Biglaw

Deal Value Is Down Big -- Brace Yourself For Hard Times

Is it time to panic yet?

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Perhaps these third quarter numbers are just an outlier. Maybe it’s just an unpleasant bump in the road that won’t carry over into bigger and badder things.

Or maybe the dip in megadeals is just ushering in a new era of middle-market deals that will fuel the M&A coffers of law firms for years to come.

But we’re all lawyers here, so let’s go ahead and assume the worst. Law firms report a major drop-off in deal value, and it’s probably the beginning of a slowdown that’s going to bite mightily into firm revenue:

Announced and proposed transactions by U.S. and foreign acquirers to buy U.S. companies fell 45 percent to a little over $300 billion in the third quarter, compared to just over $560 billion in the second quarter, according to Bloomberg Law data.

In third quarter 2016, total deal value involving U.S. targets reached more than $450 billion.

Super! While the market continues to climb — and indeed that can contribute to a slowdown, as acquiring public companies becomes more expensive — there have been rumblings that a reckoning is on the horizon. Optimists hope this is just a jittery investment landscape waiting to see what, if anything, this administration manages to secure in the way of tax reform. Unfortunately, given the legislative acumen of this administration, those deals could be on hold for a while.

And let’s not underestimate the fact that this administration operates in full “Yellow Peril” mode at all times:

Increased scrutiny by the Committee on Foreign Investment in the U.S. (CFIUS) also is sparking concern for foreign buyers, particularly the Chinese, who are now unsure about the prospects for their U.S. deals, Vaughn told Bloomberg BNA.

CFIUS is a multi-agency panel headed by the Treasury Department that reviews national security implications of acquisitions of U.S. businesses. In September, President Donald Trump blocked a $1.3 billion deal between U.S. chipmaker Lattice Semiconductor Corp. and Canyon Bridge Capital Partners, a private equity firm backed by a Chinese investor. The president opposed the proposed acquisition based on CFIUS’s recommendation.

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But there’s still a lot of small-scale activity out there. Just because the big ticket deals are on hold doesn’t mean there’s no work for transactional attorneys. If this truly is the beginning of a renaissance for the middle-market deal, that’s not so terrible. On the other hand, if the megadeal slowdown is just the beginning of a waterfall of doubt that runs down the transactional food chain, it won’t make for a very happy holiday in Biglaw M&A departments.

If we really want to dwell on the worst case scenario, maybe we’re tumbling into the next recession. When Biglaw announced its raises last year, David Lat pointed out that the legal industry almost always hands out raises just before the economic hard times hit. The cautious, glacial pace of Biglaw decision cycles always seem to fritter away to 90 percent of a recovery before feeling comfortable hiking salaries. At the time, he predicted trouble within about 18 months.

The Biglaw salary hikes began about 16 months ago….

U.S. Deal Value Plunges in Third Quarter [Bloomberg Big Law Business]

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HeadshotJoe Patrice is an editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter if you’re interested in law, politics, and a healthy dose of college sports news.

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