Peer panel: M&A – Behind the new deal
7 July 2014
3 February 2014
12 May 2014
1 October 2014
7 July 2014
7 August 2014
Will the volume of deals soon return to the market and has the UK Takeover Code’s aim of introducing fee transparency hit its target? Our experts discuss
What have been the key trends in public M&A in 2013/14?
Charlie Jacobs, partner, Linklaters: Offerors are increasingly conscious of the need for secrecy, with a greater number opting to down tools in the event of a leak to avoid an announcement and the start of a put-up-or-shut-up (PUSU) period. We have seen more state-owned enterprises and overseas offerors, and, as expected with the PUSU rules, fewer bids from private equity sponsors.
Keri Rees, partner, Eversheds: To an extent, the public M&A market, with one notable exception, suffered from the same dynamics as the M&A market generally: a lack of confidence at boardroom level, a risk-averse approach with a greater desire to shore up balance sheets and not take on a risky deal and, despite a notable change in the latter half of the year, the availability of debt. All played their part in depressing M&A activity. This has been exacerbated in the public market, with equity valuations strong.
There has undoubtedly been an element of valuations being carried along by the tide of a strong and rising equity market, and, when you couple this supply side issue with the aforementioned demand side issue, there has been a generally depressing effect.
Again, as with general M&A, there has been a theme of overseas buyers looking to transact in the UK. From the deals we’ve been involved in, we’ve seen a preponderance of US buyers, perhaps driven by the fact their economy has seen confidence return came sooner, as well as the availability of debt.
Our view is that as positivity picks up there will be an increasing desire to expand by acquisition, and with growing confidence and availability of funding will come more acceptance of pricing.
Clive Garston, consultant, DAC Beachcroft: Public M&A activity was significantly down in 2013 compared with 2012. However, the number of offers announced on AIM was only slightly down, and this trend continued into 2014. This may partly be accounted for by changes to the UK Takeover Code, which bring in all companies that have their registered offices in the UK, the Channel Islands or the Isle of Man, and whose shares are admitted to trade on AIM.
There is generally increased confidence about investing via M&A. This is encouraged by economic stability and growth, but could be derailed by political developments such as what is going on in Iraq.
Selina Sagayam, partner, Gibson Dunn & Crutcher: Anecdotally, most practitioners view the market for public M&A more optimistically than for some time. Equity capital markets (ECM) activity in the past 18 months or so has been significant, with a series of high-profile listings on the world’s main markets. This is a sign of general investor confidence, and often confidence translates into increased M&A activity.
However, these conditions have not yet materialised into significant dealflow. Indeed, in 2013 there were only nine main market bids compared with 24 in 2012. The AstraZeneca bid has dominated the headlines in the past couple of months and it remains to be seen whether a potential deal of this size – and, indeed, the use of an inversion structure for US offerors – has a ripple effect or whether a successful defence will be a dampener.
How has the uptake in ECM activity affected the volume of public M&A?
Jacobs: In general, offerors haven’t been raising equity finance so they aren’t competing for funds in the equity markets.
With debt markets being open for business and the fact that some offerors having cash on their balance sheets, we have seen predominantly cash bids, although there have been some large securities exchange offers.
The improvement in confidence that has led to buoyant equity markets has spurred some offerors into action and will hopefully continue to do so.
Rees: The real issue has been the strength of equity valuations. It is this that has driven the uptick in ECM activity and this pricing issue has probably had a depressing effect on the public M&A market. So on the whole I don’t think the ECM uptick has affected the public M&A market, rather that they are each inverse symptoms of the strength of the equity market.
That said, it’s fair to say we are seeing a significant number of takeovers so it would seem the general return to confidence is starting to help.
Garston: There has been a significant increase in UK IPOs in 2014, although there’s a feeling now that the market may have peaked and valuations are being looked at more closely.
Some of the valuations achieved in Q1 2014 look to be at the top of the range, as evidenced by the fact that share prices have dropped, some to below IPO price.
However, the upturn in ECM activity will affect the public M&A market to the extent that any bidders need to raise capital in the public markets. Unless that is the case it is unlikely to have a direct effect on public M&A activity, although improved sentiment, economic stability and confidence will always drive M&A, particularly in the public sector.
Are we witnessing the death of hourly rates in public M&A?
Jacobs: No. They are still the starting point and the base from which fee arrangements are worked. However, uplifts on large and/or complicated deals are not uncommon as the flipside of some form of discount on an abort.
There will always be situations where other approaches to charging clients for our work are appropriate, but the starting point will continue to be the hourly rate and variants thereof.
Rees: This has been much mooted, and not only in public M&A. But given recent changes to the takeover rules, you can see there is the potential for increased pressure in public M&A. However, I don’t think we’re seeing the death of the hourly rate and, perhaps surprisingly, this is not only driven by legal firms but clients too.
Certainly, we are seeing alternative fee arrangements, but the hourly rate still seems to be the accepted building block on which you constitute these alternatives. We’ve also seen instances where clients are so used to the hourly rate that even if a separate fee arrangement is offered or agreed at the outset, they can’t help but wish to know what the hourly rate equivalent is and use this in the final analysis for agreeing the fee.
Garston: It’s too soon to say the hourly rate model has died or is dying, but it is clearly unpopular and law firms must adapt to modern conditions. Public M&A may be more appropriate to fixed fees than private M&A, in view of the lack of warranties and indemnities. These days, clients want to know what the fee is going to be and are not prepared to hand lawyers a blank cheque. Whatever the fee arrangement is, it has to be something both the buyer and the seller of legal services is comfortable with. It’s a difficult move for law firms to make, but a switch from billable hour charging is the future for a successful law firm.
Have lawyers adjusted their approach to fee negotiation since the Takeover Panel introduced its new disclosure rules in 2011?
Jacobs: No. The requirement to include fee estimates in offer documentation has provided greater transparency, of that there can be no doubt. Law firms and clients are able to look at the range of fees charged on similar transactions, and expectations are measured accordingly. However, in general, by the time an offer document or defence circular is published there is a good degree of visibility on how a transaction will play out. Disclosure rules aside, clients will in any event expect guidance on fees, so it hasn’t made a major difference to negotiations.
Rees: There’s clearly a greater need for certainty, but this really only bites at the final stages of the transaction and is not necessarily setting a rigid new approach at the outset.
We’re seeing more work divided up into strategic and preparatory advice prior to the decision being made to make an approach. There has been a greater degree of accountability required by clients and more emphasis on certainty. The rules introduced in 2011 have helped clients in pressing this cause. More important, however, has been the depressed market and the fact there is generally more competition between advisers to be appointed. This has been particularly telling where offerees have the ability to chose between a number of firms.
Garston: Since the code was revised in 2011 the offer document must contain an estimate of the aggregate fees and expenses expected to be incurred, and this includes fees for legal advice. If one looks at the fees that have been disclosed on the various public M&A transactions that have taken place since that date there is a wide discrepancy. I don’t think this has arisen as a result of the change to the code requiring disclosure, but rather that it reflects the fact that some law firms have a higher fee structure than others and some transactions are more complex than others.
Law firms are aware their fees will become a matter of public knowledge and this has led to an ability to compare and ascertain a ‘going rate’.
Jonathan Earle, partner, Gibson Dunn & Crutcher: Although dealflow has been slow since the Take-over Code rule changes, there is now a reasonable amount of information available on the level of legal fees.
Has disclosure radically and materially altered the fee landscape? Probably not, although having a feel for the level of fees in the market is increasingly being used positively by lawyers and clients.
Prominent factors in the quantum of fees and how they are calibrated remain the intense competition between the leading firms for these prized mandates and the fact that deal activity is still relatively modest.
Irrespective of increased transparency, clients rightly demand quality along with exceptional execution and relationship skills from their lawyers on public bids, given their strategic importance. And, like most other forms of corporate transactional work, the fee has to be justified by the value of the service provided.
Jonathan Earle,partner, Gibson Dunn & Crutcher
Clive Garston, consultant, DAC Beachcroft
Charlie Jacobs, partner, Linklaters
Keri Rees, partner, Eversheds
Selina Sagayam,partner, Gibson Dunn & Crutcher