Big business has its work cut out as worldwide M&A deals decline. By Andrew Pugh
Chancellor George Osborne last week declared that Britain was “open for business” after announcing measures to reduce the deficit and stimulate the economy.
If the latest M&A figures from Thomson Reuters are anything to go by, then big business needs all the help it can get: the total value of transactions completed in the UK slumped by almost 30 per cent in the first two quarters of 2010, compared with the same period last year. Many lawyers in the M&A space feel the economy remains fragile and that it will be some time before dealflow picks up.
The number of worldwide deals dropped by 13.4 per cent to 12,554 over the first half of this year, while deal value fell from $800bn (£538bn) to $720bn. In the UK the number of transactions fell from 1,337 to 1,282 and deal value slumped from $115bn to $81bn.
Market share among law firms in the UK continues to be spread more evenly than in the past as the magic circle appears to be losing its grip at the top in terms of overall market share.
Clifford Chance now tops the table for deals with UK investment, working on transactions totalling $34.1bn, up from $23.9bn last year, when it ranked sixth. The figures were bolstered by the firm’s work advising Kraft on its takeover of Cadbury, as well as representing Babcock in its £1.3bn takeover of VT Group. The firm has also seen a surge in demand from private equity clients such as Warburg Pincus, acting for the company in its acquisition of Poundland.
“We’ve had a very strong performance over the past nine months in terms of dealflow, particularly in international, cross-border work,” says global head of corporate Matthew Layton. “We’ve had good penetration and market share, and have seen an increase in private equity activity.”
Like most observers, however, Layton is less than optimistic about the prospects for the UK economy in the coming year. “We continue to be in a relatively fragile economy and the UK’s not immune from what we’re seeing in the eurozone,” he says.
“That kind of market volatility doesn’t help in valuation issues and continues to keep activity levels down. We don’t expect to see a significant pick-up in the next quarter but feel more optimistic about the fourth quarter.”
Perhaps the most impressive performance in the first two quarters of 2010 came from Herbert Smith and its European alliance firms, Gleiss Lutz and Stibbe, which collectively leapt from 10th in the UK deals table to second and was involved in deals totalling $30.2bn. The alliance recently advised the Al Fayed Family Trust in the sale of Harrods to the Qatari Investment Authority, and Arriva in its takeover talks with Deutsche Bahn.
“I think we’ve had an excellent first half of the year, with a lot of work from embedded clients,” says Herbert Smith M&A head Stephen Wilkinson. “We’ve also made a lot of progress in our international offices, particularly in Asia. Traditionally we’re stronger in the second half, so these results are very encouraging.”
Wilkinson believes difficulties in obtaining leverage means that companies continue to sit on their hands. “The strategy is to mind the shop and watch the balance – and that’s the right strategy for the economic environment.”
Allen & Overy had a poor performance in terms of completed transactions, dropping from second in the table to 15th, with deal volume falling from $65.7bn to $4.7bn, and the number of deals it worked on falling by 50 per cent to 16.
London corporate chief Andrew Ballheimer says: “It’s a market where there aren’t a lot of deals and few big transactions. I think the market appears to have plateaued and has now hopefully hit bottom.”
While the firm has seen growing interest, Ballheimer says many banks are reluctant to lend and companies are reluctant to pay over the odds – something they were more likely to do in the past.
Cleary Gottlieb Steen & Hamilton had a strong showing in both the UK and worldwide tables. It worked on transactions totalling $111.6bn, including acting for JPMorgan in its $1.7bn acquisition of RBS Sempras Commodities.
“Part of it’s down to an upturn in activity,” says Cleary London corporate partner Tihir Sarkar. “There aren’t a huge number of deals but there have been some fairly big ones. Part of our strategy has been to get big-ticket M&A work and that can be seen in the results.”
Sarkar believes that the magic circle will lose market share to US firms in future. “A lot of US firms are now making inroads into international work. The magic circle has tended to dominate, but firms such as ours and Skadden Arps now compete for cross-border international work.
“The magic circle has the depth to work on these deals, but sometimes suffers from integration issues that can affect cross-border transactions. I think US firms tend to be more integrated.”
A majority of those interviewed by The Lawyer expect to see an uptick in activity within the next few quarters, but as one lawyer points out: “That’s what we’ve been saying for the past two years.”
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