Engineering Greater Efficiency in Mergers and Acquisitions

Abstract

Technological changes have transformed “retail” transactional law by fostering greater standardization, lowering the cost, and expanding access to basic transactional documents. But lawyers appear to have barely scratched the surface in unlocking the potential for technology to heighten efficiency and standardization of corporate transactional agreements. Part of the challenge is that high-end areas of legal drafting, such as mergers and acquisitions, entail opaque processes that necessarily take place in secret to protect the interest of their clients. The public sees the end product, but there is a need to understand better the process that creates these agreements.

In this article we seek to lift the veil on the M&A drafting process to highlight the evolution of merger and acquisition agreements over time and to provide evidence of drafting inefficiency. We leverage our empirical findings to show how M&A lawyers can use search tools to enhance the efficiency of the drafting process by identifying agreement precedents that are closely related to the deal at hand.

We compiled and analyzed a twenty-year data set of public company merger agreements and conducted a computer textual analysis of these agreements to determine how they evolved over time. Our software determined the likely precedents for each public company agreement and the editing history from the precedent to the final document. We show empirically that M&A lawyers choose template agreements that have remarkably little similarity to the deals at hand, which fosters an increasing proliferation of textual variants in public company merger agreements. On average lawyers engage in “editorial churning” rates of over fifty percent of the words of each acquisition agreement. As a result, M&A agreements, instead of converging on standard textual forms, rapidly drift away from their ancestors and from one-another, potentially undermining the benefits of standardization in market terms.

Lawyers end up expending considerable time and resources reworking agreements to fit the deal, rather than investing time up front to identify a template that is highly similar to the deal at hand which would minimize the need for drafting changes. Lawyers seem to choose precedents based off of familiarity and recency, rather than applicability to the deal at hand, and fail to utilize fully internal and external databases of prior deals.

We suggest how law firms can use technological tools, much like those we developed in this study, to search comprehensively for the best precedent documents or to identify relevant provisions to adapt from other prior deals. This approach will allow lawyers to increase the speed and accuracy of the drafting enterprise, as well as to foster an equally important secondary goal—heightening the degree of modularity and standardization in acquisition agreements. The more lawyers focus on identifying the most applicable precedent or provision, the more they will have incentives to design agreements that have greater modularity, the ability to interchange provisions without having to rewrite the entire agreement. In this way lawyers can move incrementally towards greater standardization without having formally to embrace a standardized template for a given category of transactions. The net effect of using technology to identify the most applicable templates and provisions would be to focus lawyers on where they can add more value to their clients and away from editorial churning.

Keywords: Mergers & Acquisitions, Legal Drafting

JEL Classification: K20, K22