8 January 2001
Is everyone experiencing New Year blues or do corporate lawyers really have a genuine excuse for being so downbeat about the coming year? Ask any legal professional for their opinion on how 2001 looks to be shaping up and the response is doom and gloom.
Dotcoms are still continuing to scare the hell out of people. Letsbuyit.com is the latest casualty - its shares, once suspended, have now been reinstated only to drop in value by 50 per cent. The knock-on effect of this is that corporate lawyers are beginning to turn their beady little eyes towards the possibilities of increased insolvency and restructuring activity. Ashurst Morris Crisp has already acted on a couple of liquidations at the end of last year and expects to see more in the coming months. Even the mighty Slaughter and May admits that in the final quarter of last year, the firm was not as busy as in the previous nine months. And for most firms, there ain't much doing this month on the old corporate side. One lawyer states that the investment bankers themselves have provided a good marker on what to expect. While he says his firm has less in its pipeline, the investment bankers have even less in their's - and their pipelines are much bigger than anyone else's. Without getting too close to the Freudian bone, all this talk about pipelines might just make sense. In M&A, lawyers would do well to analyse where their next meal is coming from. And certainly, both US and UK lawyers will have to become more inventive in their deal-structuring advice because the financing will not be as readily available as it has been over the past two years.
Slaughters, along with Herbert Smith and Clifford Chance, is able to feel a wee bit smug, since all the firms are acting on one of the only major bids to light up the market at the moment - the Bank of Scotland and Lloyds TSB's potential fisticuffs for control of Abbey National. Yet this aside, it is generally expected that public bids will begin to dry up substantially. Just compare this year to last year, when the Vodafone and Mannesmann deal was in full swing; there was also that little hostile bid kicking off between the Bank of Scotland and the Royal Bank of Scotland for NatWest.
The impetus for this is coming from the US, where the bottom has dropped out of the stock market. Mass selling in high-tech stocks means Nasdaq dropped by 7 per cent, while the manufacturing sector continues to shrink, giving rise to talk of a recession. The default rate in the US market on speculative grade bonds is alarming to say the least. In December alone, 17 issuers defaulted on a total of $4.2bn (£2.8bn) worth of investments. While the indications are that Europe is in a slightly healthier state, the US is, after all, the largest economy in the world. Like the butterfly effect, one misplaced move might bring the whole world crashing down.
In any event, many corporate lawyers are expecting average deal values to be substantially lower, with bids settling around the £100m mark. Does this mean more work for firms below the magic circle, such as Lovells and Eversheds? Not necessarily. Just as the magic circle firms are happy to raid mid-size and regional firms for partners, they will be equally keen to recolonise the medium-size deals. Just watch the larger firms over the next year turning their focus to this financial bracket as a means of sustenance through this odd period.
Only the bravest of lawyers will admit that the market could be beginning to teeter on the brink of recession. While the value of the euro has risen against the dollar in the past few days, it seems foolish to think Europe will be immune to a slowdown. While there are predictions that the financial services sector will be the one to watch in 2001, with a fresh wave of consolidation expected, particularly in Germany (will Deutsche Bank and Dresdner ever find merger partners?), law firms will nevertheless have to be realistic about entering a depressed year. Insolvency lawyers suddenly look rather popular again.