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The mergers and acquisitions market came roaring back in 2004. A recovering economy and the willingness of companies to once again embrace risk in order to achieve substantial growth deserve most of the credit. But some M&A lawyers also credit the law that has overwhelmed their in-house counterparts: the Sarbanes-Oxley Act of 2002. Several outside attorneys say that SOX, as it is often called, has paved the way for deals because it has inspired greater confidence in the accounting of publicly traded companies. It’s pumped up the diligence in due diligence, they say, and prodded everyone — including lawyers — to sit straight. Others aren’t so sure. The law’s effects have been marginal, say some lawyers — especially those who represent financial institutions and companies in industries that were already heavily regulated — and its rigidity can actually increase risk. Jones Day partner Robert Profusek staked out the middle ground when he acknowledged that the technical aspects haven’t been all that important. But Sarbanes-Oxley in the “metaphorical sense,” he said, has created an environment of “heightened awareness and scrutiny,” and that has been important. Profusek represented Nextel Communications Inc., which merged with Sprint Corp. in a deal worth $35.2 billion, the year’s third largest according to a list compiled by The Deal, a sister publication of the NLJ. The Nextel deal was one slot behind the other blockbuster telecom deal, the merger of Cingular Wireless LLC and AT&T Wireless, valued at $41 billion. Together, the deals helped make telecom the fastest growing sector, more than tripling the value of transactions in 2003. [See chart.] On two points all can agree: Deals were way up in 2004 and Sarbanes-Oxley — whether it helped or not — created lots of work for M&A lawyers. “Any change in the legal system is always good for lawyers,” said Profusek. At a minimum, clients need explanations. SOX has “added to the due diligence,” said Philip Richter, a partner at New York’s Fried, Frank, Harris, Shriver & Jacobson who represented BellSouth Corp., parent of Cingular, in the AT&T Wireless acquisition. Cingular “had to get itself comfortable with the accounting, as any acquirer does,” he said. It asked target AT&T for information it might not have requested four years ag It wanted to see complaints raised with the audit committee about accounting or Securities and Exchange Commission compliance. It requested audit committee minutes and all information provided to the committee for its meetings. It also wanted to examine any subcertifications executives required before they signed off on the financial statement. Sarbanes-Oxley’s �404 certification, which requires companies to assess internal controls, will take effect for most companies next month. It has made acquiring companies even more cautious, Richter said. They have already asked targets whether they anticipate disclosing any “material weakness.” On balance, Richter concluded, “Sarbanes-Oxley has had a positive impact on transactions.” It’s made auditors much stricter and that, in turn, has generated more confidence in publicly available information. As a result, he added, more companies are considering deals. The number of deals jumped from 7,699 in 2003 to 8,377 last year — an increase of 9 percent, according to Thomson Financial. But the dramatic rise was in their value. Deals in 2003 totaled $567 billion, compared with $834 billion in 2004, a leap of 47 percent. The only sectors that gave ground were industrials and consumer staples. Scooping up the work, the powerhouse New York firms led the way. Skadden, Arps, Slate, Meagher & Flom topped the list, working on deals with a total value of $254 billion. Sullivan & Cromwell was next with $239 billion, followed by Wachtell, Lipton, Rosen & Katz, with $197 billion. Not only does Wachtell perennially vie with firms that dwarf it in size, this year it worked on five of the top 10, more than any other firm. [See story.] Cravath, Swaine & Moore also had a big year. But there was no magic, according Robert Townsend, a Cravath partner who represented Sprint and also Johnson & Johnson in its acquisition of Guidant Corp. — the fourth-largest deal. “It’s a function of our clients deciding that the time was right to pursue bigger company acquisitions,” he said. In the wake of Enron and other scandals, many companies focused on internal growth and made sure their houses were in order, he said. There were fewer deals, and they tended to be smaller. Now companies seem more comfortable shouldering risk as they reach for greater benefits. And the run of deals at year’s end, he added, “ought to help people get comfortable going forward.” [See story.] SOX hasn’t remade the landscape, he said, though the added due diligence can make it harder to do deals. “It now takes several months to complete due diligence,” Townsend said. “During that time a number of things can happen that can cause a deal no longer to work.” A change in the stock price could scuttle it. For lawyers, said Paul Ware, a partner at Birmingham, Ala.’s Bradley Arant Rose & White, “there’s more business, but it’s harder business.” Ware represented SouthTrust, which was acquired by Wachovia Corp. in the fifth-largest deal. “As we say in Alabama, all the slow rabbits have been shot,” he said. “There aren’t any more slow rabbits in what we do. It’s all difficult.” Due diligence may not be exciting, he said, but it’s essential: “The mole that you ignore ends up killing you.” EXPENSES MOUNT Lawyers acknowledge that the cost of the additional work mounts, though they said it was impossible to estimate how much was attributable to SOX. It’s worth noting that J.P. Morgan Chase & Co., which acquired Bank One in the year’s largest deal, last month reported fourth-quarter earnings that were weaker than anticipated. One factor, the bank reported, was $1.45 billion in charges for merger-related costs and accounting changes. “I want to feel like it’s money well spent,” said Ware. “But sometimes, being up to my elbows in minutiae, it doesn’t necessarily feel like as much value is being added.” Furthermore, the law is not an invincible shield against wrongdoing. For companies intent on cooking the books, it may make it more difficult, said Marshall Eisenberg, a partner at Chicago’s Neal, Gerber & Eisenberg, “but that doesn’t mean Sarbanes-Oxley can prohibit them from perpetrating fraud.” Eisenberg represented General Growth Properties Inc. in its acquisition of Rouse — the year’s seventh-largest deal. It was announced less than two months after the first contact, proving, he said, that due diligence doesn’t always delay transactions. But Eisenberg, who is also a certified public accountant, is no fan of SOX. “It’s been good for lawyers. It’s been good for accountants. It’s been a tremendous burden for companies. And the criminal penalties strike me as excessive.” It’s no coincidence that very few European issuers have registered securities in the United States since the law was enacted, according to Rodgin Cohen, chairman of Sullivan & Cromwell. This limits the size of their deals, he noted, since they must be all cash. The companies “say the expense and the administrative burden and the enhanced risk are simply not worth it,” explained Cohen, who represented J.P. Morgan and Wachovia in their respective deals. Some smaller U.S. companies are considering delisting, Cohen said. The costs may outweigh the benefits. For Jones Day’s Profusek, it’s been a mixed blessing. In 1999, the Citicorp merger with Travelers was put together in five days. The synergies in his telecom deal were obvious, he said, but it still took about a year. “In the 1990s, no matter what you did, it seemed to work out fine,” he said. “Two plus two always equaled five. In the 21st century, we’re more concerned that two plus two better equal four.”

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