15 October 2001
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9 September 2013
Since 11 September one thing has become: it is no longer a question of whether there will be a recession, but rather how bad it will be. At The Lawyer's breakfast briefing last Tuesday morning, three speakers tackled the subject from different angles - and with varying levels of optimism.
The briefing was organised by The Lawyer to coincide with the publication of the quarterly Law Firm Business Confidence Survey, in association with Wheeler Associates and McCallum Layton.
Sudhir Junankar, associate director of economics at the Confederation of British Industry (CBI), gave an overview of the UK economy in 2001, focusing on current trends and short-term prospects. He said that lawyers are not alone in having a dwindling business confidence, and he warned lawyers not to ignore the performance of the manufacturing sector. "Too many people think of themselves as separate entities," he said. "But there are linkages between [the performance of] the manufacturing sector and business and professional services."
On the back of this, Junankar noted that price trends in the service sector were generally down. Retail was the exception, but price trends in that sector came from a relatively low base.
But despite many adverse indications, the picture was by no means all gloomy. Junankar said: "The world economy and the UK economy were already slowing down prior to the terrorist attacks on New York. Our view is that the UK will weather the difficulties and should see modest growth in 2002."
Whereas Junankar was relatively optimistic about the UK's prospects, Stephen Barrett, vice-chairman of KPMG Corporate Finance, painted a bleaker picture on the transactional front.
As everyone recognises, global M&A has grown enormously in the past five years. "During the 1990s we saw roaring growth, with a fourfold rise in deal value throughout the last decade," said Barrett. "The number of deals has risen by 250 per cent. It's been a very long bull market."
This is clearly not sustainable. In 1999, the combined value of cross-border deals was $843bn (£575.41bn) and in 2000 the combined value was $1.222tr (£834.1bn). In 2001, the first three quarters have yielded only $476bn (£324.9bn).
"My best guess is that deal values this year will be between $600bn (£409.54bn) and $700bn (£477.8bn) - that's a big fall back from last year," said Barrett. "In fact, we're going right back to pre-1998 levels - back in 1998 deal value was $616bn (£420.46bn)."
In terms of the number of cross-border deals, it is a similar picture. In 1999 there were 8,106 deals. This grew to 9,261 deals in 2000. This year there have been 5,103 deals for the first three quarters of the year. Barrett said: "My prediction is that I reckon we'll fall back to a maximum of 7,000 deals for the year. And the last time we saw that level was, again, in 1998. Against the backcloth of the last 24 months' results, we're going to see a continuation through to the second quarter of 2003 of lower levels of activity."
Intriguingly, the UK has done exceptionally well in terms of global buyers. UK companies have topped the league for the past three years, with US companies topping the global sellers league - small wonder that US and UK law firms have benefited. As might be expected, France and Germany also feature heavily, but delegates at the breakfast briefing expressed some surprise at the strong showing of Swiss companies on the chart.
"Inevitably, as years go by, you have to take more care in defining companies as American, British, German or so on - it's increasingly difficult," continued Barrett. "Look at Daimler-Chrysler - is that German or American? These companies are genuinely global. I'm not sure all lawyers have adapted themselves to that changing market, though I'm not suggesting that in being global you have to have representation in 30 different countries."
As for law firms' reactions to the current climate, confidence is clearly dropping. As reported last week (The Lawyer, 8 October), only 35 per cent of managing partners surveyed expect their firm's turnover to grow in the next six months - down from 66 per cent in the previous quarter.
Kevin Wheeler of Wheeler Associates revealed that confidence on profitability was equally shaky. "Compared with three months ago, managing partners are now much less optimistic about the growth in their firms' profits," he said. "Only 23 per cent now expect profits to grow over the next six months. This compares with 51 per cent predicting growth in the second quarter.
"At a time when firms' profits have virtually stopped growing, it's interesting to note that half the firms expect their partner numbers to increase."
On the whole, though, and in line with lower growth forecasts for their services, most firms expect to maintain their overall staffing at current levels. Only a third of firms anticipate any increase in their staff, and a small number will undergo staff reductions.
An intriguing finding of the survey was the difference between City and regional firms. In general, regional firms were a lot more upbeat about their prospects than their peers in London. Wheeler said: "Provincial firms are predicting fee growth of five per cent over the next six months, while City firms are only expecting two per cent growth." Not only that, but regional firms are planning to increase their marketing by five per cent, while City firms expect to increase theirs by only one per cent.
The decreasing level of business confidence among law firms has hit investment budgets. "In the face of a worsening market, firms have dramatically cut back on their investment plans since our last survey," said Wheeler. "In the main investment areas - IT, training, marketing and premises - firms are expecting to increase their expenditure by only a couple of percentage points over the next six months. By the time of our next survey, it will be interesting to see if firms are actually reducing expenditure in these areas."
So, it is certainly a mixed picture, but there is no reason for prolonged pessimism. As one managing partner present observed: "We'll just have to batten down the hatches for 18 months."