Volume down, value up
4 July 2011 | By Joshua Freedman
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Firms are hunting those few, precious megadeals as rankings show deal numbers are falling. By Joshua Freedman
Tennis players know it is not how many points you win that counts, but which ones. And the latest preliminary Thomson Reuters M&A rankings of legal advisers show pretty much the same thing: to get the credit, you have to win those few critical mandates for the high-stakes deals.
The rankings give a serious pat on the back to those firms that advised on the billion-dollar deals that were announced or completed in the first six months of 2011.
It is clear why. The number of deals with a UK target or acquirer - or ultimate parent company - was down on the same period last year, from 1,996 announced deals in the first six months of 2010 to 1,774 in the past half-year. Completed deals fell too, from 1,666 to 1,453.
Yet the data shows a strong UK M&A market by announced deal value, rising from $127.7bn (£79.62bn) to $169.1bn when compared with the same period last year. Completed deals totalled $152.3bn, up from $98.5bn in the first six months of last year.
In other words, there have been fewer deals around, but when they do arise seats at the negotiating table can bring real rewards.
The figures point to a significant upturn in the energy sector, especially in the first quarter of the year. This trend is demonstrated by a handful of massive deals, with GDF Suez’s £17.1bn investment in International Power just one example. Clifford Chance and offshore outfit Carey Olsen acted for International Power, while Linklaters, French firm Bredin Prat and Jersey’s Ogier advised GDF Suez.
The upturn in the energy and natural resources industry has also meant a strong showing for sector specialists such as Baker Botts and Vinson & Elkins.
The international nature of the big deals - especially in busy sectors such as energy, telecoms and pharmaceuticals - means a large number of firms get on to the cast list, spreading the credits and legal spend widely.
These deals also require competition and regulatory expertise across a number of jurisdictions, meaning it is not only the pure corporate advisers that get a look-in. Thomson Reuters considers corporate and competition advice as relevant for the rankings, as well as the lawyers acting for the financial advisers.
Coming or going?
There is something ambivalent about the way the legal profession views the M&A environment. Deals are there, but they are hardly rolling off the conveyor belt. There have been chunky transactions, including EP Global’s $5.7bn merger with Anglo & Overseas and KSE UK’s $836.5m takeover of Arsenal FC, which rises to $1.06bn including the target’s net debt. Slaughter and May acted for Arsenal, while KSE gave mandates to Clifford Chance, the Herbert Smith alliance - which includes best friends Gleiss Lutz in Germany and Stibbe in Benelux - and Jones Day.
“It feels busier and there’s more being talked about. It feels a better landscape,” says Freshfields Bruckhaus Deringer corporate head Mark Rawlinson, who will soon be overall head of the firm’s London office. But corporate partners still refer to the market as sluggish, with talks opening that never lead to transactions being announced (these do not see the light of day in Thomson Reuters’ table). “There’s not much there to get your pulse beating,” Rawlinson adds.
Easily more than half of the announced dealflow by total value for the first six months of 2011 was contributed during the first quarter. The M&A market got off to a bright start to the year, with $92.9bn changing hands up until 21 March. This period saw GDF Suez’s merger with International Power close, as well as the announcement of BP’s £10bn share swap with Russian state-owned oil business Rosneft.
What this points to is a period of plenty for the energy and natural resources industry, the vogue sector of the moment.
“Certainly energy transactions have been a key feature of the market,” says Herbert Smith joint global head of M&A Stephen Wilkinson. The firm is pushing its energy work, acting for Chevron on the disposal of its European downstream business and for Essar on the acquisition of Shell’s Stanlow refinery, where Clifford Chance advised Shell.
“There have been one or two major deals that have already closed this year, and [there will be] more to come,” says Wilkinson. “There have been deals in other sectors such as TMT, industrials and consumer goods, but energy has again been one of the most active.”
This has meant work for the magic circle and top City firms, with Freshfields, headed by Sebastian Lawson, acting for Rosneft on its deal with BP. In the same deal Linklaters partners Stephen Griffin in London and Grigory Gadzhiev in Moscow acted for BP.
The energy boom has also pushed up firms with a focus on the sector, with Baker Botts standing in 11th place for value of UK announced deals, higher than the Herbert Smith alliance. Baker Botts clocked up $11.5bn worth of deals in the past six months, based on just two deals. The firm was the vendor’s US counsel facing Allen & Overy (A&O) on UK-based Wood Group’s sale of its well-support division to General Electric (GE).
A&O acted for GE in the UK and the US, while Slaughters advised Wood Group in the UK.
Energy specialist Vinson & Elkins came out even higher, hitting $13.3bn off four deals, including a $7.2bn joint venture between client Reliance Industries and BP. Vinson, AZB & Partners and A&O advised Reliance, while Linklaters acted for BP.
Quality not quantity
This discrepancy between deal count and deal value appears to be a theme of the M&A legal market, with several firms advising on a large number of deals but lagging behind on total value.
No one advised on more announced UK M&A deals during Thomson Reuters’ research period than DLA Piper, but the international firm lies 24th in the rankings, having advised on a combined deal value of $5.76bn from 42 deals.
This puts DLA Piper higher than Freshfields (30) and A&O (27) for volume, but on deal value it is pipped by almost $3.5bn by Indian firm AZB, which worked alongside Vinson advising Reliance on the BP deal.
A&O is a strong candidate for this year’s champion for both quantity and quality, advising on a massive $48.8bn worth of deals between January and June, and rising above Freshfields, which led the 2011 rankings when first-quarter figures were released earlier in the year. This gives A&O a 28.8 per cent market share, and more than twice as much work by deal value than any of its rivals.
Yet A&O corporate partner Alan Paul still says the market has seen “quite a dull quarter”, with most of the activity coming between the turn of the year and March. Aside from the GE-Reliance deal, A&O, together with Hogan Lovells, advised SABMiller on its acquisition of Foster’s, a deal valued by Thomson Reuters at $12.5bn.
Freshfields has also seen a strong year, pushing ahead of fierce rival Linklaters, as it did in the Hemscott ranking of firms by number of FTSE100 clients last month (The Lawyer, 6 June). It advised on a total of $24.3bn worth of announced deals, compared with $13.9bn during the same period last year, representing a rise from eighth to second place.
On worldwide deals, the Fleet Street outfit comes second out of all UK firms after A&O, remaining in eighth position globally with a static market share of 7.2 per cent. In line with the rest of the market, Freshfields has advised on fewer deals than at this time last year, but total value has soared from just under $77bn to $101.7bn. In the biggest deal of the year for Freshfields, the firm advised Synthes on its $20.8bn takeover by Johnson & Johnson. It also acted for Swiss pharma outfit Nycomed on its e9.6bn (£8.4bn) sale to Japanese buyer Takeda Pharmaceutical Company in another deal that bolstered its worldwide value score.
Like Freshfields, A&O advised on three deals globally in excess of $10bn, but secures a higher average deal size (Freshfields advised on one anomalous deal worth only £1.4m). Even Shearman & Sterling bagged a smaller market share than A&O.
Outside the magic circle, Hogan Lovells has earned dividends from the transatlantic merger of Hogan & Hartson and Lovells last year, with some tasty billion-dollar deals. The SABMiller-Foster’s deal was the biggest, but the firm also won the mandate from News Corp, a longstanding client of legacy firm Hogan & Hartson, on its acquisition of Shine Group, the television company owned by Elisabeth Murdoch, daughter of media mogul Rupert.
“One or two very significant deals like that make a big difference to the rankings,” admits Hogan Lovells corporate partner Nigel Read. “The overall market’s been tough, so it’s been difficult to make a lot of progress. All the usual suspects are there, and in general there’s no massive trend away from the major firms.”
The firm jumped from 14th to fourth place compared with the first half of 2010 - the merger went live last May - and has almost doubled its UK market share for announced deals. But worldwide its total deal value lags behind its UK performance. Globally it finds itself roughly on a par with the Herbert Smith alliance, putting it outside the top 25.
Market sources say Herbert Smith has done a good job of convincing numerical rankings compilers that it functions with its best friends as a single entity, even though competitors might not see it as such.
“We work extremely closely across all sectors,” says Herbert Smith’s Wilkinson on the alliance with Gleiss and Stibbe, denying that the firm has an unfair advantage in tables such as these.
The merged figures have served the firm well on global M&A, where its total deal value stands at $27.2bn, including $24bn in Europe, of which less than half is from UK transactions. The question of the merged figures is less relevant to the UK market, where it stands 12th for deals announced this year and a lofty third for completed deals.
Slaughters, which Herbert Smith models its global strategy on, has seen a significant dip in deal numbers compared with the same period last year (from 35 to 24), but a slighter drop in deal value, from $14.6bn to $11.6bn. It now lags behind Vinson and Asia-Pacific firm Allens Arthur Robinson (AAR) for market share, both of which advised on only four deals.
The international nature of deals, especially in busy sectors such as energy, lends itself to a broad range of firms being hired, as energy companies often have assets in a number of jurisdictions, plus lawyers will be hired for competition and regulatory advice specific to different countries. Squire Sanders & Dempsey’s lofty position - it advised on $25.5bn worth of UK completed deals this year - is based largely on its role as competition adviser to GDF Suez on its tie-up with International Power.
“Some clients have horses for courses - you do see more than one firm acting for the same party on one deal,” says Slaughters corporate head Frances Murphy.
The Volkswagen-MAN deal in May saw three firms hired as counsel to MAN - Hengeler Mueller, Milbank Tweed Hadley & McCloy and Sullivan & Cromwell - and seven for Volkswagen: A&O, Clifford Chance, Freshfields, Latham, Linklaters, Mallesons Stephen Jaques and Stikeman Elliott.
Canadian and Australian firms get a lot of credit: AAR had a bigger UK market share by value than Slaughters and Herbert Smith, and Canadian firm Fasken Martineau gets quite a look-in too, lagging just behind A&O for deals completed in 2011.
US firms are another strength story, with Latham almost doubling its total deal value compared with last year and achieving a strong showing in worldwide M&A rankings.
“We’re very conscious of the fact that they’ve been busy and it’s reaping rewards,” says a rival corporate partner on the US firm’s European success.
Sullivan is on top for worldwide announced deals, comfortably ahead of Simpson Thacher & Bartlett, Wachtell Lipton Rosen & Katz and fellow stateside outfit Skadden Arps Slate Meagher & Flom.
Even on UK-related deals, M&A powerhouse Wachtell comes out higher than Clifford Chance, thanks to the firm’s close relationship with corporate and banking giants across the Atlantic, even though it has no base in the UK. One City corporate partner comments that some US clients “won’t do a deal without Wachtell”.
But international firms still fly high, able to scoop broad work on the biggest deals.
“It’s the firms with an international footprint that seem to be doing well. We’re finding that having international strength is a very strong card,” says Clifford Chance partner David Pudge, who acted for International Power on its deal with GDF Suez.
Although further down for announced deals, Clifford Chance reaches second place in the completed deals table this year, but off much fewer transactions than the same period last year.
As the market continues to falter, those scrambles for instructions are as fierce as ever.