‘The biggest issue for the market is uncertainty’, says Richard Youle, who has headed Skadden’s London office since July. ‘Whether that’s in relation to the current geopolitical landscape, higher interest rates, inflation, or navigating tougher stances by regulators – we’re seeing people take longer to think about transactions and execute them. There’s also a mismatch of expectations – sellers are looking for 2022 prices, while buyers are looking for a reduction.’
Indeed, this view is borne out by the data. According to Refinitiv, worldwide M&A activity for the first three quarters of 2023 is down 27% compared to the same period last year, to a ten-year low of $2trn. There are some positive signs. Q3 2023 saw activity dip 16% on Q2. But four of Refinitiv’s top ten highest-value global deals were announced between June and September, and the months since then have seen further high-value activity. Still, these points notwithstanding, Q3 2023 remains the slowest Q3 since 2012.
Much of this is thanks to macroeconomic pressures. But conversations with deal lawyers reveal a raft of additional challenges, from a rising tide of antitrust regulation around the world to ever more fierce competition from US firms.
American dominance
‘The rise of the US firms in London is a trend that’s been going on for the last 20 years or so. It’s picked up in the last decade, and Brexit added some fuel to that fire. It all comes down to where capital is flowing from.’ With this statement, Sullivan & Cromwell London corporate M&A partner Jeremy Kutner sums up a prevailing sentiment among deals lawyers.
‘It’s been a very challenging decade for UK capital markets and there’s been a consistent flow of US investment into Europe, both by strategic and financial investors.’
Will Pearce, Davis Polk
Freshfields is the only UK-based firm to feature in Refinitiv’s top ten principal (lead) advisers on global M&A for Q1-3 2023 (see tables, opposite). This is perhaps unsurprising given that the US remains, in Youle’s words, ‘a global economic powerhouse’. The US accounted for 52% of the value of global announced M&A for Q1-3 2023, increasing its share from 47% the previous year, despite a 19% decline in value, to a total of over $1trn. Europe lagged far behind: its share dipped from 26% last year to 19%, with a drop in value of 45%, to a ten-year low of $391.7bn. The UK, meanwhile, saw its share fall from 6.6% last year to 4.7%, with a 48% nosedive in value to $94.4bn.
This US dominance has buoyed US firms in the European and UK markets. US firms hold half of the top ten spots in the European principal adviser rankings for Q1-3 2023, and three in the UK rankings. Freshfields is in first place on both counts, with only one other Magic Circle firm showing up in the top five. Linklaters is in fifth place in the European table, and Allen & Overy (A&O) is in fifth in the UK. Freshfields is also the only UK firm to appear in the top five in both rankings every year since 2018.
In Refinitiv’s top ten firms, US firms passed UK firms in terms of total deal value in Europe for the first time in 2023. And while UK firms remain ahead in terms of total UK deal value, the gap between UK and US firms has narrowed significantly. The total value of UK deals handled by UK firms in the top ten was 685% that of US firms in the first three quarters of 2018. By the same period in 2023, UK firms handled a total value just 115% that of US firms (see chart, below).
Of the top five biggest UK deals of Q1-3 of 2023 (see table, below), three involved a US company, with two of those involving a US acquirer. Of the five biggest European deals, meanwhile, only Glencore’s acquisition of Teck Resources did not feature a US-based party on either side of the transaction. In three cases, a US acquirer bought a European target.
For Will Pearce, head of Davis Polk’s Europe corporate practice: ‘It’s been a very challenging decade for UK capital markets and there’s been a consistent flow of US investment into Europe, both by strategic and financial investors.’
This has provided significant opportunities to US firms that can build credible cross-border offerings. ‘We structure ourselves very deliberately in a manner that allows our partners around the world to co-operate on every transaction,’ explains Karan Dinamani, a private equity partner who joined Sullivan & Cromwell from A&O in March. ‘As most of the money in terms of investor capital flows is still coming from the US, we’re in a better position to take high-value work in Europe as well.’
Complexities mount
In the face of adverse market conditions, many firms have opted to redouble their investment in core sectors. Perhaps unsurprisingly, the most popular sectors have been the three highlighted in Refinitiv’s report as the highest performers. Energy and power is in first place, accounting for 14.5% of the overall value of global M&A in Q1-3 2023, or $292.2bn. Technology is in second (14.4%, $289.7bn), and healthcare in third (13.4%, $270.9bn).
‘There’s a mismatch of expectations – sellers are looking for 2022 prices, while buyers are looking for a reduction.’ Richard Youle, Skadden
Of these, however, only healthcare posted an increase in value year-on-year, of 29%. Energy and power declined by 21% and technology by 55%. Still, firms view these absolute declines in the context of a wider slowdown, and none reported a desire to pull back from investment. Firms continue to hire both specialists and corporate generalists. And the gap between the two is narrowing, as corporate lawyers increasingly cite specialist sector expertise both in their public promotional materials and, anecdotally, in pitches to clients.
‘For certain sectors you do need more knowledge of the particular industry, but M&A expertise is also crucial’, comments Linklaters corporate partner Tracey Lochhead. ‘Take the tech sector: the tech lawyers are going to understand the actual technology more than we are, but if we understand enough, we can help drive the M&A activity.’
Of the five biggest UK deals in the first three quarters of the year (see table, below), one was in tech and two were in healthcare and life sciences. The remaining two were both in the defence sector, which has close ties to the technology industry.
The biggest deal in the UK in the period was the tech sector merger between Vodafone and Three’s UK businesses, which will see Vodafone own 51% of the new CK Group combined entity in a transaction valued at $7.5bn. In a show of strength for UK firms, a Magic Circle firm starred as a principal adviser on each side of the transaction.
Slaughter and May advised long-time client Vodafone with a team led by corporate partners Roland Turnill, Victoria MacDuff, and Richard Hilton. Claire Jeffs and William Turtle advised on competition matters, while Rob Sumroy and Duncan Blaikie led on intercompany and services issues. Mike Lane advised on tax, Chris Sharpe on pensions, Philippa O’Malley on employment and incentives, and Nick Bonsall on financial regulation. Finance advice was provided by Ed Fife, Charlie McGarel-Groves, and David Hay, while Lisa Chung supported on Hong Kong issues. All partners are based in London apart from Chung in Hong Kong and Turtle and Jeffs, who split their time between London and Brussels.
Corporate partners Robert Cleaver and Hugo Stolkin led the London-based Linklaters team that advised Three and its parent company CK Hutchison. Georgina Kon and Marly Didizian led on TMT with support from partner Rich Jones. Paul Joseph led on IP, Chris Smale led on tax, and Bradley Richardson led on incentives.
The deal awaits regulatory approval after the Competition and Markets Authority (CMA) kicked off its examination in October. Invitation to comment closed on 1 November and the watchdog is set to begin a phase one investigation within the next few months. The ongoing process is just one example of higher levels of regulatory activity around the globe, which many in the market noted as another factor adding pressure to an already troubled deals market.
‘There’s an increasingly important regulatory, antitrust, and FDI backdrop,’ says Andrew Hutchings, London transactional head at Freshfields. ‘The regulatory framework is getting much more demanding, both in terms of process and substance.’
Dinamani, too, notes ‘significant complexity on the antitrust side, not just in the States, but in Europe and the UK as well. Stakes are higher going into any transaction’.
Firms have responded by building their competition benches. Davis Polk was early out of the gate with its announcement of a Brussels-based EU antitrust practice in January. The team is led by former A&O partners Jürgen Schindler, who headed A&O’s global competition and antitrust group, and Frances Dethmers, now special adviser at Davis Polk. The office opened in November. Dechert hired four partners from Orrick in February, including global antitrust head John Jurata in Washington DC, Russell Cohen in San Francisco, and Douglas Lahnborg and Saira Henry in London. Also in London, Linklaters brought over former Addleshaw Goddard competition head Bruce Kilpatrick in November after losing partner Simon Pritchard to Latham & Watkins in March, while Daniel Vowden left Herbert Smith Freehills for Mayer Brown.
What next?
Despite these pressures, the overall mood among M&A lawyers is optimistic, if cautiously so. Interest rates have begun to settle down. The Bank of England has held rates steady at 5.25% since September, ending a series of hikes that began in December 2021, and following the lead of the Federal Reserve, which has since July agreed to hold rates in the 5.25-5.5% range. Inflation, too, appears to be past its peak. The UK inflation rate hit 11.1% in October 2022, and stayed in the double digits until April. It fell to 6.7% in August, down from 6.8% in July. It remained at 6.7% in September and fell again to 4.6% in October.
‘Bankers will tell you that they’ve never been busier, preparing things for 2024. But it would take a braver person than me to predict whether that actually comes to pass.’
Karan Dinamani, Sullivan & Cromwell
These positive indicators have yet to translate into a surge of dealmaking. But lawyers are increasingly of the view that activity will pick up into 2024. Notably, many in the market report that clients are moving ahead with deals that they plan to announce in the new year. ‘There’s quite a lot of caution around at the moment,’ comments Hutchings. ‘But I’m optimistic. There are significant amounts of private capital available for new deals, and existing investments will come to exit. There’s pent-up demand on the corporate side, too. Overall, I’m confident for our business over the next 12 months.’
For Dinamani, however, the future is less clear: ‘Bankers will tell you that they’ve never been busier, preparing things for 2024. But it would take a braver person than me to predict whether that actually comes to pass.
‘If the question is, are we going back to 2021 levels, the answer is no: I don’t think anyone expects that to happen.’
Youle concurs: ‘We’re not going to see the same levels of M&A that we saw in 2021. The 2021 levels, which everyone now thinks of as normal, were extremely high – they were the highest levels of M&A activity in the history of humankind.’ LB