The US eagle takes flight
19 March 1996
The JANUARY-February Corporate Money league tables for 1996 show a leaning towards advisers based in the UK and Canada. Although not dominating these charts, this representation from across the pond accounts for almost 25 per cent of entries in the law firms' Top 25 list.
But each US or Canadian firm entering the league tables has been on the back of just one, albeit substantial, transaction. Will these foreign advisers be one-deal wonders in the UK bids and deals scenario, or will their activity continue?
The indications are that this is a genuine trend and is likely to continue. In 1995, according to figures from accountants KPMG, US cross-border purchases increased almost 75 per cent by value (from $28.7 billion to $50.7 billion) over the previous year, compared with almost no increase for European cross-border buying activity (from $65.4 billion in 1994 to $65.8 billion last year). Within that figure there was a drop of one third in UK cross-border buying by value, from $27 billion to $18 billion.
However, on the selling front, US and Canadian businesses disposed of in 1995, cross-border, were up a mere 12 per cent by value on the previous year to $58 billion, whereas European cross-border disposals were at twice that rate of increase (up 24 per cent to $53 billion) and the UK showed a 120 per cent leap in cross-border disposal activity. The US is apparently accelerating cross-border buyers, while Europe, and the UK in particular, is busy selling.
Some of the law firms involved in this US assault on the Corporate Money league tables can dispel the suspicion that they are there on a fluke bid. They have a demonstrable involvement in UK/US cross-border deals which predates the current wave of activity. For example, Davis Polk & Wardwell, which entered the 1996 charts in 10th place for advising Farnell Electronics (alongside UK firm Allen & Overy) in the £1.85 billion bid for Premier Consolidated, was also instrumental in the huge 1988-9 cross-border merger to create SmithKline Beecham.
In the earlier deal, Davis Polk represented the US party, SmithKline Beckman, and was also involved in a number of related transactions including the tax-free spin-off of two of SmithKline Beckman's non-core businesses. It took a Davis Polk team just four weeks to reconcile applicable US and UK laws and market practices, create hybrid equity securities for completing the transaction tax-efficiently, negotiate terms, devise the complex governance and equalisation provisions of the documents of the resulting holding company, advise on securities law issues as they arose, and draft and obtain clearance of the required disclosure documents in both countries.
The firm also represented Imperial Chemical Industries in its demerger of Zeneca into a separate bioscience business. The deal, valued at over $5 billion, remains one of the largest worldwide reorganisations.
And Davis Polk looks set to keep its hand in for deals involving the UK. The partner chiefly involved in the Farnell negotiations, Joseph Rinaldi, believes there will be further acceleration of UK/US cross-border activity in 1996 as the concept of globalisation takes an ever-greater hold. "I expect many more such deals as the regulatory authorities - the Securities and Exchange Commission in the US and the UK's Stock Exchange - recognise the need to be more flexible in derogation of rules to allow cross-border activity," he said.
"One outstanding example of that tendency was the Enterprise/Lasmo deal in which the SEC co-operated in terms of the hours its staff put in, and the facilitation it allowed negotiators through relaxing its rules."
If Davis Polk is a significant presence in UK/US cross-border deals, then Jones Day Reavis Pogue, which advised Premier Consolidated in the Farnell deal, is even more so. With its 1,100 lawyers in 20 offices around the globe, and ranking as the second or third largest firm in the world by fees earned, it is unlikely to disappear from the league tables.
Stephen Fiamma, of Jones Day's London office, also expects the lively climate for US/UK business to persist.
"I expect this trend to continue growing as clients try to expand in order to capitalise on economies of scale. Farnell and Premier is a good example - showing the bidder's recognition that it is more commercially viable to take over a thriving concern than to try and plant one's flag in a territory starting from scratch," he said.
"And open economies, such as the US and UK, provide that much better opportunities for such cross-border activity."
Cravath Swaine & Moore partner Melvin Bedrick agrees. He said the consensus among colleagues is of "cross-border UK-US acquisitions increasing 1996 over 1995".
Cravath, engaged by Pearson Group in its £377 million purchase of HarperCollins books, is no stranger to cross-border advisory work involving a UK party; clients include Unilever, BAT, GEC, Guinness, Courtaulds, Prudential and Tarmac. And a string of 1995 transactions it gave advice on includes Swiss Bank's $1.36 billion acquisition of SG Warburg, Tarmac's $1 billion exchange of its housing division for the Wimpey Construction and Wimpey Minerals subsidiaries of George Wimpey, and Pearson's $201 million acquisition of Interactive Data Corporation from Dunn & Bradstreet.
Canada, entering the league tables on the strength of Unilever's purchase of industrial cleaning products maker Diversey from the Canadian group Molson, is similarly experiencing buoyant cross-border activity. McCarthy Tetrault - Canada's largest firm with representative offices in all its major financial centres - ranks 12th world-wide for fee income and has noted significant activity on behalf of its 20 or 30 UK clients, including ICI, RTZ and Rolls Royce. Oliver Borgers, in McCarthy Tetrault's London office, said: "More and more foreigners are interested in acquiring businesses in Canada, probably as a result of globalisation tending to concentrate ownership in a few hands."
Foreigners must notify a body called Investment Canada if an intended transaction is worth less than C$160 million and must seek its permission for deals above that level.
In 1995 there were 600 notifications or requests for permission to invest, according to Jones Day's Fiamma. This was a continuation of a "frenzied pace of M&A activity in Canada in 1994, which itself showed a rise of 34 per cent above record levels".
Although not mentioned by any of the US law firms enjoying this wave of UK-related work, the healthy activity levels have been influenced to some extent by two factors which have little to do with the regulatory and economic climate. First, KPMG identifies a 'follow-my-leader' tendency of the middle market as larger organisations' preaching and practise of consolidation and globalisation produces a knock-on effect. The other big influence is the transformation produced by technological advances, which KPMG predicts will continue "into the new millennium". Such advances mean the world is now a single market for any corporation, irrespective of industry sector or region, a realisation expected to "increase the options for cross-border expansion further still".
While such cross-border activity continues apace, lawyers in the dominant trade regions are likely to be engaged for advice. Don't expect the US chart-toppers to disappear from view in the foreseeable future.