Deals are back, but with a whimper, not a bang – Corporate round up

The corporate world may have recovered from its 2009 nadir but M&A, capital markets and private equity remained fragile in 2010. For many firms, the emerging markets remain the only bright spot

As global markets head into their fourth year of uncertainty, it’s becoming clear that a slow gradual recovery is on the cards for much of the world, barring any major shocks. M&A, the traditional bellwether for the modern law firm, is clawing back some respectability after a prolonged period of relative inactivity. Broadly speaking, the consensus is that 2011 will be better than 2010, as 2010 was, in turn, stronger than 2009.

The latest data from mergermarket suggests that an upward trend is likely to continue. Last year saw global M&A rise in volume terms by 22%, around 1,000 deals short of the mark set in 2008. Global values also rose to over $2.1trn in 2010 compared to $1.7trn in 2009. This all augurs well for a more comfortable 2011. Peter Baldwin, a corporate partner at Jones Day, offers a note of caution: ‘You can make a good case for either the upside or the downside for M&A in 2011. What that should tell you is that no one is really certain how the year is likely to pan out.’

Certainly when the European market is taken into account worries over further issues with sovereign debt, the Euro crisis, VAT increases and widespread public sector cuts, it is difficult to see what investors have to be optimistic about. However lawyers, notorious for hedging their bets at the best of times, are more confident for a number of reasons.

‘Will we see a meaningful return to IPOs in the first half of the year? Probably not.’
David Paterson, Herbert Smith

Firstly, the cautious optimism is more a by-product of people being fed up with being pessimistic, and secondly, corporates can only sit on their hands for so long: businesses, by their very nature, need to evolve. ‘The length of relative inactivity is ultimately a driver for activity,’ comments Linklaters global head of corporate, Jeremy Parr. Lastly, and most significantly, the M&A work emanating from emerging markets is not only holding up deal volumes globally, but is keeping international firms very busy.

Firm trends

Judging any firm’s overall performance purely on deal tables can be myopic and it’s important to treat the results within the context of what each firm wants to achieve. However, as an indicator of how close a firm is to a particular objective, they are instructive.

The Linklaters versus Freshfields Bruckhaus Deringer annual slug-fest was made no less interesting this year by the fact that BP instructed the latter on M&A defence work, something which didn’t go down well at Silk Street. In the tables honours are even, with Linklaters topping the volume charts in Europe working on 202 deals at €119bn, while Freshfields leads the value table advising on €172bn worth of deals. Of the top European deals of the year, Freshfields appeared on three to Linklaters’ two. For capital markets work, Linklaters took a clear lead, topping the EMEA tables for both issuer and manager mandates.

In the current climate volume is arguably a more important measure than value, as the latter is easily skewed by one large mandate. However, both firms can draw comfort from the way in which their core practice has held up over the past few years. ‘FIG, energy and infrastructure and private equity deals will be among our key business areas over the coming year,’ reckons Parr. ‘It has not been an easy period for any of the firms, but I think that we have done as well as any in the difficult markets.’

US and UK firms continue to compete for bragging rights in Europe – of the top ten M&A advisers by value, there are five from the US and five from the UK. Skadden, Arps, Slate, Meagher & Flom had the standout US performance of the year, acting on 67 deals worth €136.1bn in Europe.

Latham & Watkins, dubbed by one partner at a London firm as ‘the sleeping giant of the City’, should be pleased with the progress it has made. In the UK, the team advised on 37 deals with a value of £23.8bn. Europe overall, however, was a little more disappointing – the firm came 15th by value, with €59.4bn worth of deals. Roles included advising Vedanta Resources, Onex and the Canadian Pension Plan. Latham’s approach hasn’t delivered the blue-chip client base of the Magic Circle, but it boasts a strong roster of sovereign wealth funds and Chinese corporates.

‘There is a real sense of us coalescing as a team,’ Graeme Sloan, global chair of Lathams’ M&A group explains. ‘We are attracting quality clients and definitely benefiting from London being something of a crossroads. We have a lot to be satisfied about in what we have achieved, but we haven’t got there yet.’

Elsewhere, firms struggle for market share. Hogan Lovells, 12th and 13th by volume in Europe and the UK respectively, continues to lag behind its peers. The firm is still looking for that one deal and headline hire that goes some way to justifying its merger. Recent client wins for Citi Infrastructure Investors and Texas Instruments are a step in the right direction, but much is to be done.

At Ashurst, European head of corporate Simon Beddow claims the firm is ‘reasserting itself as a leading private equity firm’. That assertion is backed up by the data that has the firm eighth in the European buy out top ten by value, working on $4.8bn worth of deals. Overall, though, M&A paints a different picture. The firm does not feature in the top 20 of either of the European tables and worked on only £6.7bn worth of UK deals over the year. Beddow’s remit of tying the European practice together needs to start paying dividends soon.

Closer to home

Views on the UK market are probably more circumspect than anywhere else in the developed world. At best, there is a recognition that activity will improve, but that there won’t be fireworks. Announced M&A deals were up to 890 in 2010, from 626 in 2009: a healthy comeback in volume terms. Values, though, remained static, coming in at £80.7bn compared to £80.8bn in 2009 and still a long way behind 2008. Equity capital markets (ECM) work dipped after a round of secondary raisings led to a spike in 2009.

On the M&A front, few expect a significant upsurge in 2011. ‘Corporates are positioning themselves to benefit from growth opportunities, assuming the economy improves later this year and next year,’ Herbert Smith corporate partner Malcolm Lombers suggests. ‘There has been some significant international M&A announced so far this year, but 2011 is likely to see volumes similar to 2010,’ he adds.

Andrew Ballheimer, co-head of the global corporate practice at Allen & Overy in London, explains that clients are biding their time to make sure they make the right investment decisions. ‘Our UK clients are still very cautious,’ he says. ‘But they are looking at deals and spending money exploring deals, which is a change from last year.’

Notably, the two largest UK deals of the year fell through, with Prudential’s failed £23.6bn bid for insurance behemoth American International Assurance (AIA), and resources company BHP Billiton’s hostile approach for the Potash Corporation of Saskatchewan (PotashCorp). Jittery investors have shrouded the M&A market in uncertainty for the past two years but, anecdotally at least, the failure rate has improved.

‘In 2009, possibly about 60% of deals fell through and, although confidence is not yet back to 2006 levels, the abort rate steadily reduced last year,’ says David Vaughan, head of corporate at Wragge & Co (where the team’s activity levels were up 20% year on year at the end of December). ‘This seems to have been down to sellers coming to terms with re-based values and funding being available for sensibly priced deals for solid businesses, against a back drop of many private equity-owned businesses needing to refinance before 2012.’

The top UK deal of the year that did not fall through was International Power’s combination with GDF SUEZ Energy International for £17.2bn, which saw the likes of Clifford Chance, Freshfields Bruckhaus Deringer, Herbert Smith and Linklaters take the top advisory roles. Of the top ten deals announced, six were in the energy and natural resources fields, an area that everyone expects to drive much of the M&A activity over the coming year. In fact, if a firm’s client base doesn’t include an energy, resources or commodities client, then it could be a long year ahead. ‘2011 will be another difficult year for the economy and deal flow will be choppy,’ says Cleary Gottlieb Steen & Hamilton M&A partner Michael McDonald, ‘But there will continue to be activity, particularly in oil and gas, renewables and commodities.’

Freshfields tops the UK adviser tables in terms of value, having worked on £83.9bn worth of deals, while DLA Piper heads up the volume rankings, advising on 112 deals – the only firm to reach triple figures. Freshfields’ standout UK deal was advising Onex Partners and Canadian Pension Plan Investment Board on the £3bn take-private of Tomkins (advised by Slaughter and May), Onex’s first investment in the UK.

So far, no surprises. If there is a trend that can be taken from the recession it is that, in terms of advisers, very little has changed except around the margins. The same firms continue to dominate the leading deals around the world. In the top UK deals, the Magic Circle crop up as advisers again and again. On the US side, Skadden, Arps, Slate, Meagher & Flom, Cleary and Sullivan & Cromwell are never far from the prime deals. The ‘flight to quality’ – predicted to be a product of the downturn – is borne out by the M&A data.

Away from M&A, there is hope that the IPO market will finally open up long enough in 2011 for a number of companies to list. Last year promised much but delivered little, despite what the statistics tell us. ‘Companies have a limited amount of time to get IPOs away,’ Ballheimer says. ‘The big surprise last year was not how many false dawns we had, but how short the window proved to be, despite the availability of institutional funds,’ suggests Ballheimer.

From rock bottom, the number of new flotations on the London stock market jumped by over 500% in 2010, with 89 companies raising just over £10bn. A considerable improvement on 2009, but a number of high-profile offerings fell over at the last minute – including New Look Retail Group and Travelport – and once the sovereign debt crisis took hold, any ambitions to float were put on ice. In the offerings for Ocado and Betfair that did get away, the starting prices were cut; both companies are now trading below their float prices.

Commenting on the prospects for capital markets work in 2011, David Paterson, Herbert Smith’s London head of corporate, says: ‘Will we see a meaningful return to IPOs in the first half of the year? Probably not. We may see more of the secondary issuances by companies for one reason or another. Unless debt markets get better, people will have to do something.’

While dwelling on the local market is instructive to a point – UK firms have clearly built their global reputations on a strong London presence – the shift in focus to emerging markets is unavoidable. Although hardly a new concept, UK-based international firms, in particular, are targeting emerging markets with renewed vigour thanks, in part, to the dearth of activity on their home turf, but also because of the growing number of global clients emanating from the likes of China, India and Brazil.

Emerging fortunes

UK plcs on London’s main market are a dwindling group, and it’s corporates with emerging market businesses that are taking their place. ‘Among the companies at the top end of the FTSE 100, much of their focus is outside the UK and in some, the companies have no UK business at all. Our clients are increasingly looking to our international experience, to help them deal with what are often their most challenging issues,’ Edward Braham, Freshfields global corporate head, remarks.

That said, the City’s position as a leading financial market is not necessarily under threat. ‘London should not decline overall, because the requirements to raise capital will always be there – people like raising cash in London,’ says Clifford Chance London corporate chief Simon Tinkler.

‘You need to be close to the largest corporates in emerging markets to be truly successful.’
Michael McDonald, Cleary Gottlieb Steen & Hamilton

Braham adds: ‘London has a natural time-zone advantage over New York in that it is open for business when Asia and many of the world’s most important emerging markets are also doing business. That helps maintain London as a key financing centre for emerging markets work.’

The appetite for growth in these key markets is astonishing considering that the global economy is barely out of intensive care. Linklaters has re-jigged its US strategy around winning work through Latin America into its New York office. Clifford Chance announced the opening of an office in Turkey, slated for this Spring. Norton Rose continues to circle its wagons round the US via emerging markets and Hogan Lovells took the interesting decision to open up an office in Ulan Bator, clearly making a play for work connected to Mongolia’s natural resources. Shortly before Christmas Freshfields hired A&O corporate partner Pervez Akhtar to head up the firm’s Middle East and North Africa corporate group, signalling the firm’s regional intentions, while Linklaters’ Brazilian ally Lefosse Advogados boosted its capital markets team earlier in the year with Carlos Barbosa Mello from Mattos Filho Veiga Filho Marrey Jr e Quiroga Advogados. In addition, Cleary announced its plans to launch in Brazil this November.

‘Emerging markets provide the greatest opportunity for further developing our business, but that isn’t to say that markets closer to home have died. There is just less room for obvious growth,’ says Linklaters’ Parr.

Whatever the rhetoric around growth, the numbers keep increasing. According to figures from Ernst & Young, M&A activity involving Indian companies hit $63bn last year – almost triple the activity in 2009. Meanwhile, Asian issuers raised the most capital in history, making up almost two-thirds of all global IPO proceeds.

Cross-border M&A activity was up by over 40% year on year, while emerging markets M&A accounted for 33% of all activity, according to Thomson Reuters. Plenty to go around then, but how do firms push home competitive advantage in an increasingly crowded market place? The leading M&A adviser to emerging market M&A is Cleary, and that’s no coincidence. The firm has been involved in Asia and Latin America for decades, built partly out of its sovereign debt expertise. In fact the top five ranking firms (Sullivan & Cromwell, Freshfields, Linklaters and A&O, in that order) all have considerable long-term experience in these markets.

‘You need to be close to the largest corporates in emerging markets to be truly successful, and we have been around long enough to take advantage of that,’ Cleary’s McDonald says. ‘We’ve been acting for leading corporates in the BRIC countries for decades and playing lead roles on emerging markets transactions is part of our institutional DNA.’

McDonald estimates that well over half of the work flowing through Cleary’s London office has emerging markets elements. Freshfields estimates that last year around 30% of its M&A came from emerging markets, while Herbert Smith puts the figure at around 25%.

Of all the key new markets, Herbert Smith’s Indian expertise has particularly paid off, and last year it took one of the lead roles, opposite Linklaters, on Bharti Airtel’s $10.7bn acquisition of Zain Africa – one of the largest telecoms deals of the year and the second-largest overseas acquisition by an Indian company (after Tata Steel’s $13bn takeover of Corus in 2007, which Herbert Smith also advised on). Most firms are reporting a significant increase in the amount of deals they are acting on that have emerging market elements.

‘Although confidence is not yet back to 2006 levels, the M&A abort rate steadily reduced last year.’
David Vaughan, Wragge & Co

‘There is no doubt that it is more competitive out there,’ Tim Gee, Baker & McKenzie’s global head of M&A, comments. ‘In the emerging markets, the biggest constraint on growth is the competition for talent – people who can operate in two cultures: the local market and the global business service standard environment.’ He continues: ‘It’s a small pool of people, and we cannot compromise on that quality.’

Pricing is also a challenge. Take your pick from the top firms operating in any given jurisdiction and for each one there is a rumour of low balling; some in one-off situations, a few consistently.

Gee takes a realistic line. ‘Emerging market clients tend to be less keen to commit themselves to the same advisers for the long term, so pricing does become very much more important. There tends to be a more nuanced approach from developed market clients as to what they want to get out of their law firm relationships.’

‘We have to make sure we are configured to take advantage of the opportunities coming out of the emerging markets,’ adds Ballheimer. ‘There are only a handful of firms which can handle that sort of work and we are one of them. Not all US firms are configured to handle the work stemming from the emerging markets, so there is a big opportunity for us.’

Rounding up

What is striking is that, at a macro level, the same firms as a decade ago are dominating adviser rankings on a global basis. But break it down further and each jurisdiction has its own specialists. For instance, Norton Rose has made good headway in Africa as have White & Case, DLA Piper and Eversheds.

Even those firms without an international network are becoming more organised in their approach to emerging markets. Addleshaw Goddard has sharpened its focus, picking up mandates such as advising Diageo on its acquisition of Serengeti Breweries in Tanzania. Managing partner of the corporate division Andrew Rosling (who estimates the team should be up 10% year-on-year in revenue terms) says: ‘We have been doing M&A in these markets, particularly for consumer clients in Africa and the BRIC countries, for quite some time now – they are really important markets for us.’ He continues: ‘These markets represent compelling opportunities for growth for many corporates, but they also come with real risks, especially given the ever-increasing focus on compliance both here and in the US.’

Commodities and financial services – the hot sectors in 2010 – look set to dominate again in 2011. The fast-moving consumer goods sector is also expected to get busier towards the end of the year, while technology is going through something of a mini-renaissance.

On the face of it, there is enough to be optimistic about in the next year, but (to butcher a favourite sporting cliché) it will ultimately be a world of two halves. The new cash-rich and aggressive growth nations of Latin America, Asia and Africa will continue to be considerable drivers of growth, while closer to home there will be a more modest recovery. The only worry is the ongoing fragility in many mature markets, with macro-economic threats, such as the developing Euro crisis, a considerable risk to the deal activity. Firms will continue to bet big on emerging markets, but will hope for a sustained pick up in activity in Europe and the US, otherwise the panacea may not be the cure-all it is cracked up to be. LB

 

 

Top ten advisers on global M&A 2010

Rank	Law firm	Value (US$m)	Deal count
1	Skadden, Arps, Slate, Meagher & Flom	336,529	204
2	Sullivan & Cromwell	322,960	153
3	Freshfields Bruckhaus Deringer	272,481	215
4	Cleary Gottlieb Steen & Hamilton	267,922	116
5	Simpson Thacher & Bartlett	253,006	146
6	Latham & Watkins	229,263	273
7	Linklaters	198,001	238
8	Davis Polk & Wardwell	179,784	94
9	Weil, Gotshal & Manges	161,133	158
10	Allen & Overy	154,625	217

Source: mergermarket