The M&A Market's Collaborative Approach to Innovation

Disrupting the market for legal services is old news. Lawyers serving a variety of markets are approaching-if not undergoing already-periods of significant disruption, as technological and organizational innovations up-end traditional business models. Some firms have responded with forward thinking, others with misguided investment, and others with good old-fashioned inaction. With disruption come high levels of uncertainty, which is precisely what makes plotting a course in the current environment so difficult.   

It is a mistake to assume, however, that past experience has no bearing on formulating future strategy. We often think of economic change in stark terms-incumbent firms, trapped in their Neolithic business models, swept from the field with the advent of a brave new technological world. Reality is more nuanced. Change is often a process of breaking down old institutions and recombining them in new configurations, a lesson taught by both strategy scholarship and economic history. What's past really is prologue.

That places a premium on understanding how innovation processes have been organized in the legal industry to date. Very little is known, however, about how innovation happens in the legal industry, particularly in transactional services. Few studies exist, with the exception of a small collection of research led by Bob Scott and Mitu Gulati analyzing innovation (or lack thereof) in sovereign debt contracting.

In a new paper, The Architecture of Contract Innovation (discussed also here), I take a step toward rectifying that gap in our understanding.  

My focus is on the M&A market, which regularly produces innovative deal tools, from the original poison pill to, more recently, top-up options and forum selection bylaws, etc.  Innovation in M&A deal design is puzzling in the sense that M&As are highly complex transactions, which presumably would make standardization of deal terms quite attractive. However, standardization in M&A has its limits, and M&A deals are perhaps best described as 'mass customizable' products. How do deal lawyers do it?

The paper presents the results of a preliminary study, which suggests that innovation in M&A is achieved through collaborative routines rather than through a strategy of highly structured 'modular' design. The study uses a combination of methods from systems engineering and economic sociology to develop an approach for mapping complex contracts, such as M&A agreements, and the organizations that produce them. Those methods produced two findings, based on publicly available data:

• First, merger agreements appear to be richly integrated rather than fully modular systems; and
• Second, the internal structure of the M&A deal teams at the three multinational law firms that were studied-Cravath, Davis Polk, and Shearman-also displayed low amounts of modularity.  

Introducing innovations into a complex product without an extensive modular design requires deep and distributed human capital, which can swiftly and accurately process changes throughout the complicated contractual system. The collaborative approach to M&A deal design that is observed here-in which teams of attorneys come together for a deal, disband when the matter concludes, and then recombine in a different configuration for the next deal-embeds that necessary expertise in the network of attorneys that takes shape as deals repeat. A key to M&A innovation is social, rather than structural.  In that respect, the M&A market resembles the behavior of innovation 'clusters' in other parts of the global economy. 

Evidence of a collaborative approach to innovation in the M&A market presents a difficult strategic question: how do new computational tools, such as artificial intelligence or blockchain contracting, interact with the human network at the core of the innovation system? Put another way, how do we introduce new technology without inefficiently interfering with these valuable collaborative processes? Much work remains to be done on that issue, which only grows more important as technological developments continue apace. This paper, already leading to subsequent research, is one step in that direction.

A similar post based on the article was first published here.  

Matthew Jennejohn is Robert W. Barker Professor of Law at BYU Law School.