Global London: The Barbarians storming the gate of City deal work

Mainstream M&A has for decades been the stronghold of the City elite… and the ground US law firms struggled to seize. As some of Wall Street’s elite ramp up City investment, is plc deal work about to fall to US invaders?

With seven days left on the clock to force through a bid for the UK’s largest pharmaceutical company AstraZeneca, many in the City were surprised when Pfizer put forward a final £69bn offer on a spring Sunday evening when most shareholders were out enjoying their weekends.

AstraZeneca’s board swiftly rejected the bid on 18 May 2014 and Monday’s headlines were written. Pfizer’s ‘overly aggressive American’ tactics have been criticised in the City ever since and a poster deal for US law firms turned into fodder for the Magic Circle to recycle arguments that American rivals don’t get public M&A work UK-style. ‘They knew they only had 28 days unless they got the [time limit] extended,’ says one senior partner at an elite London firm. ‘They needed big shareholders to get on board and they were poor at it. On day 21 they come up with a sum and declare it final, which is the worst thing to do and never works. They had seven more days and squandered it with no pressure on the board.’

While City rivals cite the influence of financial advisers on that bid – ‘a car crash of investment bankers piling into a payday’ – and Pfizer’s counsel at Skadden, Arps, Slate, Meagher & Flom are believed to have advised against the tactics, the episode was embarrassing for an M&A brand as strong as Skadden’s. It was hardly a vindication of using US advisers on a top-line, cross-border bid.

But is this the exception or the rule? There has been a steady slew of US advisers securing major English law mandates and signs are that they are starting to attract more work from heavily-institutionalised FTSE 350 clients.

The race to acquire engineering company Charter International in 2011 is cited as a significant moment, with Skadden and New York rival Simpson Thacher & Bartlett tussling for US manufacturing group Colfax Corporation and London-listed Melrose Industries respectively on a UK deal. Skadden client Colfax ultimately prevailed with a £1.5bn bid, advising opposite Slaughter and May head of corporate Andy Ryde. One Slaughters partner concedes: ‘Charter was the first poster deal. That was the first time US firms advised on both ends of a major deal. That shows they are getting traction.’

‘We haven’t handed over any English law corporate advice to any other firm for a very long time.’

Michael Hatchard, Skadden

Previous attempts by US firms to garner a FTSE following have largely fallen flat and the Magic Circle has maintained its commanding share in plc corporate work, even while losing material ground in lucrative areas like private equity, funds and leveraged finance.

With London as its hub, private equity accounted for nearly 40% of all European deal value in 2015, according to Thomson Reuters. US firms, already holding strong relationships stateside, have used these clients to push into general corporate work via portfolio companies and initial public offerings (IPOs).

Skadden – for years the bellwether for US advisers in high-end European M&A – has continued to advance, even with a lean office. The widely-admired City veteran Michael Hatchard, who co-led Skadden’s advice to Pfizer and spearheaded the Colfax deal, struck again last year when beverage can-maker Ball Corporation acquired UK rival Rexam for £4.3bn and used Skadden for M&A advice on both sides of the Atlantic, only turning to Slaughters for competition work.

While M&A activity in the UK has been hit by fears of a global slowdown and the Brexit vote in June, the FTSE 100 are once again generating big-ticket deals after hoarding cash during the post-recession years. The value of deals involving the FTSE 100 increased from £77.5bn in 2011 to £244bn in 2015, according to Mergermarket, and US firms are taking a small but notable slice of that work.

Charles Martin, senior partner at Macfarlanes, says: ‘US firms have undoubtedly had an impact. They have broken the presumption that you need the Magic Circle for big ticket public or private M&A in the UK. Some may disagree but from where we sit that is clearly the way it looks.’

Given the strategic importance of high-end M&A work in the UK and European legal market, the stakes couldn’t be higher for US and UK advisers. Could a slow advance become a rout?

The $1trn bike ride

While Skadden’s City office is barely larger than five years ago and London promotions have centred on disputes, its flagship corporate team has achieved more prominence. Much of that has been Skadden’s central role in the string of so-called tax inversion mergers, the controversial structure Skadden pioneered to allow US acquirers to cut taxes in the US by switching domicile to lower-tax nations.

The structure was dreamt up during a bike ride by Skadden partners from its City and New York offices through the south of France in the summer of 2010. After Pfizer’s AstraZeneca bid, Skadden ‘quarterbacked’ the Viagra-owner’s $160bn takeover of Botox-maker Allergan last year in an inversion deal that became the largest pharmaceuticals merger in history. This helped Skadden to become the first legal adviser to handle over $1trn in announced M&A deals in a single year in 2015.

But the firm’s breakthrough in the City has not been restricted to inversion deals. It has been a steady, sustained push, spearheaded by Hatchard, that has seen Skadden advise on six out of the 33 offers for London-listed companies in 2015. Four of these were on the core M&A aspects. Hatchard – cited by peers as the most formidable English law dealmaker working for a US firm – has been refining Skadden’s M&A team since joining from Theodore Goddard in 1994, working in a long-term partnership with US veteran Scott Simpson, the arranger of that highly-profitable 2010 biking sojourn. (The trip is an annual idea-sharing tradition for Simpson with a shifting group of his colleagues. Despite a recent hip replacement, Simpson says he is ‘fighting fit’ and ‘will be there in July’ for this year’s bike ride.)

‘US firms have undoubtedly had an impact. They have broken the presumption that you need the Magic Circle for big ticket public or private M&A in the UK.’

Charles Martin, Macfarlanes

Skadden built a potent City deal team by bucking trends. While Wall Street peers initially targeted securities work, no-one else was in play for substantive deal work in the mid-1990s. ‘I got calls saying: “You’ll be torn apart,”’ recalls Hatchard. It was a different age. The firm even required special dispensation from the Takeover Panel to work on public deals as Skadden’s Canary Wharf offices were outside the Square Mile.

The firm famed for pioneering hostile deal work in the US ushered in new tactics to the City, using an injunction in 2011 for client Alfa, Access & Renova in its dispute with BP regarding the oil major’s alliance with Russia’s Rosneft, which it claimed broke the rules surrounding the consortium’s 50% stake in TNK-BP. This led to a renegotiation and the buyout of TNK-BP by Rosneft in a £36bn deal in 2013. Recalls Simpson: ‘We have used litigation and other defensive strategies on M&A for the first time. Linklaters told us we couldn’t do it.’

Skadden’s instruction by Ball was its largest deal last year, but the firm’s City arm also received instructions by London-listed car parts maker HellermannTyton on its £1.16bn sale to US rival Delphi Automotive; Japanese insurer MS&AD Insurance Group Holdings on its £3.47bn deal for London-listed underwriter Amlin; and US food services group Middleby Corporation on its £119m takeover of London-listed cast-iron cooker maker Aga Rangemaster. Hatchard asserts: ‘Just to make it clear, we haven’t handed over any English law corporate advice to any other firm for a very long time.’

While the London office’s 125 lawyers give Skadden a City headcount only slightly higher than in 2011, the firm has more general corporate depth than most US firms in London, with around 45 of these in corporate.

The HellermannTyton instruction is another example of US firms leveraging private equity connections to secure FTSE deals, holding on to that client since it ran the IPO for longstanding private equity client Doughty Hanson in 2013. Ironically, private equity (PE) has been the chink in Skadden’s City armour, even as many US peers have forged ahead, with veteran partner Allan Murray-Jones retiring in 2014 and Shaun Lascelles joining Ashurst last year. Despite Skadden’s pledge to replace Murray-Jones, the struggle of its biggest PE client in the City to raise a fund following the death of founder Nigel Doughty in 2012 has made finding a replacement difficult and Skadden’s search for a successor has become something of a joke among buyout lawyers.

Likewise, critics maintain the brand remains heavily reliant on the Hatchard/Simpson axis. But Skadden remains in bullish mood, with Simpson citing Scott Hopkins – ‘he’ll be one of the greats’ – and Lorenzo Corte as key deal partners. He also argues that Skadden’s competitive edge comes from its restless focus on new techniques. The firm is currently eyeing the wave of Chinese investments into Europe as the next frontier for deal innovation and has brought John Adebiyi back from Hong Kong to better position itself for that work.

‘Michael and I were going into boardrooms and meeting with bankers in this town four years before the inversion wave hit, to highlight what we thought would be a significant trend, and they thought we were from Mars,’ observes Simpson. ‘Without inversions we would not have hit $1trn. Skadden is at its best finding the trends and acting on them.’

While Skadden has long had a broad offering in London, other credible M&A brands in the US have struggled to challenge the Magic Circle. But the robust activity levels of US sponsors in Europe has shifted that dynamic over the last five years. The standard-bearer in this regard is Simpson Thacher & Bartlett – Wall Street’s top buyout firm – which has more than doubled the size of its City arm to 106 lawyers over the last five years and dramatically hiked its UK revenues. Despite running a lean operation, Simpson Thacher is rapidly becoming a bellwether for high-end M&A. Between 2011 and 2015, revenue at the London office has doubled to over £125m.

Corporate heavyweight Adam Signy, a 2009 lateral from Clifford Chance (CC), is undoubtedly the star name. Although brought in to handle M&A for US buyout giants The Blackstone Group and Kohlberg Kravis Roberts & Co (KKR), and leading UK house Apax Partners, Signy was followed by loyal client Melrose – a London-listed company known for its private equity-style investments in manufacturing businesses. Signy’s relationship with Melrose landed Simpson Thacher’s London office a flagship mandate in the UK, when it unsuccessfully bid for Charter five years ago. Since then, Signy’s work for the firm’s sponsors has led to three further FTSE clients: magazine business Ascential, Auto Trader and pet supplies retailer Pets at Home. Simpson Thacher ran all three IPOs on the London Stock Exchange, floating Apax’s Ascential in February and Auto Trader in March 2015, while exiting Pets at Home for KKR in early 2014, and has continued to act for them ever since.

‘What’s the difference between us outsourcing pensions, real estate or basic due diligence and A&O sending it to Belfast or Freshfields sending it to Manchester?’

Simpson Thacher and its Wall Street peers often use local firms in supporting roles. Elite US firms with selective practices in the City have formed close relationships with independent City players, with Simpson Thacher and Sullivan & Cromwell sending work to Travers Smith, Macfarlanes and Slaughters. Simpson Thacher also often uses Gowling WLG and Dentons for real estate and due diligence work. Skadden regularly uses Mills & Reeve, Shoosmiths and Nabarro for general support and employment issues, and Berwin Leighton Paisner on real estate. Says Hatchard: ‘We can get City-standard advice for £200 per hour. That’s appealing to most clients.’

Ironically, many argue that elite US firms in the City are benefiting from the commoditisation of legal services. With many City rivals now nearshoring volume work, London rivals are offering a less integrated service. One US law firm partner comments: ‘What’s the difference between us outsourcing pensions, real estate or basic due diligence and A&O [Allen & Overy] sending it to Belfast or Freshfields [Bruckhaus Deringer] sending it to Manchester?’ Indeed, many argue that the current renaissance in mid-tier City law firms is being driven by booming US referrals on corporate support work. Macfarlanes’ Martin adds: ‘If you look at how the in-house legal function has developed at a FTSE 350 company, it is now often sufficiently well-resourced and sophisticated to coordinate and project manage a lot of their transactional work themselves. They do not have to pay an integration premium to large global firms to manage the entire process. They can do that themselves and choose external law firms on a more à la carte basis.  Why go to one firm exclusively when you do not need to and there can be cost, efficiency and control advantages in doing things differently?’

Simpson Thacher’s private equity practice, covering both funds and M&A, could see the firm become house counsel for a further ten major FTSEs through IPO exits within a decade according to the firm. And the concentration of top buyout talent at US firms, with the likes of Linklaters, CC and Ashurst damaged by the loss of partners to US rivals, is providing a steady route to public M&A work to top firms. Others have tried this strategy, with Weil, Gotshal & Manges long endeavouring to use its private equity practice to win corporate clients in the UK, though the firm is seen to have lost momentum in recent years.

But Simpson Thacher has the client base to potentially take the tactic to an entirely different level. The firm’s nine-partner promotion round in 2015 saw three made up in London: deal finance lawyer Carol Daniel, funds specialist Seema Shah and real estate M&A lawyer Wheatly MacNamara. (The latter two reflect the sharp growth in the firm’s funds practice over recent years and Blackstone’s real estate business being an anchor client for its City arm.)

Gregory Conway, London managing partner of Simpson Thacher, sums up the model: ‘We don’t have lots of mouths to feed. If there’s been a guiding philosophy it’s that if we do really, really, really good work and look after the firm’s core clients – everything is going to be fine.’

However, there is no doubt that the potential for elite US advisers to make aggressive inroads has been curbed by the fear of profit dilution. Even having hiked its revenues, Simpson Thacher’s headcount remains small, while Sullivan & Cromwell and Davis Polk & Wardwell have been even more cautious over the last five years.

Sullivan’s Tim Emmerson, a 2007 hire from Milbank, Tweed, Hadley & McCloy, ranks among a select band of heavyweight M&A practitioners at US firms in London. However, the office is heavily slanted towards servicing house clients – in particular Goldman Sachs – and doesn’t have the private equity engine to generate portfolio work. Davis Polk’s English law practice in London was launched in 2012, 16 years after Sullivan, to support the firm’s push into Asia. While Davis Polk’s Will Pearce, a 2013 hire from Herbert Smith Freehills (HSF), has a solid reputation, the firm lacks the tested hands seen at Skadden, Simpson Thacher and Sullivan. One Magic Circle partner comments: ‘[Pearce is] good and I like him, but he hasn’t got the market recognition.’

Like a UK firm

While the Wall Street model is to pick off top European deals without running a costly full-service model, less profitable US rivals are attempting to more directly challenge the Magic Circle with broader practices. Baker & McKenzie and Shearman & Sterling are two long-time proponents of this strategy, with Latham & Watkins and White & Case driving the same approach. Between them, those four firms employ over 1,300 lawyers in London, the same number as Linklaters and Freshfields combined. The pitch is similar to the Magic Circle’s but with less UK depth and quality, supposedly balanced out by stronger US practices.

Bakers and Shearman, two long-established offices, have made some ground over the last few years after targeting corporate work. Bakers, traditionally a mid-tier player despite its massive global network, has secured some more lucrative big-ticket deals after establishing a solid team of partners targeting FTSE clients eight years ago. Tim Gee, global head of M&A at Bakers, says that ‘most of these relationships began with relatively small mandates, with our strong competition and tax teams breaking new ground, and some of those have blossomed into M&A mandates’.

Gee is the firm’s most prominent corporate name, with head of telecommunications Peter Strivens and Tim Sheddick also established. The push in the London market saw the firm act for Unilever on the purchase of soap brands Zest and Camay from Procter & Gamble at the start of 2015, and British American Tobacco on its £394m acquisition of Croatian cigarette maker Tvornica duhana Rovinj last summer. The firm has found some success in the communications space but is still struggling to win frontline public M&A roles, with Slaughters picked to help US data giant Equinix on its £2.35bn takeover of UK rival TelecityGroup as Bakers picked up the finance work.

‘We were going into boardrooms in this town four years before the inversion wave hit and they thought we were from Mars.’

Scott Simpson, Skadden

More potent has been Shearman. Despite a string of reverses over the last decade in the US, the firm has won a series of major corporate mandates out of the City. Shearman advised on four of the 33 public M&A offers for main market companies last year, with longstanding client Fairfax Financial Holdings entrusting two bids for London-listed companies to European head of M&A Laurence Levy and City partner Jeremy Kutner. The firm handled all aspects of Fairfax’s £1.22bn takeover of London-listed insurer Brit last summer and the English law aspects on its £165m take-private of power plant supplier APR Energy as part of a consortium.

Many US firms have found success with tech clients, where relationships with law firms are less institutionalised, and Shearman brought in Freshfields’ co-head of telecoms, media and technology, Frank Miller, last September to build up in the sector. Having already faced off against a joint team of Slaughters and Paul, Weiss, Rifkind, Wharton & Garrison on the Brit deal, Levy and Kutner are working opposite the pair again for Liberty Global on its £3.6bn purchase of FTSE 250 company Cable & Wireless Communications. That is a deal Freshfields or A&O, as regular advisers to Liberty, would have expected to have won.

While many rivals argue Shearman lacks genuine deal heavyweights, Levy says: ‘The hires we’ve made may not have made the headlines in the way Nigel Boardman would, but we’ve taken top talent and it’s clear we have made an impact on the market.’ Since Levy’s arrival from Norton Rose a decade ago, the firm has gone from two to seven core corporate partners, who between them generated around $35m last year. Levy adds: ‘You can’t win UK public M&A just because there’s a US angle, as they need to know you’ve got experience under the UK Takeover Code and Panel as, without that, all the other experience is irrelevant. There are times when US expertise is a factor in why we’re chosen, as that means clients don’t have to use two firms, but our regulatory group – headed out of London and extremely strong, even stacked against the Magic Circle firms – provides a compelling position following the wave of financial regulation.’

With a large band of US firms avoiding an assault on the UK corporate market, Latham & Watkins and White & Case are two other leading contenders, again in part working off sponsor clients.

Of the two, White & Case has the larger corporate practice, with Latham’s leading M&A name Nick Cline largely focused on the firm’s sovereign wealth fund clients in the Middle East, and PE heavyweight David Walker focused on key firm clients The Carlyle Group and Hellman & Friedman. While a breakthrough has yet to materialise, White & Case’s Allan Taylor says ‘the US firms are chipping away because of the internationalisation of the FTSE’ and the ‘ability to drop successful partners into our remuneration pool’.

White & Case now employs more than 400 London lawyers following dramatic recent growth of its corporate team. For a firm long associated with finance, it has been a surprising reinvention. While the bulk of that expansion has been around the private equity team run by Richard Youle and Ian Bagshaw, the duo’s 2013 arrival from Linklaters has given White & Case a new swagger. ‘We have to go out and back ourselves,’ says Taylor. ‘Ian and Rich knocked the ball out of the park and have been transformational. It has created visibility in the market and we track the exits to help build that corporate client base.’

The shift at White & Case has been backed by a wider tilt towards mainstream transactional deal work in Western markets and at the expense of its historic emerging market focus. Chair Hugh Verrier put corporate at the heart of the firm’s 2020 strategy, with London tasked with doubling its corporate revenue in that period. Taylor, John Cunningham and Philip Broke are the firm’s strongest names in the City. Taylor argues: ‘There are US firms drawing away from other US firms and that’s not just a scale issue. White & Case and Latham are the leading US firms in the City. There’s not much debate around that. The full-service nature and ability to provide that is core to success with corporate clients. They need regulatory cover, the ability to handle disputes and employment matters… They want you to be a UK firm and we’ve positioned ourselves as a UK firm better than anyone else.’

Sliced up

Below the larger teams positioning for deal work is a band of aspiring firms. Perhaps surprisingly, given its gearing around project finance, one of those is Milbank. The firm is pushing a more international agenda than in the past and is looking to build its corporate client base in New York and London. The hire of Mark Stamp from Linklaters in 2012 went some way towards filling the void left by Emmerson, but the firm has struggled to attract the laterals it needs to establish the practice.

Milbank has targeted adding another three corporate partners in the City, which would take it to five, and has made launching a London competition practice a priority. The firm has started to have some success in PE, recently handling multibillion-dollar deals for Terra Firma and Highbridge Principal Strategies. Stamp says ‘there is the political will to transform the firm into a dynamic corporate practice in New York and London over the next decade’, adding: ‘We want to build corporate as one of the main pillars of the firm. Are we there yet? No. The initial hires were the most difficult as it required a leap of faith from them, but it becomes easier when they can see what is happening for themselves and there will be a snowball effect. There are significant growth opportunities and we are capacity-constrained.’

The conservatism of Milbank’s senior management towards growth is one constraint the firm faces, but there are no such restrictions at Gibson, Dunn & Crutcher. A top-15 global practice with average partner profits over $3m, Gibson Dunn has the resources to build a potent City practice, though until two years ago had focused its UK offering on disputes. Since then, the hiring of four corporate partners from Ashurst, including high-profile senior partner Charlie Geffen in 2014, has signalled a change in direction. With Geffen aiming to build a rounded practice, the hire of HSF global capital markets chief Steve Thierbach and rising star Christopher Haynes last year added credible finance options. Building up the work has taken longer, though Gibson Dunn did last year handle the UK corporate work on insurer Towers Watson’s $18bn merger with Willis.

‘We are building a fully-rounded London office that will push us towards FTSE work,’ says Geffen. ‘The US firms in London have either grown from a capital markets or private equity angle, with some focused on inbound M&A without seeking to grow a big UK corporate team. We are pleased with the progress we’ve made, but there is still a long way to go. With the addition of the new recruits, we believe we now have as strong a corporate capability as any US firm in London.’

Geffen argues that the market is moving in favour of US firms, which are increasingly geared up to handle high-end advisory work in their partner-driven practices, leaving UK firms to sell what he terms ‘execution’, the wider project management, and crunching through documents and secondary support work. This means US firms can farm out much of the ancillary work to mid-tier City firms (see Horizon Scan).

‘White & Case and Latham are the leading US firms in the City. Clients want you to be a UK firm and we’ve positioned ourselves better than anyone else.’

Allan Taylor, White & Case

Ropes & Gray is running a similar strategy to Gibson Dunn and has exceeded expectations since its 2010 launch. Other firms lack the brand positioning, or the big-hitting partners, required to challenge the Magic Circle. (Covington & Burling, Jones Day, Mayer Brown, Morgan, Lewis & Bockius and Sidley Austin also fall into this category.) Others, such as Proskauer Rose, Kirkland & Ellis and Debevoise & Plimpton, have largely avoided investing in general M&A to focus on funds and sponsor clients.

The struggle of these profitable and established players to assert themselves in deal work underlines the reality that progress in corporate work has been slow and uneven over the last 20 years. The majority of US advisers – even when they have hit on profitable lines in disputes, funds and finance – suffer from confusion and ill-defined plans in M&A.

The worrying conclusion for the City advisers is that their one-stop-shop model is progressively being turned on its head for high-end corporate work.

One senior partner at an elite UK firm notes: ‘The truth is that few US firms are really geared up for public M&A work.’

Even for the few to have had success, the questions is: what comes next? As one Slaughters partner puts it: ‘They need to make up their minds what they are actually trying to do here. Ranking just a notch below Clifford Chance and A&O is a lot of progress. But they are all very reliant on one or two individuals, so it’s fragile.’

Still, a determination to follow the money is in some cases compensating for strategic shuffles. The influence of sponsors is bleeding into the mainstream corporate market, while the broader trends towards US-driven enforcement and financing also cannot be dismissed. The transformation of Simpson Thacher’s City arm into a lean and profitable transactional machine will surely embolden more US rivals to invest in UK corporate.

The worrying conclusion for the City advisers is that their one-stop-shop model is progressively being turned on its head for high-end corporate work, even as major corporates concentrate more business-as-usual work in the hands of a smaller band of broad-service ‘execution’ advisers. When this late and best-defended gate is breached, the City will be changed forever. LB

tom.moore@legalease.co.uk