Commercial Question of the Week: Seeing the Bigger Picture - How Do You Integrate Commercial Awareness Into Legal Advice?
One aspect of commercial awareness is having an appreciation and understanding of how trends impact companies and their industries, and why this is relevant to lawyers.
Every commercial lawyer should be commercially aware - not just for their own personal interest (though that certainly helps) but because it is an essential ingredient for advising business clients effectively.
A good legal understanding is more than just knowledge of the law, but it is how that law is affected by and how the law might affect any particular industry or market. And this can all be affected by market trends.
Of course, nothing can be said for certain.
Black swan events do occur, and they can change everything. These are “unpredictable events beyond what is normally expected from a situation and that have potentially severe consequences…characterised by their extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight.”
When trying to understand patterns and hence future changes in a market, it is necessary to consider both what is happening and why. The latter helps develop a way of thinking by applying existing knowledge to new information. By no means essential, potentially knowing why a change is happening, or expected to happen, could allow you to better understand the impact of related events in their broader sense.
Below I walk you through a framework I try to use to better understand these issues to help develop my own commercial awareness.
Understanding Market and Industry Changes - The Framework
Event: What have you read in the news?
Potential Trend: How could that impact an industry or market?
Supporting Evidence: Why do you expect this outcome? What facts or analysis support this? Has something similar happened in the past? How did that play out and why?
Counter-claims: Play devil’s advocate - why might this not be the case this time? What opposing arguments or risks could change the outcome? This is the idea of black swan events.
Neither your supporting evidence or counter-claims will ever be exhaustive, but they are a useful way of considering why something might happen and their consequences.
This framework provides a powerful way to consider the broader impact of singular events and helps to develop a range of useful skills, from understanding what has happened to considering the consequences.
The Event shows you are actively developing your commercial awareness. The Potential Trend highlights your ability to consider the impact on an industry and how that might affect your work as a lawyer. The Supporting Evidence shows how you back up your understanding with facts, while Counter-claims illustrate your capacity to view issues from multiple perspectives. This is particularly valuable when navigating complex, multi-jurisdictional deals.
The Framework in Action
Context:
M&A activity has been sluggish lately, with global deal value and volume down 33% and 18 % respectively compared to 2022. However, 2024 is reported to show an uptick.
Potential Trend:
Increasing M&A activity is anticipated to continue through into 2025.
Supporting Evidence:
Globally, we have seen a series of interest rate cuts:
25 basic points (bps) by the Bank of England to 5%
50 bps by the US Federal Reserve to 5%
25 bps by the European Central Bank to 3.5%
Lower interest rates provide more favourable lending conditions, with companies more willing to borrow when the costs are lower, and with increased demand, banks may see a need to increase the availability of loans.
Loans may help facilitate M&A activity, as they typically involve a combination of debt and equity financing.
The potential trend in rate cuts seems set to continue. For instance, US inflation fell to 2.4% in September - though it still exceeded forecasts - reinforcing expectations that the Federal Reserve will implement a further 25 bps cut in November. Meanwhile, the US economy also added 254,000 jobs that same month, surpassing expectations and indicating resilience in the labour market.
The aforementioned all indicate a healthy environment for M&A growth in 2025.
Counter-claims:
In the UK, the outlook may be less optimistic. Potentially significant increases in capital gains tax (of up to 40%) are being mooted in the next budget, which could stifle future investment and deter M&A activity, whilst accelerating crystallising capital gains in advance of the budget. Market confidence may be adversely affected undermining the potential for M&A growth despite global financial conditions becoming more favourable. These domestic pressures might counteract the positive impact of falling interest rates.
Against this backdrop, it is prudent to remember that black swan events may occur, and whilst not anticipated, that is their very nature. Such events can create seismic changes in a short space of time, for which markets are unprepared, leading to potentially significant changes to the trends.
Narrowing the Focus: Sector-Specific Trends
Honing in on specific sector trends is a way to refine your commercial awareness to more relevant issues. For instance, consider the above M&A trend but within the life sciences industry.
Context:
Healthcare M&A value and volume are down 16% and 24% respectively compared to 2022.
Potential Trend:
M&A activity within the life sciences sector is anticipated to increase.
Supporting Evidence:
It has been reported that we are facing the largest “patent cliff” in over a decade, meaning that a significant number of patents on profitable drugs will be expiring between now and 2030, leading to a loss of market exclusivity. Once this happens, other companies can produce generic versions, reducing the revenue for the original patent holders. Last time this happened, instead of rushing to bring new developments to market, the potentially lost revenue was replaced through an acquisition-based growth strategy.
It is uncertain if the same situation will occur again, and the nature of this M&A is also unclear. Will major pharmaceutical companies focus on biotech companies or mid-tier pharmaceutical companies? Alternatively, they could pivot towards investing in medical AI and exploring the potential of personalised medicine?
Counter-claim:
However, it is important to consider external factors that could influence this trend. The upcoming US presidential election in November could lead to significant changes in regulatory and healthcare policies. For example, shifts in drug pricing regulations or approval processes could affect the strategies of companies exploring growth through acquisitions.
Moreover, how easy will it be to manufacture generic versions this time? Are these drugs similar to those from the previous occurrence? For instance, chemical drugs are quicker to replicate than biopharmaceuticals.
Why It Matters for Law Firms Too
Being aware of market trends is not only about advising clients. Law firms are businesses, and as such need to be aware of and adapt their strategy based on emerging trends which affect their own market. For example, increasing M&A activity is likely to see some firms beefing up their corporate team, whilst anticipating a retreating economy in the coming year may see firms seek to bolster their restructuring and insolvency teams to brace the storm.
Final Thoughts
If it was possible to identify or recognise market trends before they become apparent, we would all be able to make accurate and actionable predictions, but this is simply not realistic. Whilst there are many organisations analysing information and data including economic and market data, AI is likely to be best placed given the vast quantity of resources available to it and the speed with which it can process that data. However, legal professionals need to tap into this way of thinking and obtain access to the results of such analyses, to help ensure the legal advice given is relevant and contextually appropriate to clients and their businesses, and ultimately for their own resource planning.
Please feel free to add your own thoughts and share any relevant market trends you may have identified in the comments below. It is not so much about the subject matter of the trend, but how that trend may be relevant and sharing your own process of analysis.