A&O, CC loosen banking shackles to flex M&A muscle

&AOld stereotypes die hard. But if nothing else, Allen & Overy (A&O) and Clifford Chance have been assiduous in dispatching one this past year: that the two firms are only the banking giants within the magic circle.

The firms' respective banking teams might still play leading roles, but it appears they are now having to share centre stage with their corporate counterparts.

The latest M&A tables show that the two firms top the European rankings, overtaking magic circle rivals Freshfields Bruckhaus Deringer and Linklaters. A&O led Thomson Financial's year-to-date table, advising on $400bn (£199.06bn) worth of deals, with Clifford Chance in second place with $356bn (£177.16bn).

As well as powerful banking practices, the respective teams share other features: both have been boosted by the M&A market of the past two years, in which private equity and highly leveraged deals have figured; both have significant overseas presences that have been heavily promoted into at partner level; and both teams are now contributing more in real terms to firmwide revenue than they have ever done in the past.

But despite similarities the reasons for Clifford Chance's corporate strength are very different from those for A&O's.

Clifford Chance's rise is perhaps easier to chart. Partners might complain that outsiders think it's all about private equity, but it's hard to see how the behemoth team could not have an influence.

Global head of corporate Peter Charlton maintains that private equity accounts for just 25 per cent of London corporate work. But that quarter has got to be the most prominent: half of London's top 10 deals this year are private equity-based.

That said, the biggest deal on the list was not. Landing the Barclays instruction was no massive surprise, but it did take Charlton and corporate partner Guy Norman five years to cultivate the relationship with general counsel Mark Harding once he left Clifford Chance to go in-house - with the help of Barclays relationship partner and global head of banking Mark Campbell, mind you.

But why not sing the private equity team's efforts from the top of Canary Wharf? Aside from everyone being bored of that tune, a snobbery still exists that a firm can't have a 'proper' corporate practice without a 'proper' amount of FTSE100 clients. For the record, Clifford Chance has 10, says Charlton.

That's fewer than any of the other magic circle firms. As the result of a merger of two firms with solid but less-than-glittering corporate practices, Clifford Chance could never hope to have the FTSE client list of Slaughter and May. Charlton explains: "Unless there's a fallout or major conflict, most FTSE100 clients don't normally shop around for law firms. You pick them up on conflicts, or you're offered a job because they're unhappy."

According to one of Charlton's partners, the team would like more FTSE100 clients. "We market in every way you can imagine," says the partner. "But to be honest, if we had to choose between our private equity clients and a load of new FTSE100 clients, we'd choose the private equity clients every time. They're the ones doing the deals."

But for how long?Surely for a private equity-heavy corporate practice such as Clifford Chance's, an impending credit crunch might be a problem? Charlton dismisses such doomsaying. "The credit squeeze will mean there's not the same level of private equity-based activity in the short term, but private equity is sitting on a wall of money that needs to be invested," he claims.

Besides, there are plenty of corporates, and not necessarily FTSE100 ones, that are willing to do the deals.

The corporate group's clout within Clifford Chance is harder to measure. Certainly, group partner promotions have doubled over four years. Revenue contribution has increased steadily from 25 per cent of firmwide turnover in 2004-05 to just under 30 per cent last year. But, says one partner, for every pound earned by corporate, another pound is earned in another department of the firm.

Incidentally, four of the 17-strong management committee are corporate partners: Charlton, European representative Ignacio Ojanguren, New York head Craig Medwick and, of course, managing partner David Childs.

A&O's corporate team has also benefited from a record number of promotions. April's batch was significant, because for the first time corporate overtook banking in the number of new partners made up, with 10 to banking's eight.

Global corporate head Richard Cranfield warns against reading too much into promotions. "It's not a competition," he jokes. "These things turn on individuals and particular business cases. The firm promotes where it feels investment is worthwhile."

Globally the corporate practice has had a storming year, pulling in a revenue of around £275m, or 31 per cent of firmwide turnover. Deals not included in the London table above include Tyco's whopping £32.4bn spin-off (garnering the most fees for A&O since Marconi's 2003 restructuring) and the £16bn takeover of client Nuon by Essent. Both deals demonstrate A&O's corporate jurisdictional focus in the last couple of years.

The US has seen massive investment and landing a place on General Electric's M&A panel is a landmark instruction. "These kind of deals create real opportunities across the network: they have significant cross-border elements and that plays to our strengths," explains Cranfield.

The Dutch M&A practice, originally Loeff Claeys Verbeke, has always been one of the strongest teams in the European region. Three of A&O's 10 biggest London deals are all related to the merger discussions (still unresolved) for ABN Amro, a longstanding Dutch-sourced client. A&O is advising on English aspects, however, while NautaDutilh is leading on Dutch law.

At A&O, Cranfield's Dutch counterpart Sietze Hepkema says: "We had to analyse our weaknesses and take an honest look in the mirror. It was about building our profile in leveraged finance, getting better contacts in private equity and putting a focus on professionalism."

Last year's hire of private equity partner Derek Baird from Lovells was a start, but there's still some way to go. "It's more complicated than one hire," says Cranfield. "In private equity it's the combined strength of our M&A and leveraged finance."

One common theory for A&O's corporate strength is that the firm has been lucky in conflicts. While it is true that last year it landed an instruction on Alliance Unichem's merger with Boots because Slaughters was already advising the latter, none of the firm's UK top 10 deals this year have arisen out of a conflict. The group has fought hard for work that it has had to pitch for: Alan Paul's team beat Clifford Chance to win an instruction by Macquarie Bank on the £8bn auction of Thames Water because it was willing to offer an exclusivity agreement.

A&O is like Clifford Chance in that it has profited from a frothy M&A market, where highly leveraged deals have been the norm. Banks have held increasing sway in instructions. Cranfield is right in that a firm with a robust leveraged finance practice is advantaged. He admits that, in this instance, having a stellar banking team is beneficial, but adds that just because A&O has a good relationship with one bit of a bank, it doesn't mean another desk will share that view.

Partner Richard Browne says A&O's strength in finance is a selling point in pitches. "But I don't think that, if the market turns down, financing packages will be less important. It plays to our strengths and to those of Clifford Chance," he adds.

Both firms' corporate teams see the strength of their banking teams as a double-edged sword - one that both helps their practices but hogs their limelight.

It has led to tense moments at both firms. But when the financial results are considered, it would seem that's a good problem to have.

A&O's Top UK M&A Deals, Aug '06-aug '07

CC's Top 10 UK M Deals, Aug '06-aug '07