Engineering Greater Efficiency in Mergers and Acquisitions. Robert Anderson (Pepperdine) Jeffrey Manns (George Washington)

Transcription

1 Engineering Greater Efficiency in Mergers and Acquisitions Robert Anderson (Pepperdine) Jeffrey Manns (George Washington)

2 Project Overview Technological challenge and opportunity for M&A Technology is transforming retail transactional law Question of how technological tools will can enhance the efficiency of M&A drafting Research Questions: How are precedents selected? How do acquisition agreements evolve over time? Degree of standardization? Impact of evolution of agreements on form and substance of deal terms?

3 Project Overview Leverage data analysis tools to compile and compare 20 years worth of public company merger agreements (12,000 agreements) covering most of the period of SEC disclosure mandate. We use a computer program to engage in word-for-word comparisons to identify each precursor agreement that serves as a drafting template Compute the Levenshtein distance, the edit distance between each pair of agreements for a total of approximately 77 million comparisons. Measure of textual dissimilarity based on the number of insertions and deletions (i.e., edits ) necessary to transform one document into the other.

4 Project Overview Identify precedent deals and assess the degree of changes from deal to deal as well as the overall evolution of the deal terms Construct a family tree of acquisition agreements that allows us to show the high degree of speciation of merger agreements at both the firm level and across the legal landscape We apply similar analysis to determine what constitutes boilerplate in the M&A context and to construct family trees for boilerplate provisions by tracing the descendants of each ancestor provision.

5 Macro Findings Absence of standardization both within and across firms Merger agreements are created in an artisanal manner despite the fact that they lend themselves to mass production and standardization. Significant variation exists among merger agreements: No evidence of firm-specific merger agreement templates even for particular industries in which firms represent acquirers. Significant editorial churning, ad hoc edits that appear to be cosmetic rather than substantive. A degree of path dependence as can trace lineages from particular past deals

6 Micro Findings Editorial churning on the macro level also takes place at the micro-level of boilerplate Recycling of boilerplate provisions from precedents But idiosyncratic edits are pervasive and may potentially undermine the substance of ostensibly standardized language. Three inter-connected problems exist Core problem appears to be rote usage of boilerplate terms Lack of apparent reflection about the purpose of boilerplate provisions is coupled with the encrustation and abrasion of words in boilerplate provisions Idiosyncratic edits are preserved from generation to generation and foster speciation of boilerplate

7 Merger Agreement Dataset Compiled a dataset of 12,407 public company merger agreements filed with the Securities and Exchange Commission between 1994 and 2014 Included only agreements whose titles contained the terms merger or reorganization to exclude other agreement types also filed under Exhibit 2. Identified the law firms representing the acquiring company and the target company in each transaction in order to identify the evolution of legal documents within firms as well as across firms Collected the SIC codes to identify the company filing the agreement and the dates of the filings

8 Role of Acquirers Counsel Table I. Role of each law firm in precedent deal. Represented acquirer in precedent deal Represented target in precedent deal Not involved in precedent deal Acquirer firm s role in precedent deal Target firm s role in precedent deal

9 Role of Industry in Precedent Selection Table II. Industry in precedent deal. All Industries 3 Digit SIC Banking 3 Digit SIC Same SIC Code 3407 (32.7%) 732 (75%) Different SIC Code 7010 (67.3%) 242 (24.8%)

10 Role of Age of Agreement in Precedent Selection

11 Similarity of Documents to Precedents

12 M&A Agreement Backdrop Average Length of Acquisition Agreements From Average Number of Words , , , , , , , , , , , , , , , , , , , , ,403.0

13 Examples of Phylogenetic Trees of Merger Agreements Figure 3. A Wall Street Firm Cluster

14 Examples of Phylogenetic Trees of Merger Agreements Figure 4. A Silicon Valley Firm Cluster

15 Assessing the Phylogenetic Trees Takeaway - Standard form agreements are not widely used, even within a given firm. Firms appear to recycle precedent from a given client But there is little consistency in acquisition agreements even within a given firm. Instead, there are lineages of acquisition agreements that bear the fingerprints or DNA of their earlier progenitor precedents. The lack of standardization even within firms suggests there are systematic inefficiencies to the precedent selection and merger agreement drafting process.

16 Costs from Precedent Selection Four costs arise from the system of precedent selection that contribute to the inefficiencies of the drafting process 1) Cost of expending efforts to become familiar with deal documents 2) Default of choosing precedent most familiar with 3) Residual costs from imperfect familiarity with precedents 4) Residual cost of an estopped bargaining position

17 Boilerplate Lineage Drift Over Time Distance From Ancestor by Generation

18 Heterogeneity of Boilerplate Descendants Over Time Distance Among Descendants by Generation

19 Technology Agenda Enable comprehensive search for precedents Establish industry standard focal point agreements to serve as base documents Standardize edits from precedent to final draft Facilitate gradual move towards computable contracts