UK behind US in deal volume recovery – but is it just a mirage?

Paul Olney

The global M&A market is shrinking. Figures released by Thomson Reuters reveal that worldwide M&A deals decreased in both volume and value ­throughout 2009.

In terms of the total number of deals announced, the UK suffered more than most last year. While worldwide deals fell from 41,018 in 2008 to 35,429 (up to and ­including 14 December) in 2009, representing a drop of 13.6 per cent, those with UK involvement fell from 4,424 to 3,053 in the same period. This ­represents a 31 per cent decline.

Deal value also fell last year. Worldwide, the total value of M&A deals fell from $2.88tr (£1.76tr) to $1.9tr. Transactions involving the UK dropped by even more, from $417.5bn to $287.7bn in 12 months.

On the global stage Freshfields Bruckhaus Deringer led the way in both value and quantity, with ­fellow magic circle stalwart ­Linklaters coming second in terms of number of transactions, but only managing fifth in value.

In the UK Slaughter and May came out top of the pile, pushing last year’s leading pair, Freshfields and Linklaters, into third and ­second places respectively.

The UK rankings in particular make for interesting reading. Although the same three firms dominate the table, as they have done for the past few years, their market share has increased ­significantly in the past 12 months.

The results come despite each firm seeing their number of deals with UK involvement fall. ­Slaughters’ deal volume fell by only five, from 56 to 51, but it still saw deal value rise from $120.2bn to $160.2bn.

Freshfields and Linklaters saw even more significant drops in ­volume. Freshfields went from 99 deals in 2008 to just 45 last year, while Linklaters went from 102 to 47 in the same period. Both firms, however, saw the value of these deals increase.

“It could be that the bigger firms are attracting high-value ­transactions, which keeps up the total value,” says Slaughters ­practice partner Paul Olney. “That would be the obvious answer.
“There’s been a lot fewer ­leveraged deals over the past year, so people who acted for lenders or advisers may have dropped away. Our practice has always been stronger advising principals.”

As Freshfields corporate head Mark Rawlinson points out, a ­flattened UK market has created some anomalies in the final table, with four Australian firms ­making up the top seven on the back of large mining deals.

“It’s definitely been a thin ­market over the past 12 months so the spike deals are going to have a bigger effect,” he says.

Blake Dawson, for example, benefited from its involvement in the joint venture between BHP Billiton and Rio Tinto, lifting the firm to sixth place in the UK table on the back of just six deals.

Rawlinson adds that it is in ­volume rather than value that the real trends can be found. “When you look at UK involvement, it’s always the same three names that stand out; which order they’re in is down to chance,” he says. “In terms of deal value, it’s almost a fluke whether you finish one, two or three.”

Freshfields’ continued lead in volume terms for global deals comes despite a significant dip in the number of transactions for all the magic circle firms – a dip not mirrored by their transatlantic counterparts.

Freshfields was involved in 205 deals, more than a third down on 2008. Allen & Overy (A&O) and Clifford Chance both saw their numbers more than halved, with A&O down to just 143 deals from the previous year’s 326, and ­Clifford Chance chalking up 128 deals compared with 291 in 2008. Linklaters fared slightly better, having been involved in 175 transactions, down from 315 in 2008.

A&O corporate head Richard Cranfield believes there is little to be read into the figures, despite the apparent trend for M&A work drying up for the magic circle on a scale not seen elsewhere.

“You need to dig behind the stats,” he says. “These things come and go, so I wouldn’t want to get too excited either way. It’s been a particularly flat year, with firms just grinding deals out. We’ve done the right number but haven’t had the value – that’s hurt our ranking.

“The big issue in 2010 is what’s going to happen and how much we can expect to happen in terms of M&A work. My instinct is that the market’s bottomed out and is improving. The US market already seems to have picked up.”

Although there is less liquidity globally in an M&A market still reeling from the aftershock of the Lehman Brothers collapse, the drastic decline in deal numbers reported by the top UK players is not matched by US firms.

Indeed, two of the largest US firms, Shearman & Sterling and Simpson Thacher & Bartlett, have seen their positions improve in the M&A market in 2009, ­rocketing them to second and fourth places respectively in the global table.

Shearman was involved in an almost identical number of ­transactions compared with 2008, but grew in terms of value and saw its market share double in the same period. Simpson Thacher went from 81 deals in 2008 to 113 last year.

Simpson Thacher was boosted in early 2009 when a team led by global head of M&A Casey Cogut advised drug manufacturer Wyeth on its $68bn acquisition by Pfizer in one of the biggest deals of the year.

“Part of it’s about being well-positioned, part is luck,” explains Simpson Thacher corporate ­partner Alan Klein. “We’re ­fortunate to have a longstanding relationship with Wyeth, which was a big ­transaction this year.

“One thing that’s become ­evident is that the US was hit ­earlier by the credit crunch. The UK and Europe benefited from longer-lasting growth – it hit later there, but in some ways it hit ­harder. In the US the deal market has bottomed out and started to return sooner than in Europe.”

Shearman can attribute its ­consistent performance to its diversity in the M&A field, and in particular to its strength in the ­sovereign wealth market. The firm was involved in three of the top five sovereign wealth deals in 2009, winning the mandate ­advising the Qatar Investment Authority on its investment in the Porsche-Volkswagen joint venture proving the most lucrative.

Co-head of Shearman’s London corporate team Laurence Levy believes the comparatively strong showing from US firms is down to more than just the different rates of recovery on opposite sides of the Pond.

“There’s more and more cross-border deals and they’re more complex,” he says. “Having US capability’s very important and on the M&A side none of the top-drawer UK firms have strong US capabilities.”

Amid the optimism stateside, Klein adds a note of caution, ­suggesting that the unexpectedly quick recovery may be a mirage.

“It would be disingenuous to say we thought the end of the year would be as strong as it has been,” he says. “In the early part of the year things looked quite ­uncertain. The real question now is whether we’ve entered a period of sustained stability or whether there’s ­another cliff we’re all going off in the next few months.”

Figures for deals with European involvement, including the UK, give the impression that the big City firms are still holding their own in a greatly reduced ­marketplace. The top four places are all occupied by the main UK players, with A&O’s slip to ninth place the only blot on the ­copybook.

Such dominance would suggest that the story is not quite so ­simple, and that those firms that have ridden out the storm have done so more by luck than by judgement.

Furthermore, last year’s top worldwide M&A firm Sullivan & Cromwell saw its numbers fall as sharply as any of the UK firms’ on the list. The US firm fell to eighth place by value, while seeing the number of transactions more than halved.

It suggests that trying to read jurisdictional trends into the ­figures might be as haphazard an exercise as gazing into a crystal ball, as the true length and depth of the recession is yet to be seen. Freshfields’ Rawlinson for one insists that the M&A downturn has had a similar effect across the board for international firms, ­irrespective of jurisdiction.

“Whichever market you’re in, it’s a reducing market,” he explains. “It’s had an effect ­globally in terms of the number of deals out there. M&A is a momentum market and at the moment it doesn’t have any.”

Aussies rule at M&A deals

Hovering just below the top three firms in the table for announced M&A deals with any UK involvement comes a small cabal of Australian firms.

Freehills, Mallesons Stephen Jacques, Blake Dawson and Allens Arthur Robinson have all benefited from a downsized UK market that has not been reflected Down Under.

While the large ‘spike’ deals, such as BHP Billiton’s $16bn (9.78bn) tie-up with Rio Tinto, account for some of the growth of the Australian quartet, it is the increasingly mulitjurisdictional nature of the new market that has helped boost the region’s profile.

“The big deals in Australia have been driven by foreign bidders,” says Freehills head of corporate Richard Loveridge. “In a challenging market clients are demanding strong cross-border execution experience and the depth to get complex deals done quickly.”

Mark Stanbridge, head of corporate at Blake Dawson, agrees that an increase in cross-border deals has changed the make-up of the table, but is not convinced the trend will be maintained.

“We think this may be reading too much into the current results,” he says. “These results are driven particularly by client relationships – in our case with BHP Billiton – and the nature of deals being undertaken during this period.”

gavriel.hollander@thelawyer.com