Increased corporate transactions boosting law firms' bottom lines

The feverish pace of corporate deal making is bolstering law firms that help close complex transactions.

Big firms in Philadelphia say buying and selling of companies, along with the forming of strategic partnerships, are proceeding at a pace not seen since 2007, just before the onset of the Great Recession.

Part of the reason is that there is pent-up demand. Fewer deals were closed just after the market collapse in 2008 and 2009, but now there are buyers and sellers in greater numbers. Also fueling the deal surge is cheap money - historically low interest rates are bringing more buyers into the market.

But that also is helping to drive up prices.

"Companies have the ability to borrow money relatively inexpensively, and what that means is they can buy assets relatively cheaply," said Stephen Leitzell, a partner at the University City-based firm Dechert LLP, who specializes in health-care transactions.

In March, Leitzell led a team of Dechert lawyers advising the Mechanicsburg health-care company Select Medical Corp. in a $1 billion-plus deal to acquire a Humana health-care subsidiary, Concentra, with Welsh, Carson, Anderson & Stowe XII L.P., a private equity firm. Concentra operates hundreds of medical centers and clinics around the nation.

The financial market collapse so traumatized potential buyers for several years that deal making dropped off a cliff.

But that has changed.

"I definitely think people think that if there is a good deal on the table today, you don't pass on it for the hope that it will be there a year from now," Leitzell said.

With so many companies' achieving high valuations, even though they have been in business a short time, corporate buyers are more likely to do deals at higher prices, said Leitzell's colleague at Dechert, David Schulman, a deal making lawyer based in Washington.

"It reinforces the idea that maybe I am not so crazy to be paying these high prices," he said.

Competition is keen among firms in the middle-market range for deals of $100 million or more. Although legal fees often are calculated on an hourly basis, the return to the law firms can range from one-half to 1 percent of the value of the transaction. For multibillion dollar mergers and acquisitions, legal fees can easily reach tens of millions of dollars.

The value of global mergers and acquisitions reached an all-time high of $3.1 trillion in 2007, but dropped to less than half that, $1.2 trillion, in 2009, according to Dealogic. At first, the recovery was slow, but the pace gradually quickened. Year to date, global mergers and acquisitions have reached $2.8 trillion in value and are on track to surpass 2007.

Also helping to drive deal making now is a burst of buying opportunities, said Brian Miner, a transactional lawyer at Reed Smith LLP, a global firm founded in Pittsburgh with a 154 lawyer office in Philadelphia. Valuations are high enough now to entice sellers, many of them private-equity firms looking to reap returns on companies that they had invested in years earlier.

During the first phase of the deal surge, the buying and selling were dominated by private-equity firms, Miner said. But now so called strategic or corporate buyers and sellers are on the playing field, looking to add or dispose of businesses as part of a larger business plan. This, too, Miner said, is driving up prices.

"During the downturn there wasn't that much to buy," said Miner, who helped close the sale by Curtiss-Wright Corp. of Cimarron Energy Inc., an oil and gas industry supplier, to Turnbridge Capital LLC late last year.

Overall, the tenor among transactional lawyers is that it's a sellers' market.

"The market has gotten a lot stronger generally, so you see a lot more sellers," said Barbara Shander, a partner at Center City law firm Morgan Lewis LLP who advises companies in mergers and acquisitions. "There is more inventory."

But that, and the fact that there is so much liquidity, is putting pressure on transactional lawyers to be especially careful, said David Denious, cochair of the private-equity group at Drinker, Biddle & Reath LLP in Center City.

With so much money available, it's easier for clients to drop their guard and make mistakes, he said. Clients, particularly private-equity firms, are specializing more and more on specific industries, with high-tech businesses generating inordinate interest.

"There is a ton of capital in the market and that has been like rocket fuel," Denious said. "Now, [clients] have become more expert and they focus on one thing or one industry and they expect us to have the same kind of industry expertise."