of the highest value M&A deals came from Technology companies located in California.

Questions for Law Firms

This year’s M&A activity creates an interesting point of conversation for law firms across the country. Will your law firm target those industries that are having a larger number of deals because there is more deals to capture, or will your law firm go after industries where there may be a smaller or declining number of total deals, but those deals are seeing higher value?

Another option is for law firms to look at sectors that seem to be stable year after year. As we noted, Financial Services did not increase or decrease much in the value of the recorded transactions, which dropped slightly to $352 billion in 2018, from $356 billion in 2017.

When looking at regions, law firms can also discern some interesting trends. In the Northeast, Financial Services also had the largest contract value; while in the Southeast, the Industrial Manufacturing and Technology sectors saw the biggest increase in contract value in 2018. In the Midwest, both Financial Services and Industrial Manufacturing had the most deals between 2017 and 2018; however, the value of Industrial Manufacturing deals dropped sharply between 2017 and 2018. In the Northwest and Southwest, Technology and Financial Services were dominant in the region by number of deals, and Technology and Energy had the greatest increase in the value of deals.

If your law firm is trying to optimize its position in the M&A market, these are important data points to consider. If your firm primarily practices in the U.S., does it make sense to target the higher dollar-amount M&A deal at the risk of losing the sheer numbers of M&A deals?

Or, if your firm wants to increase the number of M&A deals it works on, is it willing to complete for a lot more deals at a lower contract value? Is your firm positioned in the correct industry sector and location to spearhead a greater dive into M&A work?

While each law firm will take a different path, those that formulate and execute the correct strategy could find themselves elevated to the next level in 2019.