The M&A Report: To have and to have not

A frenetic 2015 has given way to a subdued deal market. LB assesses the outlook and asks which of the City’s deal teams have the individuals to win lucrative top-end work… and escape the squeezed mid-market

Amid a global economy experiencing considerable turbulence, 2015 was still a fantastic time to be an M&A partner at one of the City’s top law firms. A run of record-breaking deals. Check. Easy finance. Check. London strongly positioned as a finance hub, the UK economy moving back into recovery and a newly-elected pro-business Conservative government. Check, check and check.

Notwithstanding the sheer size of the deals, global complexity and mounting regulatory burdens mean that high-end M&A has never been more profitable. For all the talk of more-for-less and pressures to commoditise on deals below £500m or even £1bn, there has never been a period in which elite law firms have seen so many £5m-plus paydays on individual M&A mandates.

Fast forward a year and the seasoned deal advisers must wonder where it all went wrong. The UK referendum on membership of the EU hit confidence and activity long before the vote on 23 June upset predictions to set in motion an uncertain Brexit process. Falling commodity prices have taken the fuel out of energy deals and the unpredictable figure of Donald Trump in this year’s US presidential election have all weighed in heavy.

M&A activity tumbled by 27% across the globe from a record high of $1.81trn in the first half of 2015, now sitting at $1.32trn. UK deal value crashed to the lowest level since 2010 after a record 2015 with 638 deals worth a total of $58.2bn, according to Mergermarket.

It seems unlikely that the City will in the months ahead see many more deals like the $108bn merger between SABMiller and Anheuser-Busch InBev (AB InBev); the proposed £21bn tie-up of Europe’s largest financial market operators, the London Stock Exchange (LSE) and Deutsche Börse; and the £12.5bn takeover of Britain’s largest mobile network group EE by telecoms giant BT.

In a tougher deal environment the expectation is that firms pushed into the increasingly price-sensitive sections of the market will face a widening gap with competitors securing the premium work.

If there is an upside, by consensus many M&A advisers had feared it would be worse in the dark days of the post-referendum summer. But not much worse. Says Ashurst London managing partner Simon Beddow: ‘I’m more confident now than before the summer started. But that’s quite a fragile confidence because as and when we serve the article 50 notice you could get another effect on the market.’

As the deal professionals face their most uncertain environment since the banking crisis, Legal Business canvassed M&A veterans to assess the current mood, and see which firms have the corporate heavyweights and ambitious young partners to ride out the turbulence ahead.

In a City market that has never been more competitive, or seen more celebrated M&A teams such as Linklaters and Ashurst suffer uncharacteristic setbacks in recent years, holding your position has never been more challenging.

Rich pickings

The union between AB InBev and SABMiller in 2015 gave legal advisers a healthy cash injection with $1.94bn set aside in advisory fees. Freshfields Bruckhaus Deringer took the bulk of the $261m spend on law firms with AB InBev spending $1.73bn for advisory and financing costs and legal fees amounting to $185m, against $725m spent on financing arrangements and $135m on corporate and financial brokering advice. Cravath, Swaine & Moore, Sullivan & Cromwell and Clifford Chance (CC) also benefited from AB InBev’s legal spend, while Linklaters took the biggest share of the $76m in legal fees spent by SABMiller along with Hogan Lovells and Cleary Gottlieb Steen & Hamilton.

Notes Andy Ryde, head of corporate at Slaughter and May: ‘They’re transformational deals. The fees can, of course, be very significant, but will be relatively immaterial to the value the whole deal is generating.’

For all the talk of more-for-less and pressures to commoditise on deals below £500m, there has never been a period in which elite law firms have seen so many £5m-plus paydays.

Judged as a whole, deal activity fell sharply through the early months of 2016 after a record-breaking 2015. ‘No-one was doing anything for the first two weeks after Brexit,’ one City partner told Legal Business. ‘If they say they were busy they are bluffing.’

While UK-driven M&A has been subdued, globally deal activity has been a little more resilient, with corporate work in Germany seeing a notable uptick over the last 12 months. With activity in energy and commodities sectors falling back – with the stark exception last year being Shell’s £35bn tie-up with BG Group – there has been plenty of activity in TMT, pharma and healthcare.

Against this backdrop there were still some significant transactions, notably Tokyo-based telecoms group SoftBank wrapping up its £24.3bn takeover of ARM Holdings. US and Magic Circle advisers will together rake in £14.5m in legal fees. Slaughters and Davis Polk & Wardwell will share £9m from ARM, while Freshfields and Morrison & Foerster together received £5.5m.

Such deals have traditionally benefited the City’s unchallenged M&A leaders, Slaughters, Freshfields and Linklaters, with the trio all appearing in the top ten of Mergermarket’s European league table for this year.

The received wisdom is that Slaughters and Freshfields have, if anything, tightened their grip on high-end M&A in the City and Europe in recent years.

Certainly Freshfields has been in particularly formidable form, both in its City heartland and across Europe. The firm dominated last year’s run of marquee M&A deals, with City veteran Mark Rawlinson (see The M&A Report: ‘Who Are Ya?’ – Mark Rawlinson: Freshfields’ playmaker leaves the pitch) working alongside partners Andrew Hutchings and Piers Prichard Jones advising LSE on its planned merger with Deutsche Börse. Global M&A co-head Ben Spiers and corporate partner Natasha Good were on the team advising BT on its bid to acquire EE. Rawlinson appeared once again alongside London corporate head Simon Marchant to guide AB InBev on its acquisition of SABMiller with the firm also advising on its $2.9bn divestment of Peroni, Grolsch, Meantime and other related assets owned by SABMiller to Asahi Group. Amid a well-packed roster of M&A partners – including Marchant, Julian Long, Bruce Embley and Claire Wills – Prichard Jones is cited as a particular stand-out. The firm’s investments in its US corporate practice and acquisition finance practice are likewise seen to have further strengthened its hand.

Freshfields’ private equity team, with leading names David Higgins and Adrian Maguire, is likewise viewed as in robust form, leaving the firm as the only City deal shop with a credible claim to marry a top-tier public M&A practice with an equivalent sponsor offering (see The clients for all seasons). One notable deal saw Charles Hayes, who was only made up to partner this year, take the lead advising CVC Capital Partners on the sale of Formula One (F1) to Liberty Media for £6.4bn.

Alongside Hayes other names to watch include Oliver Lazenby, George Swan, Sam Newhouse and Alison Smith, who is cited as ‘unbelievable’ by Rawlinson for her work on SABMiller/AB InBev. Of the slightly more seasoned operators, the hard-to-impress Rawlinson also singles out the ‘formidable’ Jennifer Bethlehem and Hutchings, a financial institutions specialist who made partner in 2006.

Lazenby, who made partner in 2011, has handled a string of headline deals, including last year advising Betfair on its merger with Paddy Power, and John Laing Group on its 2015 float. Newhouse, meanwhile, has handled a number of energy clients, in recent years advising on substantive deals for Emirates National Oil, BP and Petrofac.

If there is a chink in Freshfields’ armour, it is, as one peer notes disapprovingly, the public reprimand the firm faced from the Takeover Panel in November 2015 for breaching its code when advising on the formation of Indonesian coal group Bumi. One Magic Circle rival comments: ‘They remain a strong firm but they really should examine what they are doing. They don’t do their clients a good service by stepping over the line. It’s partly the way they create competition internally which leads them to push each other to do things which backfire.’

‘Freshfields has an A-grade team, but are they hungry for the next five years? There is a changing of the guard. It has a tier-one team, but it’s not that big.’
A City partner

Freshfields’ Marchant remains bullish. ‘I genuinely think we are the best in London – we are quite significantly smaller than we were three years ago – but there is a great depth and spread in M&A, private equity, capital markets and carve-outs. I don’t think any other firms can claim such leading positions across different disciplines.’

Observes one City partner at a leading US law firm: ‘Freshfields has an A-grade team. They’ve done a great job. The question is: are they hungry for the next five years? There is a changing of the guard. Freshfields has a tier-one team, but it’s not that big.’

Slaughters, meanwhile, has posted another respectable showing after a sustained post-Lehman run that has rarely looked troubled. Over the last 18 months the firm has advised on deals such as Ladbrokes’ £2.3bn merger with Gala Coral, turning to a team including corporate head Andy Ryde and partner Mark Zerdin. Long-time client ARM turned to Slaughters for its acquisition by SoftBank, as did William Hill for its rejected £3.6bn takeover bid by 888 Holdings and The Rank Group.

Ryde concedes that the firm, like its peers, had a ‘quiet calendar year’ through 2016. Slaughters’ playmaker Nigel Boardman predicts uncertainty will have more of an impact on M&A coming out of FTSE 250 clients, rather than FTSE 100. ‘The uncertainty around Brexit remains a real constraint on the likelihood of major capital commitments. That will alter if the Brexit road becomes clear, but until it does that will impact M&A.’

The firm, of course, maintains a roster of highly-rated deal lawyers, including veterans like Boardman, Ryde and Jeff Twentyman as well as seasoned operators like David Johnson, Roland Turnill, Simon Nicholls and Andrew Jolly.

Current names to watch among younger partners include Rob Innes and Chris McGaffin, who were both made up in 2015 and newly-promoted Victoria MacDuff. Strongly tipped lawyers with more experience include Zerdin and Richard Smith.

Of the three traditional leaders in M&A, Linklaters is widely viewed to have had a more mixed run since the banking crisis recast the market. A persistent criticism is that the firm lacks the spread of top-notch deal lawyers in their mid-to-late 40s that distinguishes Freshfields and Slaughters. According to this critical reading, it is a dynamic that has left Silk Street over-reliant on a handful of business-drivers, most notably Charlie Jacobs, who has just stepped into the senior partner role, depriving Linklaters’ deal team of by far its biggest name. The recently appointed head of corporate, Aedamar Comiskey, has gone some way to filling the vacuum, establishing herself in the last three years as one of Linklaters’ most productive partners, having taken on substantive deals for Aviva, Tate & Lyle and Amlin. Notably she last year advised Visa Europe on its €21.2bn acquisition by the US Visa business and has acted for HSBC on a series of Latin American disposals.

The firm has also suffered more than its peers in terms of partner losses, with its private equity practice being targeted by a number of US rivals. One partner at a Magic Circle rival was critical of the losses: ‘It’s quite hard to name a lot of Links partners that are standout. There are some that are fine, whereas at Freshfields they’re all fine. It looks like Links lacks a little bit of leadership and personality, but they’re very competent and they’ll do a lot of deals.’

Another Magic Circle partner notes examples of Linklaters losing its grip on benchmark clients, like BP and Vodafone.

However, Linklaters has been on more confident form in its core public M&A practice in the last 18 months, after handling a string of headline-grabbing deals.

Comiskey picks up the point: ‘We are very upbeat, despite the general concern that has been around London generally. The department is performing very well and we are seeing a good pipeline.’ She adds: ‘We are always ambitious to win new clients, it’s what excites people. Our strategy and our focus is always on our clients. We have to make sure we are moving with our clients to new areas of opportunity.’

‘Our firm has been around 177 years and is far bigger than any individual. You leave a firm like Linklaters for a few extra quid at your peril.’
Charlie Jacobs, Linklaters

While other firms tend to reel off different names depending on who you talk to, it is clear who Linklaters sees as its next generation with the same half a dozen individuals highlighted repeatedly, both internally and by peers. David Avery-Gee, Matt Bland, Dan Schuster-Woldan, Simon Branigan, Nick Rumsby and Iain Wagstaff comprise a group of corporate partners around the mid to late thirties that have proved to be some of Linklaters’ most productive names and have gelled as a cohesive and entrepreneurial team.

‘There is a feeling that we have a golden generation at Linklaters,’ asserts Avery-Gee (see Rising Star: David Avery-Gee, Linklaters).

Rumsby, the most experienced of the group, led with Jacobs on Linklaters’ marathon representation of SABMiller – winning glowing reviews from the client – while Avery-Gee has stepped into Jacobs’ shoes in overseeing Linklaters’ mining relationships having advised Glencore in a series of matters (Jacobs has long sung his praises, comparing his relationship with Avery-Gee to his old apprenticeship under David Cheyne). Schuster-Woldan, meanwhile, has been a key name for the firm with financial institutions clients, handling major mandates for The Royal Bank of Scotland, RSA and AXA. Bland, who has been seconded to Goldman Sachs, has been a regular Linklaters contact for Lloyds Banking Group and led the team advising Friends Life on its takeover by Aviva in late 2014.

Despite facing a series of high-profile losses in its private equity practice to Kirkland & Ellis – among them high-billing Matthew Elliott, rising star Stuart Boyd and well regarded private equity partners Roger Johnson and David Holdsworth – the firm’s young practice head Alex Woodward receives strong notices from peers. Observes one of the City’s top names in sponsor work at a Magic Circle rival: ‘[Woodward] is a very good guy. A good operator. I like Alex a lot, I just think he’s on the wrong platform.’

Jacobs remains philosophical over the modern reality that corporate partners now semi-regularly leave Magic Circle firms. ‘Our firm has been around 177 years and is far bigger than any individual. You leave a firm like Linklaters for a few extra quid at your peril.’

As with Jacobs’ elevation, many peers questioned the impact of Steve Cooke’s promotion to senior partner of Slaughters, taking one of its top names out of deal work, while another of its key figures, William Underhill, is nearing retirement (Boardman in contrast shows no sign of stepping back and remains a central figure). Ryde is quick to point out that Cooke is ‘still active in the market’ pointing to his recent lead role advising ARM on its acquisition by SoftBank.

In a similar vein, Freshfields has just seen its most high-profile M&A tactician, Mark Rawlinson, depart to Morgan Stanley to take up a senior role, while some older hands still note the loss of Fleet Street legend Barry O’Brien, with his retirement in 2014 from the firm.

Room to move

Judged on the deal rankings, CC was a strong performer in Europe across the first half of this year with deal value totalling $76.81bn, according to Mergermarket, ahead of both Linklaters and Slaughters. London corporate head Mark Poulton admits work was more patchy than in 2015, but argues that the firm is continuing to make good ground. He says: ‘We’re right in the pack with the Magic Circle. We acted on four of the top ten UK deals last year, we acted on two of the top ten UK deals in the first half of this year. A lot of our work is cross border rather than narrowly UK focused.’

‘We have senior dealmakers, but what is gratifying is seeing the next generation coming through.’
Paul Dolman, Travers Smith

 

 

Fellow finance leader Allen & Overy (A&O), meanwhile, makes much of its corporate ambitions, as underlined by its election earlier this year of M&A veteran Andrew Ballheimer as its new managing partner.

The firm’s head of London corporate Dominic Morris, who took over the role this year from his predecessor and new global corporate co-head Richard Browne, is adamant A&O’s City corporate strength is ‘as strong as it’s ever been’ with its highest FTSE ranking after steady growth over the last five to ten years. Alongside advising Asahi on its acquisition of Peroni and affiliated assets from SABMiller, the firm advised 888 on its bid alongside The Rank Group for William Hill and AIMCo on the sale of its stake in Chile’s Autopista Central to Abertis for €948m. Market consensus and its published deals suggest, however, that the firm remains a level below the top deal players.

Aiming to challenge that perception in the years ahead will be younger partners such as Seth Jones, Annabelle Croker, Simon Toms and George Knighton. The firm also argues that it has moved to address its coverage in equity capital markets – not traditionally one of its strongest areas – under partners such as David Broadley and James Roe.

Herbert Smith Freehills (HSF) is regarded as having stabilised after a rocky period several years back in the run up to and wake of the Herbert Smith and Freehills union, even if the firm has looked on solid rather than spectacular form through the last 18 months.

In the UK, HSF won a satellite role advising SABMiller’s second-largest shareholder Bevco through the AB InBev merger and scored the role as financial advisers to LSE on its proposed merger with Deutsche Börse. It has also advised on some of the UK’s largest infrastructure projects – High Speed Two, Thames Tideway, Hinkley Point C and Swansea Bay Tidal Lagoon.

In contrast, Ashurst is widely perceived to be facing headwinds in its core corporate practice, with its post-Blake Dawson incarnation switching its centre of gravity towards finance and infrastructure.

Comments one Magic Circle partner: ‘Ashurst has obviously been bleeding people and it doesn’t have that quality, which is a shame. I’ve worked with a lot of them over the years and I like the firm, but it’s going through a difficult spell.’

Aside from Beddow, corporate co-head Robert Ogilvy Watson and partner Adrian Clark, its ranks are light of brand name older partners, while the team has seen a string of departures in recent years from its M&A team.

However, the run of mandates remains respectable, with Ashurst advising Gala Coral on its £2.3bn merger with Ladbrokes; UBS and Morgan Stanley on Sainsbury’s £1.2bn offer for Home Retail Group; and Wells Fargo Securities and PJT Partners on Verizon’s $2.4bn takeover of Fleetmatics. Nevertheless, the firm has been short of one or two confidence-raising breakthrough mandates in recent years, while its private equity team has suffered similar departures.

Beddow argues that Ashurst’s corporate team posted a ‘really strong year’ in 2015/16 despite a subdued firm-wide performance, maintaining that the team is positioned alongside CC and A&O in the next tier of M&A teams.

And as the US firms continue to dominate global M&A, mid-market firms like Travers Smith and Macfarlanes have striven to position themselves as natural referral partners with considerable success.

‘I don’t like the term rainmaker. It implies some type of magical process. It’s about high levels of service and competence. If you deliver both consistently, clients want you.’
Nigel Boardman, Slaughter and May

 

 

Macfarlanes guided Altria Group, the largest shareholder of SABMiller through its merger; members of the senior management of F1 on its sale to Liberty Media; and Visa on its €21.2bn acquisition of Visa Europe. Travers Smith has just landed a trophy role advising Micro Focus on its $8.8bn merger with the software business segment of Hewlett Packard Enterprise, and Steinhoff International on its £1.4bn proposed takeover approach targeting Home Retail Group.

While ‘chasing pack’ corporate teams have often struggled to sustain form in post-Lehman years, Travers and Macfarlanes are widely seen to have strengthened their hand and largely resisted the loss of key talent from US rivals.

Travers Smith private equity head Paul Dolman says that the firm remains very confident of its positioning, with sponsor clients still having large reserves of ‘dry powder’ to commit, leading to pressure for deals.

Dolman adds: ‘We have a generation of senior dealmakers, but what is also gratifying is seeing the next generation coming through. We have rising stars, such as Lucie Cawood, Jim Renahan, Adrian West and Jon Reddington, who, we believe, will be the next generation of rainmakers.’

A personal business

Amid the jostling for position in the City, deal professionals are facing one of the hardest environments to read for years. With the increasingly clear prospect of the UK giving article 50 notice next spring to quit the EU, there will be huge focus on the evolving terms of the UK’s relationship with Europe. The consensus remains that such factors will weigh heavily on mid-market M&A or deals in the FTSE 250 to 350 (dollar-dominated bluechip investments mean a falling pound typically boosts FTSE 100 stocks).

The caveat is that Brexit, particularly a ‘hard’ Brexit, heralds the medium-term prospects of even weaker sterling, making UK assets more attractive to bargain-hunting foreign buyers.

The potential complications are comments from prime minister Theresa May that the UK may take a less liberal stance on foreign takeovers, a concern noted by a number of partners interviewed for this article, even though the UK currently lacks the framework to block deals on ‘national champion’ grounds.

Comments Ogilvy Watson: ‘You may find that it is not so easy to buy big trophy assets in the UK. The takeover of ARM has attracted a lot of scrutiny. It was the first time a bidder has given a legally binding commitment to maintain headquarters in the UK under the Takeover Code.’

Linklaters’ Jacobs agrees that a tougher stance is a risk for deal professionals but notes that ARM/SoftBank ‘showed the UK was still open for business and that May’s government would be pragmatic’.

Jacobs, citing a post-Brexit vote rebound in deal work and buoyant European equity markets, concludes: ‘We are confident there will be further foreign takeovers of UK plcs given the fall in sterling.’

Aside from unpredictable events, pricing and commoditisation weighs heavily on deal teams. While high-end M&A, underpinned by rising regulatory and antitrust complexity has never been more lucrative, pressure to commoditise has never been stronger, kicking in on sub-£1bn deals and getting progressively more intense at the lower end of the mid-market.

Freshfields, Linklaters and Slaughters have all notably experimented with new ways of working to boost efficiency, with Freshfields’ 300-strong Manchester operation launched last year and Slaughters currently trialling a much touted AI system from Autonomy founder Mike Lynch to cut costs.

A notable trend highlighted by several of the two dozen corporate partners interviewed for this piece was the waning influence of bankers in the deal process, leading some firms to less assiduously cultivate M&A advisory teams in favour of plcs and sponsors.

Says one Slaughters veteran: ‘Investment banks have lost influence in putting together deals. Pre [banking crisis] the bankers were very, very influential but now the bankers have lost the spring in their step. They’re no longer the masters of the universe and they’re even reluctant to admit they’re bankers at parties.

‘We used to have a time where every chief executive had an influential investment banker on speed dial. That’s not quite the case now. They have several, but often there’s no longer that trusted adviser role they once had.’

Such trends play to the sustained rise of private equity and similar sponsors in the City, with Nigel Boardman noting the dramatic long-term reduction in the number of publicly listed companies (see Postcards from the edge).

Despite a question mark hanging over the City, few expect London to lose much ground as a professional services hub, with most expecting a further widening in the array of firms fighting to secure a share of M&A market. While US firms remain largely confined to niches, Skadden, Arps, Slate, Meagher & Flom and Latham & Watkins are both seen as potent forces in mainstream M&A.

Unless you gear your business heavily around sponsors – a tactic proving increasingly lucrative for US firms in London – the most ambitious corporate teams need a delicate balance of talented individuals ranging consistently from mid-level associate to early 50s veteran. In addition, such teams need increasingly proactive antitrust and regulatory support and slick back-office support.

That leaves partner/associate leverage falling – (high-end M&A is increasingly defined by three-to-six partner teams on top mandates) – and individuals as important as they have ever been to leading law firms. Ask a corporate lawyer where a firm rises and falls and it always comes back to the same thing: the individuals that can lodge in a client’s mind come the big deal.

Boardman reflects on the role of the individual: ‘I don’t like the term rainmaker, because it implies some type of magical process, which there isn’t. It’s about high levels of client service and competence. If you deliver both consistently, the clients want to use you.’

With a number of veterans nearing retirement or taking on c-suite roles at their firms, there will be plenty of space for the next generation to assert themselves, albeit against a widening pool of competitors.

CC private equity head Jonny Myers notes the enduring pull of the individual in deal lawyering: ‘There’s a changing of the guards across the Magic Circle. Client relationships are personal and clients want their trusted advisers to follow through with their work. In a way, there’s an expectation for us all to be both rainmakers and see matters through.’ LB

madeleine.farman@legalease.co.uk, matthew.field@legalease.co.uk

For further reading, please see The M&A Report: ‘Who Are Ya?’ – Mark Rawlinson: Freshfields’ playmaker leaves the pitch or click to return to the main menu of The M&A Report