Living for the city
19 December 1995
Everyone else may be losing their heads but corporate finance lawyers are certainly keeping theirs.
This year has been a difficult one for the merchant banking community. Barings teetered on the verge of collapse this spring and was rescued at the last minute in a hasty takeover by the Dutch bank ING. Other enduring names - Kleinwort Benson and SG Warburg - also found it too difficult to go it alone and were bought out.
But the outlook for the legal corporate finance sector is almost universally good. A rise in takeover activity is pushing up corporate finance salaries again. Gavin Crocker, of recruitment consultancy Garfield Robbins, predicts a rise in City firm salaries next year, fuelled largely by corporate finance work. "There's much more work around now," he says. "But there is a shortage of supply of lawyers. During the recession a lot of employees weren't kept on. But if the clients are looking for deals to be done very quickly, the payment to lawyers will rise."
Several industries - electricity, water, building societies and insurance - are in the midst of a spate of takeovers, mergers or flotations. Other industries may find a similar need to rationalise resources in future.
Lawyers are playing an increasingly prominent role in takeover work as the level of regulatory requirement rises. UK lawyers are not yet central to the takeover process (as their counterparts in the US are) but their role is certainly getting less peripheral. In the past, merchant banks brought in the work and distributed it to their friends in the law firms. Nowadays, however, there is a growth in the level of work brought in by lawyers and referred to financial advisers.
Garfield Robbins believes in-house training for corporate finance lawyers has improved, leading to a greater appreciation of their services. There is also a growth in the number of lawyers employed by merchant banks - a development which aids communications with solicitors' firms. KPMG Corporate Finance, the merchant banking arm of the accountants, now has six lawyers in a team of 52 professional staff.
Partner Stephen Barrett, who used to work at Norton Rose, believes the corporate finance world has changed enormously in the past 10 years. "The presence of lawyers enables the financial advisers to become more intelligent purchasers of legal services," he says. "But fees are perhaps at the bottom of the list of what we look for. First and foremost, we want an intelligent, agile and practical lawyer. Next we want to see the partner on the account actually working with us on the deal. Then we are interested in the make-up of his team. And then there is the issue of fees."
These views are echoed all over the City. The Lawyer contacted large merchant banks - which between them spend millions of pounds a year on legal fees - and found none are overly concerned about cost; price comes bottom of the list for most. Eighty per cent of the merchant banks rated the quality of service they got as good or excellent. The one which described the service it received as "variable, but mainly good" was the only one which seemed concerned about price.
The existence of KPMG Corporate Finance shows how the mergers and acquisitions world has changed since the mid-1980s. It was established three years ago. It did 10 deals in its first year, 20 in its second and has done 33 deals so far in 1995. Like some of the other accountancy firms it has identified a 'middle market' in M&A where it is challenging the traditional merchant banks.
The old merchant banks, including Rothschilds and Barings, are also being challenged by the US investment banks which have built up their resources on this side of the Atlantic in the past few years.
These companies, including names such as Morgan Stanley and Goldman Sachs, are used to high-profile US lawyers and will be quite happy to see a similar trend develop in the UK.
And KPMG's recent launch of its investment bank boutique in New York has led to claims from top accountancy firms that merchant banks are now unnecessary for acquisitions and flotations up to £1 billion.
David Cheyne, corporate finance partner at Linklaters & Paines, believes some US habits are coming to the UK with the development of US companies here. He says: "In the US, the lawyers write a much higher proportion of the prospectus than they do over here. The international market is very much the same as in the US. But slowly and surely the investment bankers here are more inclined to let the lawyers do a greater element of the documentation. They want to see an efficient use of resources."
Lawyers have not yet noticed any change in work flows as a result of bank takeovers. Even the specialist magazine Acquisitions Monthly does not detect any change yet. Deputy editor Christian Marriott tried to see if Barings had made any changes to the law firms it was using since the ING takeover. But he says: "Barings uses an absolutely huge range of law firms for takeover work - and it's not possible to see if there is a pattern developing. They keep the law firms on their toes by spreading the work about."
Cheyne has not noticed any changes in work flow but believes they are possible in the future: "Lawyers tend to be instructed by the people who are running the deals. Changes among these people would make a difference. But the ownership of the bank would not have any effect at all. But you could get stronger legal departments in these banks with different approaches. You might get lists of 'preferred law firms'. That would certainly have an effect . There could be changes if an institution decided to narrow down the number of law firms it uses."
Bulk buying is a concept which merchant banks may instinctively shy away from, but if their accountancy firms are strong enough they may be forced to accept a gradual switch to bulk buying of legal services in the future.
Richard Cranfield, of Allen & Overy, agrees the corporate finance world is changing fast but - like Cheyne - believes it may be too early to say what the changes in ownership could mean: "These things take quite a long time to come down the pipeline. Changes of personnel are what affect us most."
The majority of merchant banks which The Lawyer surveyed said "specialist legal knowledge and reputation" was the quality they valued most in their lawyers. Efficiency, cost and international ability were unimportant by comparison.
The marketplace will undoubtedly change in future but even one of the most ambitious of firms, Dibb Lupton Broomhead, does not think the established pecking order will alter.
In its survey of the first half of this year, Acquisitions Monthly found that the firms which did the most M&A business were, in order, Slaughter and May, Freshfields, Herbert Smith, Clifford Chance and Lovell White Durrant.
Dibbs partner Andrew Sherratt believes that they will continue to do "the really sexy, international headline-hitting stuff" but he says: "The domestic corporate finance work has changed beyond recognition in the last five years. It's very competitive in terms of price. The bog standard work is very much a commodity which people can buy on price."
Neasa MacErlean is a business journalist at the Observer.