With the number of large-scale tech M&A deals increasing in 2011, some believe that another technology bubble is forming. Following the coalition government’s pledge to help the developing local tech sector at Silicon Roundabout, LB finds out how law firms are placing their bets, and who is getting ahead of the game.
All eyes in the legal community are firmly fixed on East London. Taylor Wessing’s October move to open a second London office in Tech City, located near the Old Street roundabout, renews focus by commercial law firms on the technology scene, and signals a flourishing of the UK’s tech sector.
Dubbed ‘Silicon Roundabout’ by Dopplr founder Matt Biddulph in 2008, the Old Street and City Road junction has, in recent years, become the centre of a thriving den of startup technology companies, earning recognition throughout Europe and among larger American companies.
In the last three years, it has experienced formidable growth. In 2008, there were just 15 companies situated in the eastern neighbourhood. Now there are more than 500, stretching beyond the Old Street roundabout and reaching the Olympic Park in Stratford. This has been helped somewhat by the vocal support from Prime Minister David Cameron and the subsequent launch in November 2010 of the Tech City UK development initiative, which, through the Tech City Investment Organisation, will help to drive investment into the area. This growth, coupled with the possibility that these companies could, with the right touch, become giants, is a magnet for any law firm interested in securing the high-profile clients of tomorrow.
From large City practices to medium-sized regional firms, the past 12 months have seen a number of firms with strong tech capabilities set their sights on work from Tech City companies, all the while keeping an eye on the global M&A market. With worries still prevalent that the world’s tech market could be headed towards another ‘bubble’, LB asks what firms like Pinsent Masons, Taylor Vinters and Mishcon de Reya get out of targeting startups. Who’s got the best offer?
City Living
The biggest move in recent months has been the set up of Taylor Wessing’s Tech City arm. Keen to show the strength of its offering, the firm opened the new office in October, which will be dedicated largely to providing drop-in advice clinics to fledgling companies. The set up will include just four desks in the Great Eastern Street office where partners and associates from across the firm’s TMT, venture capital, intellectual property, tax and incentives, inward investment and employment practices will be available to local companies for free in scheduled clinics. There will be at least two lawyers in the office at any given time, and partners frequenting the office include Mark Barron, Graham Hann and Simon Walker, as well as other partners and associates.
‘By opening the office we’re offering much more than a lot of other organisations that want to get involved in Tech City,’ explains Barron, a corporate partner who acts for technology and life sciences clients. ‘It’s about being close to people and the issues that they are facing so that we can offer services that fit with the culture of this area.’
‘Companies don’t necessarily feel they have easy access to the law firms based in the City. We saw a need to integrate properly into that community.’ – Simon Walker, Taylor Wessing
In fact, one of the firm’s biggest clients, Google, has taken up 25,000 sq ft of office space on Bonhill Street in a £5m deal. The tech giant aims to use the space as a launchpad for entrepreneurs.
Describing what the benefits of an additional London office are, Walker, who is leading the initiative, explains: ‘Companies don’t necessarily feel they have easy access to the law firms based in the City. We saw a need to integrate properly into that community.’
Despite the government’s pledged support to Tech City, Taylor Wessing says it did not receive any incentives, concessions or other support on the project.
IP partner Hann, who will also be taking part in the office’s operations, stresses: ‘We have interfaced with the government on this and we have given our views on how we think Tech City can be best supported, but the office is something we’ve done independently. In fact, Tech City has developed its own community independently of government support really.’
‘Of course we hope to eventually get some new clients out of this, but more importantly, it is about being part of that community, and being physically rather than just verbally there to support the young companies that need advice,’ adds Barron. Taylor Wessing has already advised Trampoline Systems and Shutl, both based in Tech City, on various funding rounds and agreements. In addition, Certivox enlisted the firm’s help on its recent series A round of funding – also in the area. The community integration appears to be bearing fruit.
Services rendered
Cambridge-based Taylor Vinters has also stayed close to the action. The firm’s tech practice has been on the doorstep of the thriving Cambridge Science Park and the myriad tech spin-offs and startups to come out of the area, such as Convergys, Apollo Media, and the Biotechnology and Biological Sciences Research Council.
Commercial and technology chief Patrick Farrant points to a number of Cambridge-based companies swallowed up by Google as being among major pieces of work the practice has completed in the last 12 months.
In August, the firm advised biotech company Atlas Genetics on a £16.9m funding round from an investor syndicate, which included Novartis Venture Funds, MVM Life Sciences Partners, BB Biotech Ventures, Consort Medical and Johnson & Johnson Development Corporation and advised Argenta Discovery on a $500m licensing deal with AstraZeneca.
Having launched a permanent London office in April 2010, the firm is keeping its finger on the pulse, and Tech City’s growth is not going unnoticed.
‘You have to immerse yourself in the culture of Tech City.’ – Adrian Rainey, Taylor Vinters
The firm has introduced the Venture Capital Startup Pack, by bundling together services aimed specifically at the early-funding, or ‘seed-funding’, stage for tech businesses. The firm is offering the services at below market rates.
Adrian Rainey, a partner in Taylor Vinters’ London corporate team and an expert in tech-related venture capital work, explains how it works: ‘We have been offering the bundle for a while in an unofficial way, but formalised it as a product just in the last few months. We run it on a system where if the startup doesn’t get the seed funding, then they do not have to pay us any fees. It makes no sense trying to charge £15,000 to £20,000 to companies that cannot afford it at all.’
Rainey insists that the scheme ‘absolutely’ represents an investment in the startups sector, because fees are capped on the pack even if the funding happens. This way, the firm’s clients don’t accumulate bills that become unaffordable. ‘You have to immerse yourself in the culture of Tech City,’ he says. ‘This is a way for us to make the firm an attractive option to the companies there.’
Mishcon de Reya is also introducing a low-cost pack for startup companies. Launched at the start of November, the firm has teamed up with ‘group buying’ website Huddlebuy to provide services to smaller and newly established tech companies. Huddlebuy allows small companies to benefit from large-order savings by purchasing services collectively.
‘We recognise that startups need significant assistance when setting up their new businesses. We have used our experience in advising entrepreneurs to create a package that offers vital legal advice,’ says Nick Davis, Mishcon’s corporate chief. ‘We have selected Huddlebuy to partner with us as they are revolutionising the way in which small businesses can purchase the essential goods and services their growing business needs.’
Known as START, Mishcon’s scheme includes contracts for new employees, advice on intellectual property ownership, an agreement to document the relationship between founding shareholders, and a consultation with a solicitor. Importantly, the package is available for the fixed price of £1,500, but the firm claims the services contained within are worth £3,000.
Participating in the START scheme also means that startups will have access to the kit on the Huddlebuy service, entitling them to the savings available on an array of other technical and marketing services such as website development and search engine optimisation, logo design, business cards and web hosting. While the scheme is not aimed specifically at Tech City, it is intended to take advantage of that market, as well as startups elsewhere in the country.
Pinsent Masons, meanwhile, is confident of its ability to integrate into the Tech City community. The firm’s Crown Place offices are located roughly ten minutes on foot from Old Street roundabout, and considerably less from City Road where dozens of startups are based.
The firm hired Danvers Baillieu, a senior associate, in February 2011 from Winston & Strawn, where he co-founded Bootlaw. The initiative, which is described as ‘a free boot camp for emerging technology, internet and digital professionals who want to learn more about the legal issues they face’, is aimed at creating a networking platform for tech entrepreneurs. Baillieu brought the initiative with him to Pinsents.
‘Everything in Bootlaw makes no money – it’s about building future business relationships,’ says Andrew Hornigold, who heads up the tech practice at Pinsents.
‘When we started Bootlaw in 2008, the economy was really struggling, so we were in this growth space from a very early stage,’ says Baillieu. ‘We’ve held around 30 meet-ups for entrepreneurs and startups, and now have an attendance of around 60 to 70 people. We give them beer and pizza, and people network and meet the right people to talk to about their business. A lot of business has been generated for us in this way.’
Pinsents also runs an event called TechPitch 4.5, held in its London auditorium, where entrepreneurs stand up to make their pitch in front of potential investors. The event, which has been held four times since its launch in February, is yet another attempt to integrate into the Tech City community and get the firm’s brand name out in front of potential clients.
But the question begs: how lucrative can this be for the firm? The recession has forced firms to think on their feet to secure work and new clients. Gone are the heady days when firms took a punt on a startup company by agreeing to take a share of the business rather than receive fees. During the ‘dot-com boom’ of the late 90s, the model for many US and UK firms advising startups was accepting stakeholdings in the company.
A partner at one large City firm says: ‘The last time round it was very common for firms to take a share in startups in return for advice at the front end, but it is much less common now. We’re no different from a lot of firms in that respect, but a lot of people were stung by that practice. When we take on a tech client now, we might take some money on account to compensate for the fact that they may not be able to pay later on.’
Being either on the doorstep or actually in the door are both far from universal tactics among law firms however. This time around, firms are tentatively attempting lower cost, lower risk ways of targeting the upcoming tech clients at Silicon Roundabout.
Rolling onto the scene
Current data would validate the confidence of these tech practices. The number of M&A transactions in the UK technology arena has almost doubled since 2009, from 49 deals to 88, according to information provided by mergermarket. 2011 has already seen $13.8bn worth of deals done, with the year rounding to a close. While it still does not match the peak of the M&A boom between 2004 and 2008, the numbers are encouraging.
There is no doubt that 2011 has seen some remarkable deals between tech companies. The last 12 months have witnessed the return of impressive figures in the sector, with a few notable big-ticket transactions hitting the international headlines. And lawyers have done well out of them.
Chief among the mega-deals was the $10bn buyout of digital analysis software developer Autonomy by Hewlett-Packard (HP) in August this year. The deal gifted roles to a raft of firms in the US and the UK. Autonomy turned to UK firm Slaughter and May as its main counsel on the deal. The Cambridge-based software company also instructed Morgan Lewis & Bockius and Morrison & Foerster to provide US advice. Gibson, Dunn & Crutcher took a lead role advising HP, with Freshfields Bruckhaus Deringer acting as co-counsel.
Another large deal to hit the tech sector was the $9bn takeover of Skype Global by Microsoft in June. Covington & Burling landed a pole position acting for Microsoft, while Skype turned to Sullivan & Cromwell. Simpson Thacher & Bartlett, Cadwalader, Wickersham & Taft and Skadden, Arps, Slate, Meagher & Flom also played a part in that transaction. Worries at the time were that the takeover deal was overvalued.
Global M&A transactions aside, social media companies are also heading towards monstrous valuations. It is thought that Facebook, should it float, would be valued at roughly $65bn. Similarly LinkedIn has an implied value of $8bn thanks to continued interest among investors after its 2011 IPO.
’It makes no sense trying to charge £15,000 to £20,000 to companies that cannot afford it at all.’ – Adrian Rainey, Taylor Vinters
‘Our view is that there is not a bubble,’ says Taylor Vinters’ Farrant. ‘At the angel investor and venture capital level, there is a lot of activity at the moment, but this is more to do with people playing catch-up after having done little in the recession years.’
Law firms appear undeterred by the return of the mega-deals in the M&A market. Many technology, media and telecoms practices are setting their sights on investment and venture capital work in this re-emerging market without equivocations.
Zickie Lim, head of Mills & Reeve’s venture capital and private equity team in Cambridge, says: ‘The market has been touchy, and this time there is a very strong emphasis on backing strong management. A number of investment terms are coming to an end, so funds have cash left over that they need to use up.’
Mark Turner, a partner in Herbert Smith’s TMT practice, says the market is simply not as risky today: ‘The system and culture in the online business sphere was not built up during the first dot-com boom, so a lot of people didn’t really know what they were doing. It is a lot more developed now.’ Herbert Smith advised joint co-ordinators Credit Suisse First Boston and Cazenove & Co on Freeserve’s $2bn IPO in August 1999.
Selling short
Despite such rapid market growth, even in this single geographical area, the healthier numbers are not giving rise to engagement of the same level seen at the turn of the century.
However, there is no denying that the market is increasingly buoyant. The figures do not point towards the danger zone of which so many are wary. But equally, those firms that have angled for more tech-related work, particularly those targeting Tech City, are still doing so on a highly cost-controlled basis.
Even Taylor Wessing, whose response to the market’s growth is easily the most significant among firms, retains a low-cost model. Its new office is smaller than many of the startups it hopes to serve, and with no permanent staff, speculative market commentators have pointed to how easy it will be for them to shut up shop if the wind changes.
Sam De Silva, head of the technology and outsourcing practice at Manches, is quietly sceptical of even the most exuberant displays from other firms. ‘I’m not sure that the Old Street area will be as big as people make out,’ he says. ‘A lot of firms that are “getting involved” have not done anything as serious as actually moving their premises there, they are just building presence.’