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Kraft Foods’ hostile takeover of Cadbury sparked renewed hysteria about foreign takeovers of the UK’s FTSE 350. For the Magic Circle, it means a client base under threat. LB reveals the winners and losers in the great British sell-off

Slaughter and May has acted for the target in more foreign takeovers of British household names than any other law firm in the past five years. Freshfields Bruckhaus Deringer is the only Magic Circle firm to have seen its FTSE 350 client base shrink over the same period. And it is Freshfields, Clifford Chance and Allen & Overy that most often get the call from bidders as foreign direct investment changes the face of the elite corporate client base in the UK.

Gordon Brown has encouraged foreign investors to buy British – most recently appearing at the Global Investment Conference in February extolling UK plcs’ virtues to 250 global chief executives – and the top UK law firms are watching their client lists change at a rapid pace. Legal Business research, in conjunction with the data provider mergermarket, shows that foreign investment represents a constantly evolving battlefield for the UK legal elite, who are either advising on major UK corporate takeovers or developing institutional relationships with FTSE 350 companies that have new foreign owners. It’s a battle no longer fought on traditional lines, but often won and lost far away from the City. To succeed, firms have to stay on their toes.

‘To put into context the challenge that all law firms face, there are perhaps 14 of the original constituent members of the FTSE 100 left compared to when it began in 1984,’ says Peter Baldwin, M&A partner at Jones Day – whose UK legacy firm Gouldens was itself taken over by a US rival. ‘In 25 years, you’ve seen 90% of the FTSE 100 turn over, and that means no firm in the UK or US is looking at its client roster as a fixed thing and all of us face the challenge of going and developing new client relationships.’

The challenge is to identify where the key relationships are, and to keep hold of the clients that you already have.

Buying British

One firm that has had to face this challenge more than most is Slaughters. The firm is prolific on inbound M&A work and a glance at the tables (see pages 36 and 37) shows its dominance in the largest deals involving the foreign acquisition of a UK target. While attention in the past 18 months has been on its groundbreaking advice to the Treasury over the financial crisis, its corporate client base remains unparalleled.

At first glance, it looks as though Slaughters has a problem. For despite its dominance, it is typically found advising UK targets, which subsequently disappear into a foreign parent company. Between 2005 and 2010, the firm advised ten of the UK targets in the top 50 inbound investment deals, including Cadbury, Gallaher Group, Pilkington Group and Corus Group. With an eroding client base and a far more conservative global footprint than its Magic Circle rivals, it would seem that the firm has its work cut out to keep its well-renowned corporate client base intact.

Nice theory, but unfortunately for its rivals, that’s as far as it goes. The fact is, Slaughters is pretty damned good at winning acquirer mandates as well. It advised Akzo Nobel on its takeover of ICI in 2007 and, more recently, Global Infrastructure Partners on the acquisition of Gatwick Airport. In 2005, the firm was lead adviser to 69 FTSE 350 companies, according to Hemscott (see graph, ‘FTSE 350 rankings 2005-10’, page 34). Today, it still advises 69 companies and remains the most prolific FTSE 350 adviser of all UK law firms. Despite the influx of foreign capital and continually reminding us of the global nature of their businesses, multinational law firms have failed to land a fatal blow on Slaughters.

Senior partner Chris Saul attributes the firm’s success to a number of factors: a focus on top-quality, commercial, legal advice and transaction management delivered by lawyers who have avoided over-specialisation and maintained a passionate focus on client relationships. He also mentions a quality that he admits is not readily attributed to Slaughters – humility.

‘We recognise that we operate in a fiercely competitive market and we know that we have to work hard every day to maintain our position,’ says Saul. ‘We take nothing for granted.’

‘These factors have, I suspect, been particularly telling with our FTSE clients over recent years,’ he continues. ‘We have also been fortunate to be able to refresh our FTSE client base, again building on these elements, and that has helped us to counterbalance the fact that we have advised a significant number of UK targets of inbound deals.’

‘We recognise that we operate in a fiercely competitive market and we know that we have to work hard every day to maintain our position.’
Chris Saul, Slaughters

The firm has adroitly leveraged its sell-side mandates. Perhaps the best example of this was its instruction to advise Banco Santander on its £1.3bn acquisition of Alliance & Leicester in 2008. Just four years earlier, Slaughters sat on the other side of the table, advising the target when Santander acquired Abbey National for £8.5bn. Slaughters had advised Abbey for years, particularly on its demutualisation in the late 1990s. In our Global 50 report in 2004, Abbey was listed as one of Slaughters’ top five clients.

At the time of the takeover, Santander’s adviser Clifford Chance was probably licking its lips at the prospect of future mandates as the Spanish giant cracked the English market. But the mandate for the Alliance & Leicester acquisition by Santander went to Slaughters, which had proved that you can advise a target in a deal and then win over the acquirer. Slaughters teamed up with best friends Bonelli Erede Pappalardo, Davis Polk & Wardwell and Uría Menéndez, effectively beating the global firms at their own game. Uría Menéndez’s long-term relationship with Santander was undoubtedly a factor encouraging the bank to plump for the UK blue-blood.

By contrast, since advising Santander on the Abbey takeover, Clifford Chance hasn’t popped up on its big UK deals, such as the Alliance & Leicester and Bradford & Bingley takeovers. However, the firm has completed deals for the Spanish giant around the world since, particularly in Spain.

Saul traces the relationship back to the 1980s. ‘I think the key elements in our continuing work for Santander have been our long relationship with Santander UK – we started acting for them in the 1980s – and alongside the building of a strong relationship with the Santander team in Spain, reinforced by the close working relationship which we have with Uría Menéndez,’ he says. ‘Uría, as you will know, has a very strong relationship with Santander.’

Selling out

Interestingly, Freshfields Bruckhaus Deringer is the only Magic Circle firm to advise fewer FTSE 350 clients in 2010 than it did in 2005 (see graph, ‘FTSE 350 rankings 2005-10’, page 34). Edward Braham, head of the firm’s global corporate practice, says the number of FTSE 350 clients will vary depending on who you ask, and that it is always changing. ‘The firm is very focused on listed companies, both those on the FTSE and those in other jurisdictions,’ he says.

Referring to the loss of FTSE clients following a foreign takeover, Braham says: ‘Over time, you win some clients through takeovers and lose some. This is a long-term game and the key is to make sure your client relationships are deep enough and strong enough to give you maximum resilience when these high-risk events occur.’

‘Our international client base does restrict the UK-listed companies that we can act for,’ Braham continues. ‘Sometimes you have to make choices.’

Freshfields has been particularly successful with its work for Ferrovial/BAA in recent years. The firm advised Spanish company Ferrovial on the £10bn takeover of BAA in 2006, while Herbert Smith acted for BAA. However, since the takeover, while Herbert Smith was instructed to advise on the Competition Commission’s investigation into Ferrovial’s dominant position in the UK, the sizeable corporate deals – including the £13.3bn refinancing of its UK airports, the sale of World Duty Free Europe and the sale of Gatwick Airport (Herbert Smith advised on real estate and competition aspects of the deal) – all went to Freshfields. The fact that Ferrovial has a habit of putting large pieces of work out to tender means that Freshfields cannot rely on a status as preferred adviser, but has won the mandates on merit alone. Both firms were names on BAA’s first formal panel, announced in April, alongside Allen & Overy, Blake Lapthorn, Brodies, McGrigors and Pinsent Masons. The firms will advise on a mixture of practice areas: corporate and M&A; finance and taxation; regulation and competition; general commercial; litigation; property; IP; projects and construction; and Scottish law. The firms will not be invited to tender for work in all areas, rather ones that they are suited to. Commenting on her new panel, BAA general counsel and group company secretary Carol Hui confirms that there is no ‘premium’ adviser among those chosen law firms. ‘Each firm included in a particular area will be invited to tender for work in that area,’ she says.

‘Being able to provide a local point of contact is very powerful, but trusted adviser status is hugely important.’
Jonathan Beastall, Clifford Chance

The battle between Herbert Smith and Freshfields to win work from Ferrovial/BAA is a classic example of a scrap between advisers post-merger. Seizing an opportunity to snare work from the acquirer when your client is taken over is critical. In fact, it is probably more important than seeking out completely new clients – the business development equivalent of cold calling. At least if you’ve acted for a target then you have a ‘lead’ in to the acquirer.

The first critical step, according to Raj Karia, a corporate partner at Norton Rose, is to try to do stellar work for the target within the enlarged group, as hopefully your contacts within the management of the target will still be there. ‘That relationship is typically overlooked by the general counsel of the acquirer, so you need to show them what you’ve been doing for their target subsidiary and then introduce other people into the relationship that will hopefully be useful to the acquirer,’ he says. ‘You can’t underestimate the power of doing work for people to get more work.’

‘When a client gets taken over, we see it as an opportunity, an entry point into the acquirer,’ he continues. ‘You have an opportunity to become one of the advisers to the acquirer – you’re not likely to become the sole adviser – but it’s an opportunity you have to work on quickly. It’s certainly not the end of the game when your client gets taken over.’

Bagging up

Jonathan Beastall, an M&A partner at Clifford Chance, doesn’t believe that the influx of new overseas investors makes law firms’ relationships with UK plcs any less secure. ‘UK companies will always need UK advice and, if anything, in this climate a plc should welcome the opportunity to have a close relationship with its legal advisers so that if a foreign investor does come along, the corporate is ready for it and is in a position to evaluate the approach in an informed way,’ he says. ‘Of course, post-investment, depending on whether control passes, the investor may want to use its UK legal advisers to provide advice to itself and the target, but where local management is retained a law firm with a good relationship may well be able to keep the relationship, or else a share of it.’

While this may be true to a certain extent, there are numerous examples of where control has been taken away from local management and a takeover is viewed as the perfect time to overhaul the roster of legal advisers. One classic example, and one in which Clifford Chance was a beneficiary, is Telefónica, which two years after using Simmons & Simmons to take over O2 for £18bn, embarked on a radical overhaul of its legal function. Out went general counsel Justine Campbell, who joined Vodafone in December 2008. Out went Freshfields, Olswang, and SJ Berwin, and in came Clifford Chance and Herbert Smith as the sole advisers in Europe.

Despite losing some BAA work after the Ferrovial takeover, Herbert Smith has been a particular beneficiary of the influx of foreign investors into the UK. Perhaps traditionally less reliant on institutional relationships with UK-owned corporates and the global investment banks, the firm has made good on winning the trust of major overseas investors. A watershed moment was taking the lead role on European aspects of Time Warner’s $181bn acquisition of AOL in 2000.

It hasn’t stopped there. Highlights include advising India giant Tata Steel on its 2006 $9.6bn acquisition of Corus Group, formerly British Steel, after a hard-fought battle against Brazil’s CSN. More recently, the firm advised EDF in its landmark acquisition of British Energy. Interestingly, Herbert Smith has been the only major UK firm to significantly increase its quota of FTSE 350 clients in the past five years. In 2005, it had 28, and now it has 40. The corporate team at Herbert Smith, as we reported last month (see LB203, page 18), has grown revenues by a compound average growth rate of 19% a year in the past five years. Much of that is thanks to foreign inbound investors.

Outgoing corporate head Michael Walter says that the globalisation of the practice was his key achievement. In 2005, when he took over, 29% of the group’s revenue was generated outside London, compared to 41% in the last financial year. Three-quarters of the firm’s top clients are now based outside the UK, including Tata Steel, Renaissance Capital, Mitsubishi and Etisalat.

‘I think one reason we’ve done so well is down to focusing on personal relationships and institutional relationships with corporates,’ says Walter. ‘Other firms might have different foci and different priorities. We’ve done very well with investment banks as well, but corporates have been a major focus for us.’

‘One thing that we have grown quite a lot over recent years is our emerging markets practice,’ he continues. ‘We are very well represented – Indian, Chinese and Russian companies in particular have been very active in M&A.’

Foreign acquisitions

Forming relationships with the key foreign investors on the ground is crucial to winning instructions on the big mandates when they invest in the UK and to continuing to win work from these clients once they are established. Norton Rose, for example, has won significant non-UK clients active in Europe, including RWE, BMW, Nestlé and Carlsberg, which the firm advised on its joint bid with Heineken for Scottish & Newcastle in 2008. Karia feels that the international firms are entering a crucial period now, where they have to form lasting relationships with the new wave of foreign investors from Asia.

‘What we’re really seeing now is the development of Asia-Pacific majors, such as China’s state-owned enterprises, and Korea, with the big chaebols that are akin to Japanese trading houses,’ he says.

The outbound opportunities from Asia continue to multiply. India was the third-largest foreign investor into the UK in 2009. According to research released in late March by the Economist Intelligence Unit, two-thirds of Chinese companies surveyed intended to make investments overseas in the next three years.

‘Chinese companies have invested over $187bn overseas in the past decade, and the report shows that the lessons learned from those experiences are being built into the plans of the next generation of investors,’ says Stephen Harder, Clifford Chance’s Beijing and Shanghai managing partner. Among issues identified by outbound Chinese investors were executing the integration efficiently and conducting due diligence properly. This could put a premium on high-level legal advice going forward.

This time around it hasn’t been as easy for the major European-based firms. There is a tacit agreement between domestic Chinese law firms and the international firms present on the ground that the local firms will allow contact between Chinese corporates and the foreign firms for outbound Chinese investment as long as the international firms stay away from local law, which they are not permitted to practise.

‘What we’re really seeing now is the development of Asia-Pacific majors, such as China’s state-owned enterprises.’
Raj Karia, Norton Rose

India is a much tougher nut to crack. Indian firms have kept their doors closed to international firms, so forming relationships on the ground has been less easy. Herbert Smith has done particularly well with Tata Steel, and has had a longstanding relationship with the company management team. In addition to the Corus Group takeover, the firm advised the Tata conglomerate on its acquisition of the Jaguar and Land Rover marques.

‘It’s a long-term relationship that has developed over many years, and inevitably it came from personal contact,’ says Walter of Tata. ‘We did the first deal for them many years ago, before Corus. We just maintained the personal contact through the partner and lawyers that knew the people in India. It’s a big area for us and we’ve worked hard on it, and it’s paid dividends for us over the years.’

Clifford Chance’s Beastall says you can’t underestimate the power of personal contact on the ground. ‘I think the things that are attractive to UK investors and corporates are equally attractive to international corporates and investors,’ he says. ‘Being able to provide a local point of contact and co-ordination is very powerful, but at the end of the day personal relationships and trusted adviser status are hugely important.’

And because India has a closed legal market, there is proof that you don’t have to have a presence on the ground to forge relationships with key global powerbrokers.

‘Cross-border work is not the sole preserve of international firms,’ argues Charles Martin, senior partner of Macfarlanes. ‘Indeed many sophisticated clients with substantial in-house capability like to choose best-of-breed in each jurisdiction for different types of work. They are more than happy to rely on one of the firms to co-ordinate the input, or indeed to co-ordinate it themselves. Of course, some clients like the one-stop-shop, but that is not invariably the case by any means.’

Martin explains how his firm targets instructions from major investors outside the UK, despite not being a Global Elite firm. ‘Developing good relationships with both leading independent law firms and substantial conglomerates in important jurisdictions, certainly including the BRIC economies, is critical from our perspective in securing inbound work,’ he says. ‘Also, making sure that you have the right profile with key intermediaries, such as investment bankers, whether they are operating locally or through the London desks of the global investment banks, can be critical in shaping a client’s decision on who to work with for a substantial inbound UK transaction or investment.’

Spending sprees

Ken Woffenden, head of corporate at Guildford-based Stevens & Bolton, has plenty of international contacts from his time as head of Asia and head of corporate at Simmons & Simmons. He argues that it’s too easy to assume that international firms will dominate all inbound UK foreign investment, both on the transaction itself and in corporate instructions after the deal. His firm has not suffered following two major takeovers of key clients in 2006, retaining Gallaher Group as a client after its £9.8bn takeover by Japan Tobacco, and BOC Group after it became Linde following an £8.9bn takeover.

‘Sophisticated users of lawyers, including the general counsel of large foreign corporates, know that the international networks of the large UK and US firms are like the proverbial curate’s egg – good in parts,’ he says. ‘It is very hard for these firms to ensure that the strength of their home brand is replicated in every office. The high charge rates of their foreign offices are simply not justified, in the case of many offices, by the quality of service. This represents an opportunity for strong independent local firms who really know the local market and are not saddled with the huge overhead costs of the big international firms.’

One partner at an international firm agrees that outbound investors from China and India will not just stick slavishly to the same old advisers for UK investment work. ‘Except for very large flotations, where many foreign investors try to buy themselves enhanced credibility by using brand-name advisers, I do not believe large foreign investors will stick to tried-and-tested firms,’ says Andrew Halper, a China-based partner at CMS Cameron McKenna. ‘I feel the market is much more up for grabs.’

‘I think you have to have priority markets. No law firm, no matter how large it is, can do everything.’
Michael Walter, Herbert Smith

Fellow CMS partner Steven Shone agrees: ‘International law firms with good local track records – especially in emerging markets, where there are issues specific to transitional economies, as well as cultural matters to consider – can reasonably hope to outperform London or New York-based legal imperialists with local due diligence crews.’

‘Foreign corporates looking to invest in the UK normally look first to their local legal advisers for recommendations as to which UK law firm to use,’ Woffenden says. ‘Very often, such firms are unwilling to recommend the big City firms with international networks because they compete in their home base. Their clients are also put off by the very high charge rates, especially for small- to mid-cap deals. They are often happy to consider high-quality, non-City alternatives, which offer real value – we have attracted work from many large foreign corporates, often won in competitive pitches against City firms, for precisely this reason.’

But arguments for and against the global legal model aside, Freshfields’ Braham warns against trying to predict where the next wave of foreign investment into the UK is going to come from. ‘China and India will be important, but that’s far from the whole story,’ he says. ‘When you look at where the consolidation is likely to take place, much of it will come from industrial companies and I don’t think the Chinese are likely to be major buyers; their focus is more on energy and natural resources and technology. Our well-established sector groups are important in winning new clients, but brand recognition is very important too. For example, our international arbitration practice is advising a number of clients that have had assets nationalised in South America. As a result, Freshfields is very well known in South America and from that comes other things. I think you have to keep your eyes open everywhere.’

‘Our well-established sector groups are important in winning new clients, but brand recognition is very important too.’
Edward Braham, Freshfields

Shone stresses that dedication to emerging markets is crucial. ‘BRIC is where all the significant economic growth is going to be for the next decade,’ he says. ‘There will be hiccups and the model will be challenged, but these are the economies with the resources – natural, human and educational – to drive the world economy forward. Of course, they have a long way to grow, but for advisers it is movement that matters and the BRIC economies are going to move big time. Firms without emerging markets credibility are going to struggle.’

‘I think you have to have priority markets,’ Walter says. ‘No law firm, no matter how large it is, can do everything. Certainly Herbert Smith wouldn’t attempt to cover the entire world, so we prioritise the growing markets and clients from emerging markets with global ambitions are pretty key to that.’

Suggesting a reversal of fortunes among the UK’s leading corporate firms would be a mistake. The role of the major investment banks in determining which law firms feature on a deal remains key. However, the myriad connections between law firms and would-be foreign investors makes it harder to predict which firms will feature on blockbuster transactions than in the past. International law firms, for all their global reach, will find it harder to cosy up to Chinese, Indian or even Brazilian investors into the UK than they did with European investors into Britain in the Nineties. Individual, personal relationships remain key in attracting work from new sources of UK-bound revenues, and brand recognition only goes so far.

But you don’t necessarily need to be in every corner of the globe to achieve the right results. Just ask Slaughters. LB