Market Spotlight: Is legal AI the new target?

Law firm Freshfields generates annual revenues in excess of £2 billion. If rumored plans of a spin-off of its AI unit materialize, the firm may land an even larger windfall.

Freshfields Lab is an in-house technology platform that harnesses AI tools to review documents and manage due diligence and litigation workflows. According to an FT report, the firm has considered separating this AI division into an independent legal entity that can receive backing from external investors.

Why legal AI is attracting M&A investment

Legal AI start-ups like Harvey and Legora have secured multi-billion-dollar valuations in recent funding rounds. Top-tier legal tech businesses can command valuations of anywhere between 25 and 40x revenues, making a sale or spin-off a highly attractive proposition for law firms that have built their own internal platforms.

Indeed, AI-powered legal tech has been a busy area of transaction activity, and if a Freshfields spin-off does ever go ahead, it will be the latest in a string of AI law and legal tech deals.

Travers Smith, for example, has spun off its AI platform Jylo into a separate entity that is selling its software to other law firms and corporate legal teams and human resources software company Paychex acquired US law firm Wilson Sonsini Goodrich & Rosati’s legal technology business SixFifty.

Private equity firms have been active players in the space too, with Inflexion Private Equity partnering with Allen & Overy (now A&O Shearman) to back the firm’s regulatory and intelligence platform aosphere.

How AI is transforming M&A

The growing investor appetite for legal AI technology comes as the tools themselves take on an increasingly important role in M&A processes, helping dealmakers automate time-consuming tasks and focus on higher-value work.

Datasite’s recent global AI report, The new deal team, produced in collaboration with FT Longitude, surveyed 1,000 senior dealmakers and found that 62% believed relying only on human decision-making in complex deals was indefensible, with 71% saying that firms that ignored AI today would not be able to compete in five years.

Human judgment and negotiation remained key differentiators, according to the report, but dealmakers are now using AI frequently to absorb process-heavy work. More than 90% of respondents reported using AI for strategy and ideation, sourcing and screening, and deal preparation, with the technology used most frequently through the time-consuming due diligence and sourcing and screening phases of a transaction.

In a case study featuring Freshfields Lab in the report, Gerrit Beckhaus, Freshfields partner and co-head of Freshfields Lab, said the firm’s lawyers were using its Freshfields Lab at every stage of the deal process, spanning target and market analysis to reviewing non-disclosure agreements against compliance.

Beckhaus added that Freshfields had also developed a platform that enabled legal advisors to download materials in a data room, then use AI to analyze and classify every document, before running gap analyses and validations.

The AI capability has enabled Freshfields to differentiate its position in a competitive market and leverage technology to tailor services and advice to the specific requirements of individual clients.

As AI reshapes how deals are executed, the tools transforming M&A processes are increasingly becoming attractive deal targets themselves.