The New York Times asks, "Is Merger Advice Worth the Price?"

Today's DealBook blog notes that the big Wall Street investment banks don't seem to be the bankers representing buyers with the best returns. As I noted in my comment, it would be useful to have access to the study. Those really interested in the question of whether M and A pays should read Robert Bruner's analysis of the analyses in Applied Mergers and Acquisitions. A link to the blog posting and comments is in the sidebar. My comment is reproduced below:

The surprising aspect of this study is in the penultimate paragraph of the story: “buyers in the analysis have outperformed their peers, some significantly.” As Wannabe Banker suggests, go read Bruner’s Applied Mergers and Acquisitions, in which he devotes a chapter to analyzing numerous studies using a variety of methodologies (including market performance) and concludes that buyers on average don’t do very well. (In his view more than offset by the gains of sellers.) In the case of the Capital IQ analysis, the period covered was one of rising stock prices, but the comparison between the market success of those doing big deals and those not doing big deals is striking. It would be interesting to have the methodology and results generally available.

But what does any of this have to do with the investment banking firm hired? What is the cause of the lack of relative success of certain deals? Did the buyer overpay (the usual market perception) or did the buyer fail to execute (the usual fact). The former may have little to do with the banker and the latter none whatsoever. Perhaps the banks that did relatively poorly just happen to represent large, less skilled corporations.

Do investment banks add value in a deal. Of course. Their analysis and guidance is usually skillful and insightful. They give great comfort to CEOs (”We hired the best.”) Are they objectively worth the fees they receive?

Deal Lawyer

There But for the Grace of God . . .

Deal lawyers representing buyers are often asked to assist in due diligence. While lawyers would insist that their involvement is properly characterized as "legal" due diligence, most will not hesitate in preparing the due diligence request list, usually a venerated law firm form requesting numerous documents, business, accounting and legal. Often these request lists are not coordinated with other professionals, such as accountants, making similar requests.

What is the responsibility of the lawyers for an understanding of the requested documents that may have little legal content? If the lawyer requests audited financial statements, is the lawyer charged with financial analysis? One would hope not. But other types of documents are more ambiguous. What of tax returns? Tax lawyers are often involved in buy-side M&A deals. Should they be reviewing tax returns?

The point is illustrated by the Final Report of Examiner (http://www.mckennalong.com/assets/attachments/Refco_Examiners_Final_Report_Exhibits_1-3_Appendices_A-C.pdf) in In re: Refco Inc. (the bankruptcy of Refco). You may have seen recent articles on the suit that Thomas H. Lee entities (represented by Weil Gotshal) commenced against Mayer Brown arising out of its LBO of Refco. Commentators noted that Weil had represented THL in connection with the acquisition of Refco and Refco in connection with the subsequent debt financing and IPO. You'll recall that Refco went bankrupt after a revelation of massive fraud. The examiner's report was examining possible claims against professionals that represented Refco. The examiner noted that Weil's representation of THL in the acquisition was not a basis of a claim by Refco, but the examiner thought that Weil's due diligence deficiencies in the acquisition would be ascribed to it in determining whether it had breached a duty to Refco in connection with the subsequent public offerings. The examiner noted that Weil had requested certain tax returns, it had a tax lawyer on the matter, it failed to review the returns and a review of the returns would have indicated problems with the assertions that Refco was making.

Apparently THL continues to have a strong relationship with Weil and does not share the examiner's characterization of failed due diligence.

Nevertheless, a different client could have used what its law firm could have discovered by reviewing papers in its possession as the basis of a malpractice claim against the firm.

A couple of thoughts. Preparing a due diligence request list should be a joint effort. Rather than trotting out the trusted form, all participating in due diligence should contribute. Rather than having the accountants going their own way, all requests should be coordinated. (This has an added benefit: sellers get very frustrated in receiving a multitude of overlapping request lists.)

More importantly, make sure that review of the documents is properly allocated so that there can be no misunderstanding of the role of the lawyers. Most documents need both a legal and a business review: make sure the client understands the parameters of the legal review. If the lawyer receives the documents, there should be a communication to the client as to the work to be done by the lawyers and those to be done by others. If there is a virtual or actual data room, the lawyers should be careful that documents for which they are given responsibility are also earmarked for others if a business review of those documents is prudent. My belief is that tax returns are better left to the tax accountants, not tax lawyers.

Deal Lawyer