Italy: Voter cycle
4 February 2013 | By Joanne Harris
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Political instability in Italy has made foreign investors wary, slashing legal activity, but there is optimism that the coming elections could start a recovery
Italy’s political woes have been well-documented in the past year. The technocratic government appointed by president Giorgio Napolitano in December 2011 and led by Mario Monti forced through a number of aggressive austerity measures to pull the country back from the brink of bailout, but collapsed a year later when former prime minister Silvio Berlusconi withdrew his support.
Italians are now preparing to go to the polls in the hope that elections in a fortnight’s time will provide long-term stability and encourage growth.
The economic and political crisis has undoubtedly had an impact on the business environment in Italy. According to Thomson Reuters data, M&A activity in the country has slumped in the past few years.
In 2007 Italy had 1,290 M&A transactions worth a total of $229.7bn (£145bn). Last year deal volume was down to just 688 transactions, with a slump of almost 200 deals between 2011 and 2012. Total value was $54.2bn. The average value of deals has dropped less, with the average deal value of $79m in 2012 comparable with that for 2008 to 2011.
Lawyers have noticed the impact of the past year on corporate activity, but think the perception of instability has been more external than domestic.
“Certainly, the instability of the euro and the threat to the Italian economy had an impact last year on legal activity,” says Gianni Origoni Grippo Cappelli & Partners’ founder and corporate head Francesco Gianni.
As an example of the way the crisis has affected lawyers and their clients, Gianni notes that international clients were asking the firm, for the first time, to include clauses in agreements providing for the eventuality that Italy might pull out of the eurozone.
“That shows there was concern about the instability of the country,” Gianni adds.
Bonelli Erede Pappalardo London head and corporate partner Andrea Carta Mantiglia says the low valuations of companies on the Italian stock market should have encouraged investors to come to Italy, but instead put them off.
NCTM corporate partner Vittorio Noseda agrees that the political environment was offputting for foreigners.
“Foreign investors were holding off on or even cancelling their willingness to invest in Italy in a period of great uncertainty,” he notes.
Gianni says things seemed much better from within Italy, where there was less of a sense that instability was a major issue.
“From the inside, as Italians, we never had that perception,” he says. “That idea was coming more from abroad.”
“The Italian situation is difficult to understand in Italy, and even more so from abroad,” agrees Noseda.
But Noseda adds that the short timeframe between the elections being announced and taking place will help the situation improve.
“It’s an advantage because Italy is used to wasting a lot of time in the month prior to elections,” he says. “For the first time ever we’ll have a short campaign.”
Lawyers in general agree the outcome of the election is crucial. If Berlusconi succeeds in regaining power they warn that instability could continue. If either Monti’s centralist coalition or the rival left-wing alliance win the outlook is more positive.
However, the lack of corporate activity and international investment has not had a negative impact on firms’ results. While none had finalised their 2012 turnover figures at the time of interview, the general trend was of a turnover increase of around 5 per cent and a sense that last year was surprisingly good for some parts of the legal market.
Legance debt capital markets head Andrea Giannelli says that while general corporate work and equity capital markets were sluggish, this was offset by activity in debt capital markets, litigation and restructuring - all areas in which the firm has been investing.
“The market has been anti-cyclical,” Giannelli observes, adding that Legance’s long-term plan to diversify and increase its focus on international clients has paid off. The firm joined rivals with a City of London office in the autumn and is pleased with the results.
Gianni also says his firm’s strategic decisions of a year or so ago, such as the addition of a high-profile corporate team from Grimaldi e Associati and the launch of offices abroad have paid dividends in the difficult market.
He adds that Italy’s strong industrial sector and the need for mid-sized Italian companies to expand abroad are fruitful areas for law firms to pursue at the moment.
“There’s been a revived interest in large and medium-sized transactions,” Gianni adds. “There are plenty of interesting technical companies besides fashion and food, and there’s a new tendency for Italian companies to become more international by expanding their activities abroad. The number of outbound investments has increased and, as a consequence, we’re busier in that segment of the M&A activity than a few years ago.”
But the economic and political upheaval in the country has led to a more significant change in the market than law firms’ individual strategies. In the past couple of years a number of boutiques have launched or expanded, including some headed by lawyers from large Italian and international firms.
Some of the most recent have been launched by lawyers from the large Italian offices of defunct US firm Dewey & LeBoeuf. The 120-lawyer Milan and Rome offices hurried into a tie-up with Vittorio Grimaldi, formerly of Grimaldi e Associati, in May, but the newly-formed Grimaldi Studio Legale has not held on to all the ex-Dewey team.
Among the firms splintering off from Grimaldi are competition boutique Caiazzo Donnini Pappalardo & Associati headed by Dewey’s Italian competition head Rino Caiazzo, corporate boutique Accini Cartolano & Associati formed by corporate partners Alessandro Accini and Francesco Cartolano, and 35-strong Gattai Minoli & Partners which was set up in late 2012 by Dewey’s Italian head Bruno Gattai.
Gattai says the collapse of Dewey “hit us without notice” and forced the Italians to seek a lifeboat with little time to spare. The team wanted to stay together, despite individuals getting approaches from other firms, Gattai adds. Agreeing with Grimaldi to use his well-known name was an effective solution in the time available.
However, the stress and friction caused by the Dewey collapse proved difficult to manage and Gattai chose to team up with fellow former Dewey equity partners Luca Minoli, Nicola Brunetti, Gaetano Carrello and Stefano Catenacci for the new boutique.
“I decided to start up my own firm because I wanted to preserve the team of people that work regularly with me”, Gattai explains. “We believe there’s room in the market for a firm like ours. We have the critical mass to handle every kind of deal.”
He points to Gattai Minoli’s deal list to date, which includes the €1.13bn (£950bn) disposal of data company Cerved from private equity houses Bain Capital and Clessidra, as proof of the firm’s ability to handle significant matters.
Gattai thinks the extra flexibility boutiques can offer is a good thing in the current market.
“In the past few years the market has changed,” he says. “It’s more difficult, it’s more complicated and it’s more important to be a good lawyer. There are no commodities to sell. Everything’s close to restructuring, to litigation; you must advise your client properly in a technical way. From a purely intellectual point of view the work is great.”
Gianni agrees the market is not what it used to be.
“The crisis has dramatically changed the role of law firms, relationships between law firms and companies, and the role of in-house counsel. We’ve had to restructure the way we deliver our services,” he says.
Lawyers in the larger firms believe the flood of boutiques is a result of the crisis and say the future is more at the top end.
Noseda points out that even the largest domestic firms tend to have the capacity to adjust to what the economic climate brings - more so than international players.
“Large Italian firms are much more flexible and able to adapt to different scenarios and changing markets,” Noseda adds.
At Legance, Giannelli disagrees, saying the future is in the mid-tier.
“Our goal is to focus on sophisticated and complex work rather than commoditised work,” he says. The small firms won’t be able to get involved in big transactions, but some large firms will struggle in terms of the amount of work available in the market.”
The outlook of most is positive, as the general assumption is of an election outcome that will benefit the business world.
“Since September last year our pipeline’s increased materially and there are a lot of deals probably closing in the first quarter of this year,” says Carta Mantiglia. “Foreign investors are still coming if they have a real industrial interest in Italy.”
Giannelli shares Carta Mantiglia’s optimism, describing a “crazy” start to 2013, while Gattai predicts more private equity investment in mid-sized Italian business.
“The backbone of our economy are the mid-sized companies and we have a number of good mid-sized companies that need to grow and be international, with change-of-generation issues, so the private equity funds can really help,” Gattai notes.
But Noseda is less positive.
“From a political point of view we’ll have clarity and that’s good, but it doesn’t mean the economy will be able to push ahead,” he says. “My outlook for 2013 is gloomier than that predicted by the banks. 2013 will remain a difficult year and I’m not even optimistic for the subsequent years.
“Law firms will need to be flexible and adapt, cut their cost structures and offer new services and conditions to clients.”
Italian firms have clearly shown their will to move with the times. Staying alert and flexible will be a boon in the months to come.
Key figures: Italy
GDP (current US$, 2011): 2.194tr
Annual inflation (December 2012): 2.4 per cent
Population (2011): 60,770,000
Life expectancy at birth: 82
Unemployment rate (November 2012): 11.1 per cent
Source: World Bank, Italian National Institute of Statistics