Bay Street lawyers big beneficiaries of recent M&A boom

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Amid incessant chatter about Big Law's demise, the current mergers and acquisitions boom is giving Canada's largest law firms the chance to prove their worth – while earning sought-after fees.

Bay Street's deal flow has been heavy since the start of 2015, but the biggest beneficiaries have largely been bank-owned investment dealers, which earned hundreds of millions of dollars in fees for underwriting scores of financings. Investment banks typically earn 4 per cent of the value of a bought deal, and last year alone there were eight such deals worth $1-billion or more.

Corporate lawyers didn't benefit nearly as much. The cost of their legal advice for a $2-billion equity financing isn't vastly greater than for an equivalent $100-million transaction because the documents they put together largely look the same. Meanwhile, banks get paid for taking on more underwriting risk in bigger deals.

To move the needle, lawyers need complex deals that require bringing together pockets of expertise – such as antitrust specialists, tax experts, litigation advice and government relations professionals. Such teams are most common in big, hairy cross-border mergers and acquisitions, and lately there's been a flurry of these deals.

Since Labour Day alone, two mega-deals have been announced in Canada, with Enbridge Inc. buying Spectra Energy for $37-billion and Agrium Corp. and Potash Corp. of Saskatchewan Inc. unveiling a $36-billion (U.S.) combination. These transactions extend a string of takeovers and combinations involving prominent Canadian companies that were already announced this year, which include TransCanada Corp. buying Columbia Pipeline Group for $10.2-billion in March.

"To paraphrase Mark Twain, 'reports of the death of Big Law are greatly exaggerated,'" said Jeremy Fraiberg, co-head of M&A at Osler Hoskin & Harcourt LLP. Although the industry's business model has had to evolve to reflect technological changes and client needs, "the value of these full-service firms is demonstrated in complex business critical transactions, such as the recently announced mega-M&A deals," he added.

During such a boom, blue-chip firms often stand out. "When you see this kind of high-stakes M&A activity, everybody wants to go into those situations with the best conceivable [legal] talent," said Shawn McReynolds, managing partner at Davies and a partner in the M&A practice. "No CFO or CEO ever got criticized for hiring the top-ranked firm to help with an important transaction."

However, the wealth is often spread out, which means the rising tide of M&A fees usually lift more than one blue-chip boat. In the recent $66-billion merger between Bayer AG and Monsanto Co., five major law firms were hired to advise on everything from tax considerations to environmental issues.

Because so much work is split up, it takes more than subject expertise to stand out. "The competitive advantage is where you can bring to bear both deep skill but also a collaborative approach to solving problems," said Cornell Wright, the co-head of M&A at Torys. "It's not an easy thing to do."

M&A fees are crucial for large legal firms because they are among the most lucrative to earn, along with those from litigation and restructurings. Yet lawyers stress that the recent string of deals isn't enough to offset the deep structural changes that the industry is dealing with – a trend commonly referred to as the "commoditization" of legal work.

For decades, large law firms were sought out for their prestige to assist with all sorts of transactions and legal contracts. Today, simpler documents such as confidentiality agreements can easily be created by startup firms such as Cognition and Axiom, which offer standard legal services for much lower costs.

Bay Street lawyers also stress that the recent headline-grabbing deals can distort the broad picture. Although mega-deals have come back, they still aren't the norm – at least not yet. Big firms have gotten a chance to prove their worth, but the fees aren't unbelievably overwhelming. "The Canadian M&A market is still pretty choppy," said David Woollcombe, an M&A partner at McCarthy Tétrault.