A global pandemic, the war in Ukraine, soaring energy prices and inflation, as well as interest rate hikes significantly pushing up the cost of debt – it is no wonder M&A markets are struggling right now. Against this backdrop of instability, arguably the bigger questions are how activity levels managed to hold up for as long as they have, and how they have not crashed further.
But, while City M&A partners are keen to stress that things could be far worse, and point to pipelines of deals in place for when markets pick up (see feature), the differences between now and this time last year are stark.
At that time, amid soaring associate salaries, some firms were once again turning to markets as far afield as Australia for talent in a desperate bid to keep pace with demand that was leaving lawyers struggling to cope with unsustainably long hours. In contrast, there are now rumblings of firms quietly letting associates go (or not replacing those leaving) as they face the lowest Q1 global deal value since 2012 and volumes at levels on par with the peak of the pandemic. And, while many companies have plenty of cash, borrowing is no longer cheap.
Of course, tough markets are nothing new. Many City partners have worked through multiple economic crises – from the dotcom boom and bust of 2000, through to the 2008 financial crisis and the great recession that followed.
How much does this tried and tested experience really matter, and how does it shape the advice these seasoned partners are able to give clients?
The benefit of wisdom
Weil London head and veteran M&A partner Mike Francies is clear on the advantages that those who have been around the block have to offer – experience and judgement. ‘As a senior partner, I’ve been in a position to see so many different situations unfold,’ he explains. ‘More junior partners, however excellent, just won’t have that. Often this means thinking outside parallel lines and being able to adapt quickly to people reacting in irrational ways to certain situations.’
It is a position that is echoed by Ashurst global chair and M&A stalwart Karen Davies (pictured), who says: ‘Clients want people who are technically excellent, but they also want people who really “get” the context they are operating in, and the opportunities and threats before them. Part of that is just down to experience – if you’ve been through a few economic cycles, you can see a few steps ahead on both the up and downsides of turbulent times. And that can make you trusted counsel, as you work with clients to help them outpace the change that’s happening all around them.’
‘You don’t need to have been a partner to appreciate being part of a deal with no precedents for anything.’ Natasha Good, Freshfields
But experience is not the only thing that matters here. As our interviews with some of the most well-known M&A partners in London (all ranked within The Legal 500 Hall of Fame) highlight, for many, the most memorable – and challenging – deals came relatively early on in their career. In some instances, right at the start.
‘I’ve practised through a lot of crises, but if you think you can’t do something because you haven’t been there before, you’re wrong,’ counters Herbert Smith Freehills M&A partner and former chair James Palmer. ‘When I had a leadership role, I would ask people what was the thing they were proudest of and, for most, it was a moment when they were really junior and did something they hadn’t done before. We’re proud of the things we thought we couldn’t do and not the things we’ve done before.’
In keeping with this argument, Palmer includes a deal that took place in 1989 – only three years after he joined legacy Herbert Smith as a trainee – as one of his most memorable mandates. Similarly, Freshfields’ Natasha Good also points to deals that took place while she was an associate as among her standouts. She stresses: ‘You don’t need to have been a partner to appreciate being part of a deal with no precedents for anything.’
Her colleague Andrew Hutchings, who heads Freshfields’ London transactions practice, was decidedly more experienced when he advised on one of his highlight deals – the collapse of Woolworths in 2008 – but it still took place only a few years after he made partner at the Magic Circle firm. ‘I advised Woolworths in the run-up to its insolvency,’ he says. ‘We’d done M&A for them, and we managed the administration. The more difficult deals are the ones you learn from, where you see the real-life impact on people.’
Over at Linklaters, James Inglis picks up the same theme, highlighting the learning opportunity that more difficult markets present. ‘Working in times of economic challenge is a great opportunity for younger lawyers to broaden their perspectives and pick up some useful experience’, he says. ‘The need to embrace challenges and think creatively for clients is key at times like this.’
Getting it right
The practical reality of tougher markets is that, while volumes and values may be lower, the most important deals will still happen – whether that is the strategic acquisitions or the distressed transactions. Company boards still need to execute their strategies, after all.
What does change though, is how the deals can play out and the type of advice lawyers need to be offering their clients.
As Francies explains: ‘Market conditions affect the bargaining position of parties in terms of financing, timing requirements and balance of power. And they often require a need to work around obstacles because of the urgency of the situation. Overall, I would say that you need to exercise much more judgement.’
Freshfields’ Good argues that getting a deal over the line in more turbulent markets can mean clients need to be braver while their lawyers need to be more flexible.
‘Anyone can work intensively hard for three months – but not 35 years. M&A is a rollercoaster.’ Andy Ryde, Slaughter and May
‘From my experience watching clients, it’s important to be brave,’ she notes. ‘Be honest about where you want the business to be in five years’ time. A lost deal to one party can be a massive win to another. Through the dotcom boom and bust you saw how that played out. There are a few tools that can be used. Think about using equity as a consideration. What’s market is no longer relevant. Clients need to be more flexible, and lawyers need to be more flexible about what they’re doing and how they guide clients around what does and doesn’t matter. That can make all the difference in challenging markets.’
‘It doesn’t take much to derail a deal in difficult markets and for people to lose confidence,’ adds Inglis, who stresses the need for sellers to put in more preparation and buyers to be cautious around pricing.
While more difficult conditions provide fertile ground for learning how to run a deal, it is not just about the technical side. They also present a learning opportunity for both client development and work/life balance.
Markets are cyclical and they will pick up again. Just as important to the development of junior lawyers is using these quieter times to focus on client and personal relationships.
As newly retired Slaughters M&A star Andy Ryde concludes: ‘Anyone can work intensively hard for three months – but not 35 years. M&A is a rollercoaster – sometimes it’s full on and sometimes it’s a little softer – you have to spot those moments and take full advantage.’