The overall success of M&A in 2012 hinges on the eurozone but there is much to be positive about, you just have to be prepared for a scrap
Confidence is a funny thing. During the first eight working days of this year, there was a sense that 2012 was going to be different. Deals had to be done, investors had to get their hands out of their pockets. Renewed optimism or even hope seemed to be a welcome antidote to the relentless doom and gloom that dominated the media for much of 2011. But then on Friday the 13th of January, talks collapsed over the restructuring of the Greek government’s debt and the ratings agency Standard & Poor’s downgraded the debt of nine eurozone countries, including France. The new-year optimism vanished overnight.
M&A lawyers will hope that an ebb and flow of confidence will not be the general pattern of 2012, as it was for 2011. Despite pessimistic voices being the loudest right now, the latest M&A league tables, point to a steady pick up in overall volume globally and there is no reason to believe that should not continue this year.
Global M&A activity increased slightly year-on-year in 2011, according to the latest data from mergermarket. Deal volumes rose by 2.7% to 12,635 announced deals in 2011. This is still a few hundred short of the mark set in 2008, when deal volumes were just under 13,000. Values increased from $2.1trn in 2010 to $2.2trn in 2011, a rise of 4.7%.
This is a decent performance and one that points towards continued growth in 2012. But Stephen Lloyd, Ashurst’s global head of corporate, tempers the optimism that is doing the rounds in London. ‘The money is there, the targets are there but no one wants to be the guy who signs a deal and has the euro collapse before it completes,’ he warns.
Indeed the macro-economic picture looks no less fragile than it did 12 months ago. A lack of clarity over how to deal with the struggling euro continues to keep investors guessing and at bay. Six months ago, any talk of the euro collapsing altogether would have been dismissed as crazy. Although a distant possibility, it is not entirely unlikely now.
Plus the shakeout and political unrest in the Arab world is still stifling work flowing into North Africa and the Middle East.
‘The markets don’t take much to spook them and last year the shocks occurred with monotonous regularity’
It is by no means all bad news. There are signs that the Middle East is gearing up for some sort of return to form. And Japan’s corporates seem to have awoken from a three-decade slumber, beginning international investment in earnest in 2011.
Emerging markets remain the shining light of the M&A world and even the US, which had a shallower dip, is beginning to find its swagger again.
Closer to home, UK M&A is at an all time low in volume terms but there is plenty to suggest that activity will pick up. The European financial services sector is readying itself for a post-Basel III and Vickers world, where strict regulations on the banks are expected to cough up new M&A instructions. Disposal of their non-core assets will be a big story of the year and distressed work coming out of the struggling retail and travel industries is likely to keep lawyers busy.
Andrew Ballheimer, Allen & Overy (A&O)’s global corporate co-head, says the next three months are absolutely crucial: ‘The first quarter of 2012 may be decisive for the whole year; people want to do deals, many corporates are cash rich and, if no additional bad news comes up, they might be confident enough to make acquisitions.’
Firm favourites
It’s important to take league tables with a pinch of salt. They are useful for spotting larger trends and pitting rival firms against one another. However, they can be easily skewed by large deals and show a distorted picture.
The oft-used maxim ‘flight to quality’ is becoming more apparent as each year passes. Clients are flocking to firms who are able to work on the most complex, cross-border M&A transactions. This was clearly exemplified in VimpelCom’s $23bn combination with Wind Telecom that saw local law applied in 20 different countries. The deal gave roles to Akin Gump Strauss Hauer & Feld, which acted for VimpelCom, and Cleary Gottlieb Steen & Hamilton, which led the team advising Weather Investments.
According to mergermarket data, European-wide M&A values were marginally up during 2011 from E502.8bn to E503.5bn. The highest valued European deal of the year that did not fall over saw US-based Johnson & Johnson come in for Swiss-based Synthes with an offer of E14.3bn.
On the deal were leading US, UK, Canadian and Swiss firms: Freshfields Bruckhaus Deringer; Blake, Cassels & Graydon; Dewey & LeBoeuf; Homburger; and Shearman & Sterling all advised Synthes and related parties while Johnson & Johnson and the banks turned to Cravath, Swaine & Moore; Linklaters; Pestalozzi Attorneys at Law; Stikeman Elliott; Sullivan & Cromwell; and Weil, Gotshal & Manges.
In the UK, the top five advisers by value (Linklaters, Freshfields, A&O, Slaughter and May, and Hogan Lovells), with an aggregate value of £196.3bn, make up 52.6% of the top-20 M&A firms in the country. Move to Europe, a far bigger pool, and the top five firms (Freshfields, Linklaters, Sullivan & Cromwell, A&O and Shearman & Sterling) own 44% of the market. The grip by the leading firms on the top end of the market has never been tighter.
Ballheimer says: ‘This is a tough market, but given we’re seeing more cross-border M&A the market should suit those few firms which have the global reach and the expertise to handle the more complex multi-jurisdictional work.’
In the battle for European league table supremacy, Freshfields had it fairly sewn up by volume and value, advising on 221 deals worth E156.5bn. Its arch corporate rival Linklaters came second by value and third by volume in Europe, accruing E136.8bn of advisory work across 202 deals.
Of the top 2011 European deals, Linklaters advised on four and Freshfields on three.
In equity capital markets, Linklaters topped both issuer and manager-led EMEA tables by value for the second year in a row, according to Bloomberg. Any worries Freshfields may have had about losing its market share in equity capital markets work would have been compounded by the news that Simon Witty is to join Davis Polk & Wardwell to set up the US firm’s English law practice. Honours are just about even.
A&O’s rise as a global M&A adviser was underlined by its showing in the 2011 mergermarket tables, coming fourth by value in Europe after acting on E87.7bn worth of deals. This includes acting for Virgin Money in its £747m acquisition of Northern Rock from the UK government, the first disposal of its kind since the economic crisis.
Meanwhile, US firms reasserted themselves on a global scale, thanks to a resurgent US market and, in particular, American corporates finding their feet and making some significant international acquisitions. In Europe, six of the top ten advisers by value are US firms and four are UK. Globally US firms make up eight of the top ten advisers by value.
Sullivan & Cromwell was the standout US performer in Europe by value, acting on 42 deals worth E90.8bn, including acting for Goldman Sachs on Johnson & Johnson’s takeover of Synthes. Latham & Watkins was the top US firm by volume in Europe, acting on 120 deals worth E44.9bn.
It’s taken some time but US firms now have mature practices in London. The likes of Cleary; Skadden, Arps, Slate, Meagher & Flom; and Sullivan now have buzzing European M&A practices thanks to well-established teams and most importantly busy clients. Behind them, Latham & Watkins has scale on its side and all it needs now is the sort of consistency required to become a top player. Some US teams, such as Akin Gump and King & Spalding, have also carved out successful niches in cross-border energy and telecoms work.
‘It’s not a complete gumming up but the funding arteries are rather furry’
‘We tend to act for emerging market companies in their jurisdictions,’ explains Akin Gump corporate partner Dan Walsh. ‘Everything for the last 15 or 20 years has been focused on cross-border emerging markets and Russian work and that is our niche. We don’t try to compete with top firms in London for European work but, when it comes to emerging markets, with our focus and experience, we can and do just that.’
Pain at home
The UK M&A market has never had a darker year than it did in 2011. According to mergermarket, the UK saw just 1,015 deals in the year with a total value of £75.1bn, around 8% down from £81.8bn in 2010 and an all time low in value terms since the company started compiling data.
The year saw a series of shocks to the market from the eurozone crisis, a stagnating domestic economy and harsh public spending cuts, all adding up to an unattractive environment for investors.
The equity capital markets were basically shut to investors thanks to a total lack of confidence. The London Stock Exchange raised a paltry £12.9bn through IPOs in 2011 although that was an improvement on 2010’s £10bn. Also debt became very hard to come by, particularly in the last six months of 2011.
‘People tend to forget that equity capital markets and M&A can turn on a sixpence’
Latham & Watkins global co-head of corporate Graeme Sloan says: ‘Deals are taking longer to complete. If you have an extreme due diligence period then people will pick up on all the little flaws in the business and forget why they were interested in the target in the first place.’
Mark Lloyd Williams, a Norton Rose corporate partner, adds: ‘What do we look for to get a commercial deal done? Stability. The markets don’t take much to spook them and last year the series of shocks occurred with monotonous regularity, making it very difficult to get deals done.’
Partners interviewed for this piece admit that 2007 deal levels will probably never return. The sort of activity levels currently being experienced are not likely to dramatically increase for at least the next 18 months.
‘There is no law of economics that says we have to return to something that happened before,’ says Jon Hayes, a DLA Piper corporate partner. ‘M&A has been and is set for a while to continue to be messy, patchy and simply different.’
Not many firms act on more deals than DLA globally and 2011 was no different – the firm topped the global and UK M&A tables by volume and came second in Europe. Standout work includes acting for the management on the £925m sale of the Priory Group to Advent International and acting for Banco Santander on the 100% acquisition of the Polish Bank Zachodni for E4.2bn.
Hayes continues: ‘Public M&A tends to increase with more confident capital markets as valuations become more certain, even if they are higher. So if and when the markets settle, this may be a factor in driving activity.’
Hogan Lovells crept up the tables after an excellent year in 2011. The firm came fifth by value in UK M&A, acting on 44 deals worth around £20bn. An impressive list of mandates included the largest UK acquisition of the year, acting for SABMiller on its £7.8bn takeover of Foster’s. The pieces are starting to fall into place for the firm after its merger; next year it will hope for a stronger showing in the international markets, particularly the US.
Meanwhile, in the mid-market Travers Smith had a promising year in 2011 thanks to an active private equity client base and a tight focus. The team acted on 38 deals worth £4.4bn, proving that there is plenty of mid-market work to be done and firms that have a grasp of it should see a good pipeline of work this year.
Chris Hale, corporate head at Travers, explains: ‘We have a good number of clients who focus on deals in the £100m to £500m range and that was a busier part of the market than for transactions with a value higher than this. While we are certainly not complacent, our position in the M&A world is as strong as it has ever been.’
General consensus has it that while this year will be at best competitive and at worst bumpy, there are a number of reasons to be cheerful. Barring a reoccurrence of the sort of shocks seen in 2011, pent up M&A will find its way to completion.
There are a number of companies that have spent the last few years sorting out balance sheets and who are now sitting on enough reserves to go out and invest. As Charlie Jacobs, a Linklaters corporate partner, suggests: ‘Many companies are in good shape, they have less gearing than the last downturn and are sitting on cash. Others are cash starved, and they look ripe for the picking in a consolidation round.’
‘Africa may be something of a distraction as work won’t be as profitable and as plentiful as some suppose’
The importance of a prolonged period of stability cannot be overstated in instilling the sort of confidence needed to execute large deals. That may be hard to come by and judging by 2011 a lot of this year’s success does rest on the eurozone governments reaching a satisfactory agreement.
Ballheimer says: ‘We’re seeing increased conditionality worked into deals and, in Western Europe in particular, conversations around the inclusion clauses pertaining to the potential break-up or partial break-up of the euro.’
It can all change pretty quickly though. ‘What people tend to forget is that equity capital markets and M&A can turn on a sixpence,’ says Ashurst’s Lloyd. ‘It doesn’t take more than a couple of months of stability before people stop sitting on their hands and start doing deals.’
Confidence breeds further confidence and one of the biggest factors of 2012 will be whether chief executives and their boards have the confidence to go ahead and do deals. But no one is predicting that equity markets will come back in any way for the first six months of the year.
‘It will not take much to damage confidence again’
The absolute key to successful dealmaking is to avoid surprising shareholders. For example, security group G4S’s £5.23bn bid for ISS in October, that Slaughters and Herbert Smith advised on, was dropped after shareholder opposition.
But where a company behaves as it is expected to, deals will be welcomed. Pratt & Whitney’s buyout of its joint venture with Rolls-Royce for $1.5bn is a good example. The deal put 10% on Rolls-Royce’s share price.
‘For the corporates it is all about how confident the boards are,’ says Edward Braham, Freshfields’ global corporate head. ‘Purely discretionary work will probably not go ahead but the strategic stuff will. I am expecting companies to do deals within the four walls of what the market expects.’
Another example of a deal driven by confidence was US manufacturing company Colfax Corporation’s £1.5bn takeover bid for UK engineering group Charter International. The deal, announced in September, saw Skadden act for Colfax and Slaughters for Charter in the UK. At the time the deal was called something of a game changer in the industry.
‘It is not a complete gumming up, but the funding arteries are rather furry,’ adds Tim Gee, Baker &McKenzie’s global co-head of M&A. ‘You cannot spring surprises on investors in these equity markets. And with the debt markets, you have to have a really solid credit rating.’
Although they are not mega-sized transactions, it’s these sorts of deals that will get through because they have a clear strategic rationale. The largest announced deal globally in 2011 was AT&T’s failed $39bn bid for T-Mobile USA from Deutsche Telekom, which was hampered by objections from the US government. Sullivan & Cromwell advised AT&T and Wachtell, Lipton, Rosen & Katz acted for T-Mobile.
‘It is probably not the climate for blockbuster deals yet,’ adds Jacobs. ‘We are likely to see strategic bolt-ons, disposals and consolidation typically not of a size to require shareholder approval. Companies do not want to go out on a deal and risk shareholders not supporting them. Companies and investors want certainty on execution, not more risk.’
Non-core
The big industry sector stories in the UK will be retail and travel in the next 12 months. The end of 2011 saw Thomas Cook saved as it teetered on the brink of bankruptcy.
While January 2012 saw high street chains Blacks and La Senza sink into administration, it threw up work for Addleshaw Goddard, Travers Smith, Linklaters and SJ Berwin. As consumer spending decreases with each passing year the likelihood of further retail and travel administrations is high.
In the financial services sector, all advisers are licking their lips at the prospect of work coming from the disposal of non-core assets by the banks.
In the UK, The Royal Bank of Scotland (RBS) is continuing its divestment programme with the sale of its aviation business to Sumitomo Mitsui Banking Corporation for $7.3bn. Clifford Chance took the lead advisory role for the Scottish bank with a team led by David Pudge. Sumitomo turned to Milbank, Tweed, Hadley & McCloy’s New York office.
RBS is also set to sell off its corporate brokerage business, Hoare Govett, as part of its plan to reduce its balance sheet from £420bn to £300bn in the next three years. There is a suggestion by advisers that private equity houses will step in to pick up key assets disposed of by the banks.
‘We cannot underestimate the effect the regulatory changes to the financial services industry will have on M&A,’ Lloyd reckons.
Although there are clear woes and some potential banana skins in 2012, the picture in the UK and Europe need not be as bleak as it seems. As has been the pattern in recent years, more and more revenue is coming from growth markets.
‘Given the uncertainties it is about having a diversified order book, a strategic focus and playing to your strengths,’ says Jacobs.
Away win
Emerging markets M&A accounted for 26% of global activity in 2011, accruing $667.4bn worth of deals according to Thomson Reuters. This is a 13.6% decrease on 2010 thanks to a strong US market but it still shows the appetite for investment into the emerging markets.
China was the most targeted emerging market with 3,689 deals worth $140.9bn, according to Thomson Reuters, with Brazil and Russia following closely behind.
Africa is causing much excitement, with a number of firms targeting francophone countries for capital markets work. At the other end of the continent, a handful of firms are hoping that an office in South Africa will be the gateway to the rest of Africa. The work will come from the energy, infrastructure and telecoms sectors, which need the most investment. One leading City lawyer worries whether ‘Africa may be something of a distraction’, because the work won’t be as profitable and as plentiful as some suppose.
Gee adds: ‘Most of the deals are about accessing new markets, and compliance is a big focus. The emerging markets have got their heads around the fact that stability of the investment environment is absolutely key.’
‘For the corporates it’s all about how confident the boards are’
The largest emerging market deal for the year was BP’s $9bn investment in India’s Reliance – one of the largest-ever foreign direct investments into India, with Linklaters representing BP and A&O acting for Reliance. Linklaters tops the rankings for advisers to emerging market M&A, working on 76 deals worth $51.4bn, giving it a 7.7% market share. Skadden, Freshfields, Sullivan and Clifford Chance (CC) round out the top advisers on announced deals.
Akin Gump’s Walsh points out: ‘We are seeing our emerging market clients looking to other emerging markets to grow scale with specific deals that have a clear rationale behind them. Previously most work used to involve the West, but now that is not a given.’
Hong Kong’s capital markets are still a sweet spot. In 2011 the Hong Kong Stock Exchange raised a total of HK$1.2trn (£100.6bn). By way of comparison the London Stock Exchange raised £12.9bn through IPOs in 2011. This in itself was a 27% year-on-year increase.
Capital markets highlights include Glencore’s $60bn dual London and Hong Kong listing in April, handing roles to CC for the underwriters and Linklaters acted for the company, and luxury brand Prada’s $2.1bn listing in June 2011. Freshfields acted on 14 IPOs in Hong Kong over the year and of the 11 listings over $1bn it acted on eight of them, including the $1.25bn listing of Samsonite in June.
It’s not just emerging markets that are having their moment in the sun. Last year Japanese corporates came alive to international investment opportunities and look hungry for more. Advised by CMS Cameron McKenna, Takeda Pharmaceutical took over Swiss headquartered Nycomed for E9.6bn, the second largest deal ever done by a Japanese pharmaceutical company outside Japan and the fourth largest global life sciences deal in 2011.
Other Japanese deals saw Bakers act for ITOCHU on its £637m acquisition of Kwik-Fit and CC advise Mitsubishi Corporation on its acquisition of a 24.5% stake in Anglo American for $3.3bn. Shearman advised Anglo American on the deal.
Simon Tinkler, CC’s London corporate chief, points out: ‘If you look at the strength of the yen then investors have seen that they may not get the returns on domestic investment that they would on international investment.’
The end game
The year ahead is peppered with ifs, buts and complications that even the savviest of onlookers would struggle to call correctly. M&A activity will increase marginally but if there is a prolonged period of stability with no major shocks to the economy then there is every reason to believe that work levels will rise even further.
The firms that have historically ruled global M&A will continue to do so and as they pour more resources into growth markets, their grip looks set to tighten at the top. In Europe and the UK, financial services work will be a calling card of the year, as will distressed retail and travel M&A.
Call it patchy, call it a mixed bag or just plainly call it uncertain’
‘Those firms that have the ability to arbitrage markets or a broad international platform will do better than most,’ says Norton Rose’s Lloyd Williams. ‘But it will not take much to damage confidence again. If we have a sustained period of stability then I have no doubt there will be some significant activity.’
Further afield, natural resources, energy and commodities will drive much of the activity as will telecoms. There is a suggestion too that Middle Eastern corporates are gearing up for something of a comeback after a quiet couple of years.
Call it patchy, call it a mixed bag, or just plainly call it uncertain, 2012 will throw up much more of a variety of work than has been on the cards over the past two years. Yes a lot of it is at the mercy of the global economy but if companies and shareholders can hold their nerves and make strategic decisions with a clear rationale behind them, deals will get through.
There will be no change to the world order, and there will be no bet-the-farm deals. But as long as the mid-market work keeps coming through firms will be delighted by a year that has no huge fluctuations. It seems that the new normal is here to stay. LB