Why lawyers could become the new investment bankers
16 June 2003
In today's gloomy world of M&A, a chink of light has appeared - increasingly, lawyers are the new investment bankers. But before you dig out your red braces and start dusting down phrases like "lunch is for wimps", that was a slight exaggeration. However, there is a definite trend for corporates to do without investment banking or corporate finance advice, and on deals where they do without, the lawyers are getting a little bit more of the pie.
At least, that's the way things are going according
to a recent survey by KPMG transaction services. This spring, KPMG questioned directors from 122 companies across the globe about deals they did in 2001. The results were surprisingly pro-lawyer, with 14 per cent of directors saying that lawyers were the advisers most involved in assessing the value of the deal to the company. That compares with just 4 per cent in KPMG's last survey from 2001.
The perceived growth in importance of lawyers' roles compares very favourably with the view of investment banks. In 2001, 19 per cent of those questioned named investment bankers as their key professional advisers, but this year just 10 per cent picked the poor old bankers and corporate financiers.
As you would expect from a KPMG survey, the accountants did quite well too, scoring 13 per cent this year, compared with just 6 per cent in 2001. The reason for this uplift is clear from the survey - due diligence was named as the most important pre-deal activity.
One high-profile corporate lawyer responds sceptically to the survey, and not just because it was undertaken by accountants. "That's absolutely terrifying," he says, "because lawyers just can't add up." However, the majority of M&A lawyers said they had seen the trend forming over the past couple of years.
The most recent example - a deal sealed just a few weeks ago - was GUS's sale of its home shopping arm to private equity investors the Barclay brothers. Neither GUS nor the Barclays used financial advisers. Linklaters and Lovells, acting for GUS and the Barclays respectively, project managed the thing themselves.
And let's face it, managing a couple of data rooms and issuing the odd When asked which advisers were most involved in assessing value, repsondents replied as follows
memorandum isn't exactly rocket science. As one magic circle corporate lawyer says: "Lawyers can do the project management stuff at least as well as the investment bankers."
Private equity investors and maverick entrepreneurial companies, particularly ones owned by Richard Branson, often don't use financial advisers, mainly because they think they know better than the red-braces set.
One M&A lawyer says: "The trend has started in the past 12-18 months or so, and its emergence seems to be cost-conscious."
For deals that don't cross over into the threshold of Class 1 public M&A transactions, there is no strict need to get an investment bank on board. It's only for the largest deals that corporates need to bring in the banks to give a fairness opinion. On those deals, concedes one corporate star, "it would be difficult to supplant the bankers, and on those deals you wouldn't want to - those guys are worth their salt".
However, even on the really big deals the input of investment banks is sometimes minimised. On the Hewlett Packard (HP)-Compaq merger, the bankers were called by HP just one day before the deal went public. Having said that, Goldman Sachs and Salomon Smith Barney, which advised HP and Compaq respectively, were reported to have pocketed in excess of $100m (£59.8m) in fees - not bad for a diminished role.
But do the investment bankers care? One says: "Investment banks are not exactly quaking in their boots." He concedes that the economic cycle has forced some investment banks onto more mid-market deals, and complains: "Price pressure has shown that investment banks are doing work for an absurdly small amount of money." However, he maintains: "It's happening, but not so substantially that they're feeling especially hurt."
Others think that the trend was instigated by the banks themselves. Corporates have retained investment banking advisers very rarely, but almost all of them did so prior to the Big Bang and the US invasion. The banks have pulled away from this work deliberately because it simply wasn't lucrative.
Investment banks have also delegated much of the technical work, such as drafting initial public offerings prospectuses, to the lawyers, because frankly it was dull and technical. When times were booming, investment banks wanted to be the deal finders, not execute the deal, which could easily be done by the more pedantic, less glamorous lawyers and accountants. Whether they regret that in the quiet times is a moot point.
One investment banker turned lawyer warns: "There's been a reduction in trust. There's a view that the investment banks are not entirely impartial."
So, what do lawyers actually get out of it? On first impressions, there doesn't seem to be that much money in it. Unlike the investment banks, law firms generally charge by the hour for the project management stuff, although the increased use of contingency fees may allow law firms to get a greater uplift when adding real value.
The two main areas where lawyers can do this, and two key reasons why lawyers are becoming increasingly important, are cross-border tax and competition. If you can invent a whizzy tax gadget that gives you access to a £1bn tax loophole, or beat off your competitors before the Competition Commission, why shouldn't you get a success fee for it?
However, the real advantage is that taking on more of the commercial advisory work allows you to get really, really close to your client at the highest level. As one investment banker says: "Ultimately, it will be the lawyers who the chief executive calls first." And for clued-up corporate lawyers, that's the Holy Grail.