Redrawing the map

The latest boom in transactional work from emerging economies is a welcome antidote to difficult home markets for international firms. LB looks at the differing approaches to growth and who the clients of the future might be

It is easy to understand how law firms get carried away by the opportunities that new, emerging markets present. In the past five years there has been a rush to set up offices in places that a generation ago would have held little attraction. The shift of transactional power has now fundamentally moved to emerging economies led by Brazil, Russia, India and China (the BRIC countries).New York and English law may still hold sway but there has been a marked rise in deals between these new markets, bypassing the traditional business centres in Europe and the US.

The numbers relating to deal activity are startling. In 2010 emerging markets M&A accounted for over 33% of global deal activity, according to Thomson Reuters, a 76% increase on 2009. While the first quarter of 2011 saw that percentage fall back to 24.5% of global deal flow, $196bn in value terms, it is still up by some 3.5% on the same period last year.

Outbound Brazilian M&A is up by 520% over three years; while Indian M&A activity has grown 200% year on year. Meanwhile, well over 3,000 Chinese M&A deals were announced in 2010, with a total value of $131bn according to Thomson Reuters. It’s the sort of deal activity and growth that developed economies haven’t seen for quite some time.

Firms are not surprisingly jostling for position in these new markets. Some are setting up offices, some are riding the coat-tails of existing clients, while others are targeting the world-beating clients of the future. For the time being at least, work is plentiful enough to take law firms’ minds off a stagnant deal market in the West.

In numbers

In 2010 Cleary Gottlieb Steen & Hamilton was the number one legal adviser in emerging market deals, advising on 33 transactions worth $76bn. As part of its deal portfolio the firm acted on the largest emerging market deal of last year, acting for telecoms company América Móvil’s move to consolidate Mexican telephone company Telmex and Telmex Internacional through their parent company Carso Global Telecom for $27.4bn.

In the first quarter of this year Linklaters was the top adviser on emerging market deals, advising on 13 transactions with a total value of $27.5bn, closely followed by Freshfields Bruckhaus Deringer ($22bn) and Allen & Overy ($21bn). The largest deal of the quarter was BP’s joint venture with Indian oil company Reliance Industries, the country’s largest corporate, worth a total of $9bn. Linklaters advised BP while A&O led for Reliance Industries, with Vinson & Elkins supporting as co-counsel to the Indian corporate.

It is clear that there is no single dominant force in these markets and winning mandates comes down to several factors. First and possibly the most straightforward is following existing, international clients into new jurisdictions. Another route is identifying the major clients of the future – looking at individual companies who have grown to a certain critical mass and show aspirations of going global.

However, arguably the most crucial consideration is individual clients’ attitudes to instructing firms and pricing. Two of the biggest headaches for firms piling into a new jurisdiction are clients who are happy to shop around, which gives rise to competitive pricing. Many partners will privately bemoan how sensitive clients are on price and how fickle they are when it comes to instructing the firm that charges the least. For some though this provides opportunity.

‘Indian clients are very sensitive to fees – they want a very high-quality service but at lower rates and that’s where we come into our own,’ asserts Andrew Edge, a corporate partner at Stephenson Harwood.

However, evidence suggests that emerging markets clients are not exclusively fixated on price. Some are starting to set up rudimentary panels and partners suggest that the new breed of clients are becoming more sophisticated users of legal servces. As Raj Karia, a corporate finance lawyer in Norton Rose’s London office, points out: ‘Some clients are beginning to build relationships and have a regular roster of firms they consult. They might come and talk to you about a deal but they won’t necessarily use you unless you offer a competitive fee proposal. But we are in a position now to have sufficient reputation in these markets that clients do seek us out.’

The high-growth strategies of these companies means they are precisely the sorts of clients that will drive growth for law firms in the coming years. Dominic Sanders, a corporate partner at Linklaters, says: ‘The emerging market clients do have the high-growth strategy but they do not necessarily have the international infrastructure to travel around the world executing multiple, large deals. The established big companies know how it all works, how to handle different political and investment climates. And from a selfish perspective they know how to get the best out of us and not just see us as an expensive overhead.’

Along with Herbert Smith, Linklaters took a lead role on one of the largest intra-emerging market deals last year, advising on Bharti Airtel’s $10.7bn acquisition of the African businesses of Kuwaiti telecoms group Zain. ‘Getting work from existing clients going into these markets is very much our first priority and is the mainstay of how we get into these economies,’ Sanders continues. ‘We of course have to look after our existing clients. But we also need to identify high-growth companies, many of whom are not necessarily on the radar screen and who are constantly springing up unexpectedly.’

Current examples of this sort of client include Nigerian oil company Oando and Angolan energy company Sonangol. Both have publicly stated that international expansion is on the agenda and with money to spend, firms will have been trying to build relationships for some time.

‘The UK plcs have done fabulously well for us (as hopefully we have for them) but as a group are not growing as quickly as many of their emerging markets peers,’ continues Sanders. ‘We do need to broaden our client base because some of these groups will be our top clients in the future. It is a fascinating challenge but it’s not a switch on, switch off strategy.’

Linklaters’ Magic Circle rival A&O has clearly established itself as a leading emerging markets adviser. A good mix of inward and outbound M&A saw the firm advise on deals with some emerging market involvement in the first quarter of this year, four of which were deals between emerging market nations. The firm heads the rankings for intra-emerging market deals in the first three months of 2011, with a combined deal value of $7.4bn, quite some distance ahead of Herbert Smith and Vinson & Elkins in second, who both advised on $2.9bn of intra-market deals.

In one standout example, A&O worked alongside White & Case, Freshfields and Clifford Chance in a deal that saw Chinese company Yantai Wanhua Polyurethanes, a unit of Wanhua Industry Group Co Ltd, increase its stake in BorsodChem, a Hungarian-based manufacturer and wholesaler of chemicals, from 38% to 96% for $1.7bn.

A&O has offices or associations in Brazil, Indonesia, Thailand and several country desks. Its Africa desk, for instance, comprises more than 100 lawyers. ‘Firms that have established a comprehensive network are in the best position to secure the work, plus the ability to do both US and English law helps massively,’ insists Andrew Ballheimer, global co-head of A&O’s corporate group. ‘If you want to be a global M&A player, the firm has to be active in the major jurisdictions where the deals are happening,’ he adds.

Vinson & Elkins, with global revenues of just over $600m in 2010, is smaller than the likes of A&O, but it has made a name for itself in emerging markets. Last summer it advised the UK’s Tullow Oil on the $2.9bn sale of stakes in three Ugandan oil exploration projects to the China National Offshore Oil Corporation and Total, advised by Herbert Smith. Most significantly, in 2010 a team from London led by office head Alex Msimang advised on the $3.1bn sale of Statoil’s 40% stake in Peregrino, a Brazilian offshore oilfield, to Chinese giant Sinochem Group. Baker Botts advised the acquirer.

Of the 15 offices in V&E’s network, seven of them are in emerging markets: Beijing, Shanghai, Hong Kong, Abu Dhabi, Dubai, Riyadh and Moscow. Riyadh was the most recent one to open, with the firm launching an association with The Law Office of Looaye M Al-Akkas at the beginning of May.

Msimang suggests that the firm has never assiduously targeted particular jurisdictions, it has just used its expertise in the energy and projects space to work on the biggest deals and to determine firm strategy. ‘The thing that makes us so active in these markets, and perhaps marks us out, is our sector strategy and not necessarily a strategy to target emerging markets,’ he says. ‘We target the largest, most complex energy and infrastructure deals that the biggest clients do all over the world and currently they are being done in these new markets.’

Tactics not strategy

Despite the firm’s role in the Peregrino deal, V&E has not joined the band of international firms with an office in Brazil. Since 2008 the following firms have all opened offices in São Paulo: A&O; Chadbourne & Parke; DLA Piper; Gibson Dunn & Crutcher; Milbank, Tweed, Hadley & McCloy; Davis Polk & Wardwell; Simpson Thacher & Bartlett; and Skadden, Arps, Slate, Meagher & Flom. Hogan Lovells is expected to open in the not too distant future.

The appeal is obvious. Brazilian M&A activity in the first quarter of the year accounted for $18.5bn across 142 deals – around 44% of all Latin American M&A activity. Although that is down by just over 25% on the first quarter of 2010, the mining, energy and telecoms sectors continue to throw up lucrative mandates. Law firms’ attitudes to growth in the region vary wildly, from setting up alliances to purely doing English and US law to managing the region from New York or London.

Freshfields is one firm that has chosen the latter route. ‘Our primary focus [in Latin America] is to build on our market-leading arbitration practice to develop strong firm-wide relationships with large local companies that are internationalising,’ says David Sonter, Freshfields’ corporate Brazil country partner. The firm has a 30-lawyer team focused on Brazil managed out of London and the US.

‘I do sometimes worry about a lemming-like attitude to law firm growth,’ Sonter adds. ‘You always have to follow where your target work goes but that doesn’t always mean having to launch local offices, especially if you travel and build strong local law firm relationships.’

‘We respond to feedback from our clients with regards to the markets that we want to be most active in.’
Sharon White, Stephenson Harwood

Beyond the BRIC economies, firms are increasingly turning their attention to Africa. Aside from DLA Piper, which has operations in Ghana, Egypt, Kenya and South Africa, no firm has really found the best way to operate in the vast continent.

White & Case and Dewey & LeBoeuf have been there for some time and do well servicing Sub-Saharan Africa from Johannesburg. Norton Rose’s new tie-up with leading South African firm Deneys Reitz should open up doors. Eversheds recently announced a co-operation agreement with a firm in Morocco but in general most international firms are still deciding whether an office on the ground makes sense.

Up until now firms have serviced Africa principally from London and Paris, and with economic and political instability commonplace across the continent there has been little need for a physical presence but that looks to be changing. The trouble is where and how do firms open in Africa?

‘Everyone will be looking at what to do in Africa – each country offers something slightly different but the potential there is huge,’ says Michael Walter, corporate partner at Herbert Smith. ‘One of the things that gives us something of a headstart is our very strong energy and natural resources teams in London and Paris who work closely with a number of key clients in Africa, particularly North and West Africa.’

If a firm is looking to open on the continent it will have to consider whether to open in North, South, East or West; whether to go for Francophone, Anglophone or Lusophone clients; plus the associated risks with setting up in countries that are, in places, extremely turbulent.

For the time being, firms are keeping their powder dry in terms of opening offices but most are honing their African strategy. The temptation to open up in new markets is often strong but Freshfields’ Sonter urges a note of caution.

‘One problem with having a few people on the ground in a small local office is that organisations can just leave it to them to build business,’ he suggests. ‘It can sometimes make more long-term business sense not to have a local presence because a broader base of offices and practice groups across the firm take responsibility for building more broad-based success.’

A firm that would certainly agree with that is Stephenson Harwood. The firm has a long association with China. William Harwood, before returning to London to launch Harwood & Stephenson in 1875, practised in the country and was one of the co-signatories at the creation of the Hong Kong and Shanghai Bank in around 1868.

Today the firm has offices in Guangzhou, Hong Kong and Shanghai. But beyond the world’s second-largest economy, it has built a very successful emerging markets practice without planting flags all over the world. ‘Much larger firms can spend a couple of million opening an office and it may work or may not work and they accept that,’ comments the firm’s chief executive Sharon White. ‘We’re not in a position to do that; SH already has good coverage – well beyond the locations that it has offices in, and we respond to feedback from our clients and sources of work with regards to the markets that we want to be most active in.’

‘Everyone will be looking at Africa – each country offers something different but the potential there is huge.’
Michael Walter, Herbert Smith

The firm acts for several low-cost airlines in India, including Kingfisher Airlines. It recently advised Severfield-Rowen, the Yorkshire-based structural steel group, and India’s JSW Building Systems, a subsidiary of the O. P. Jindal Group, which has an annual turnover of over $12bn, on a joint venture. Elsewhere, impressive mandates have come from Macquarie Bank in Korea and Citadel Capital in Africa.

Asia is where international firms have had the most success in setting up networks of offices in the past decade and it is easy to see why they have made it work. The first quarter of the year saw $83.8bn of M&A activity in Asia Pacific and China was the most targeted emerging market with 827 deals worth $30.5bn. Although activity may have flattened out compared to 2010 there is still much opportunity in the region.

‘The confidence of Chinese businesses to do deals abroad has increased dramatically,’ says Simon Marchant, former managing partner of Freshfields’ Asia practice. ‘Things have come an awfully long way in ten years. It is very impressive and I have no doubt that it will continue.’

South Korea is in the process of liberalising its market, paving the way for law firms to open offices in the country and is likely to be the next high-growth market for law firms. The fourth largest Asian economy has been hitherto closed but a free trade agreement between the EU and South Korea was signed in February. Firms will be allowed to open in the country from July once the agreement is ratified. US firms cannot currently open in the country despite a free trade agreement being signed in 2007 that is yet to be ratified.

Clifford Chance was the first firm to announce its intention to open in Seoul earlier this year, while several other firms are looking at their options, including A&O and DLA Piper.

The deal market is flat

The list of emerging markets that provide real opportunities for growth continues to lengthen. After BRIC, the latest acronym coined by one economist to cover the next high-growth markets is CIVETS, including Colombia, Indonesia, Vietnam, Egypt, Thailand and South Africa. As long as there are deals being done, the leading law firms will prosper, but the question is how long can it last? As emerging markets develop and clients lose their appetite for rapid investment, growth will inevitably slow.

According to the International Monetary Fund, gross domestic product growth in emerging and developing economies will be 6.5% this year, down from 7.3% in 2010. Predictions for the next five years have growth holding steady around the 6% mark. While this is certainly far more than advanced economies, which will record around 2.5% growth, it is an indication that the current rush for work cannot continue.

Deal flows are still being affected by the Arab Spring, continued uncertainty in the eurozone, and the disastrous earthquake and tsunami in Japan.

After three years of faltering, European M&A should make something of a comeback this year, easing the reliance some firms have on new markets to drive transactional practices.

‘Developed market mega-deal activity will mask the emerging market to emerging market deal activity.’
Tim Gee, Baker & McKenzie

‘This year and beyond we are likely to see developed market mega-deal activity pick up, which will see a slight masking of the importance of emerging market to emerging market deal activity,’ suggests Tim Gee, head of corporate at Baker & McKenzie.

Freshfields’ Marchant says that carving up the world into geographic regions is too simplistic. ‘The way I see it, M&A is much more a global activity than being split into simply Europe, North America, Asia and emerging markets; everything is much more interconnected now than it was a decade ago,’ he suggests. ‘Most clients that we act for are present in all of the main regions and many of their deals will have implications across a number if not all of them. M&A is a global business.’

What should emerge in the next five years is a group of elite international firms who have struck a good balance between emerging and developed market work. Perhaps then we can start viewing M&A as purely a global movement. LB