Closing the deal
20 December 1999
1999 saw a flurry of high profile mergers and acquisitions, with lawyers having to fight hard to win their trophies. Dearbail Jordan looks back at a busy year
It was a deal that should never have happened. In February 1999 the Italian-based Olivetti Group launched its audacious £36.5bn bid for Telecom Italia, a company seven times the size of its aggressor.
Financial centres around Europe sent out cries of disbelief that a company like Olivetti - which was recovering after selling off its loss-making PC business while struggling with massive restructuring costs - could possibly raise the capital needed to make such a purchase.
But Olivetti's ultimately successful bid for Telecom Italia was indicative of what the market could expect over the next 12 months.
As Nigel Boardman, head of corporate at Slaughter and May, says: "One of the strands of M&A work in 1999 was hostile continental takeovers."
The Telecom Italia/Olivetti transaction was ground-breaking for a number of reasons.
Firstly, Olivetti's financial advisers Donaldson Lufkin & Jenrette Securities, Lehman Brothers, Chase Manhattan and Mediobanca were charged with raising £15.4bn to fund the takeover - one of the largest syndicated loans ever.
Secondly, the takeover tore at the delicate social fabric which binds together the Italian economy.
In Italian society, an enormous amount of credence is placed on establishing and maintaining highly personal and political relationships between banks and businesses. However, Mediobanca was originally aligned with Telecom Italia, and the fact that it worked for Olivetti on the takeover sent shockwaves through the Italian business community.
Nick Wrigley, managing partner at Clifford Chance's Italian office, says: "[The deal] upset so many relationships between banks and customers."
Most importantly, Olivetti's hostile bid opened the eyes of the Italian legal profession to the threat of UK lawyers benefiting from the boom in the Italian economy.
Both Olivetti and Telecom Italia were represented by local firms Erede & Associati and Chiomenti Studio Legale respectively. But UK firms Herbert Smith and Clifford Chance scooped work on the financing side of the deal.
Although Italian firms had already begun to consolidate earlier in the year, for example Erede merged with Bonelli e Associati and Pappalardo e Associati, the Telecom Italia/Olivetti deal enhanced the desire to merge.
Wrigley says: "As a result of the takeover there were concerns that local firms needed critical mass.
"Europe had begun to consolidate in the same way that businesses in the US did about five years ago."
Wrigley points to the merger in July between French energy giants Elf Aquitaine and Totalfina as an example of European consolidation.
What began as a hostile takeover bid by Totalfina for Elf quickly became a game of cat and mouse as the takeover target made a counter-offer to the predatory company.
US firms were the victors, picking up work on the deal. Jones Day Reavis & Pogue acted for Totalfina while both Sullivan & Cromwell and Cleary Gottlieb Steen & Hamilton represented Elf.
Totalfina's £28bn bid for Elf eventually won out, despite predictions that Elf would take the role of acquirer since it was perceived as the stronger company. But in a year where normal M&A protocol went out the window, Totalfina's success seemed positively normal.
As did Wal-Mart's, when in June it thwarted retail giant Kingfisher Group's £17bn merger with Asda at the last minute.
Freshfields was acting for Kingfisher on the agreement to merge with Asda, represented by Slaughter and May, which was first announced in April. On 13 May, the closing date for the merger was set for 18 June. But three days later, Simmons & Simmons received a phone call from investment bank Wasserstein Perella inquiring about legal advice on behalf of its US client Wal-Mart.
Only four days before the closing date, Kingfisher discovered it was not Asda's preferred partner when the Wal-Mart takeover was announced to the public.
Ultimately, in a cloud of cloak and dagger secrecy - throughout the negotiations Wal-Mart was code-named "Wishbone" and Asda was known as "Apple" - the US retail giant emerged triumphant while Kingfisher slunk off to lick its wounds.
And just to add insult to injury Kingfisher sustained a £4.3m exceptional charge in its interim results for the period ended 31 July 1999 due to the failed merger.
But Wal-Mart's success in taking Asda from the clutches of Kingfisher was nothing compared to the fun and games which began in May when Whitbread attempted to buy Allied Domecq's retail arm.
By the end of May, Whitbread's £2.3bn bid for Allied's 3,500 pubs seemed assured.
Both sides had engaged the services of magic circle firms - Clifford Chance for Whitbread and Linklaters & Alliance for Allied Domecq - to reach an agreement and set a completion date for 2 August.
But in an unexpected twist, rival brewery Punch Taverns launched its own bid for Allied's pubs.
The company had sold-off a 70 per cent stake in the brewery to US private investment partnership Texas Pacific to raise money for an attack and what ensued was one of the most aggressive takeover battles the City had ever witnessed.
By 24 June, Punch had trumped Whitbread by offering £2.7bn for the retail arm while Bass, represented by Allen & Overy, promised that if Punch's bid was successful, it would pay £1bn for 700 of the pubs. The bid was rejected. Punch then launched its advertising campaign through the press, urging Allied's shareholders to reject Whitbread's offer.
Boardman says Punch's tactics were reminiscent of old style corporate battles, when businesses would pull out all the stops to secure their target. "It used to be much more fun," he muses.
Unfortunately for Whitbread its downfall in the battle was confounded by the fact it had announced that its bid did not create any competition issues.
If only the Office of Fair Trading had seen it that way. In July, Whitbread bid was referred to the Competition Commission, at which point the brewer withdrew. Just three months later, Punch closed the deal with Allied.
Punch, represented by Slaughter and May, spent over £100m on fees, although it was not specified how much went to its legal adviser.
Allied shelled out £27m on fees, while the frugal Whitbread kept its costs down to between £8m to £10m.
While lawyers were still reeling from the Allied/Punch deal, they could not have guessed that yet another major corporate fight was just around the corner.
In September, the Bank of Scotland, advised by Herbert Smith, stunned the City and the banking sector by launching a £21bn bid for its rival NatWest Bank.
NatWest, represented by Linklaters & Alliance, was already engaged in a proposed £10.7m merger with UK insurer Legal & General, which was being advised by Slaughter and May, when the Bank of Scotland stepped into the fray.
In a situation reminiscent of Olivetti's takeover of Telecom Italia, the Bank of Scotland is much smaller than the company it is targeting. But this has not deterred the bank, and it is still going ahead with the hostile bid.
Since the initial bid, the Legal & General merger has effectively fallen through, while the Royal Bank of Scotland, represented by Freshfields, has launched its own hostile £26.5bn takeover for NatWest.
NatWest has rejected both offers, even after the Bank of Scotland raised its bid to £26.3m.
Jeremy Parr, corporate partner at Linklaters, says: "I think it is the biggest UK to UK takeover ever. There has been an awful lot of speculation about the future of the banking sector. While there is a great deal of excitement, a lot of players in banking know they will be affected."
UK lawyers are aware that 1999 has been an outstanding year for M&A and financing work.
James Featherby, corporate partner at Slaughter and May, says: "We were all talking about a recession last year. But [the market] got going as soon as we realised that a recession wasn't going to happen."
And corporate battles look set to keep the work rolling in. The fight for NatWest is not yet over and the latest hostile £19.8bn bid from Vodafone AirTouch, represented by Linklaters, for German telecommunications giant Mannesmann, will continue well into the new year.
In a climax to one of the most entertaining years in the M&A world, Mannesmann tried to stall Vodafone AirTouch's bid.
The German group went to the High Court, on the advice from Norton Rose, to stop financial adviser Goldman Sachs acting for Vodafone since it had already acted for the German group on its purchase of Orange earlier in the year.
At the moment, Mannesmann seems helpless to stop Vodafone AirTouch's bid, with the UK telecommunications group on the verge of securing the financial backing it needs to continue its hostile bid.
Vodafone AirTouch is now likely to publish its offer before Christmas, after prompting from the German takeover commission.
But whether Mannesmann can keep Vodafone AirTouch at bay, in the year when the aggressor has emerged triumphant, remains to be seen.