Bloomberg had an article last week detailing the top dealmaking law firms in 2008. The article notes the collapse in mergers and acquisitions in 2008, particularly in the fourth quarter when deals were down 43% from the third quarter. Overall for the year deals were down 38% from 2007. And most law firms are expecting it to get even worse in 2009 as the credit crunch continues and private equity players stay on the sidelines.
The article notes the fallout of lower deal volume for large law firms with three major firms going under (Heller Ehrman, Thelen and Thatcher Proffitt) and most other large firms laying off attorneys in the last half of 2008. The Chicago Tribune had a similar story last week relating the trying times for law firms because of the downturn in deal activity and the increasing costs of maintaining the large law firm structure. Included in their article are some predictions for law firms in 2009 and a senior partner from Kirkland & Ellis' mergers & acquisitions group saying it's the quietest he's seen in 30 years. Overall 2009 is expected to be a very difficult year for large law firms that do not have established bankruptcy practices to keep them afloat (expected to be one of the only bright spots for law firms in 2009).
One of the major reasons for such a large drop in fourth quarter deals is the rapidly falling valuations of acquisition targets. Buyers often have to take a long hard look at whether completing a deal still makes sense in a worsening economic environment at an inflated acquisition price. Buyers are often throwing in the towel, looking to utilize material adverse effect clauses to get out of deals or just paying break-up fees.
As noted earlier by this blog, Scottsdale-based JDA Software did not close on its acqusition of i2 Technologies in December due to valuation issues. And, according to an article last week in the Arizona Republic, the deal by private equity firm Insight Equity I LP to take Phoenix-based contractor Meadow Valley Corp. private is on the rocks because of a more than $6 million drop in Meadow Valley's valuation since the deal was signed. According to Insight, that drop in market value is a material adverse effect under the merger agreement and therefore Meadow Valley will have to pay a termination fee of $2.5 million if Insight choses to terminate the deal due to the valuation drop. The full merger agreement can be read here for readers interested (the MAE definition does include the valuation language).
These are just two local examples of what is happening nationally and internationally as deals, large and small, fall through. The hope is that over 2009, deals to buy distressed companies and assets take up some of the slack created by failing deals and deals that are unable to obtain debt financing or are simply too risky in an uncertain economic environment.
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