Will Ashurst's review herald a sea change in activist hedge fund work?
25 June 2007
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Ashurst's review herald a sea change in activist hedge fund work?" />
Daring pioneers or risky opportunists? Several law firm heads of corporate will be pondering which category to place Ashurst in following the news that the top 10 firm is launching a review of activist hedge funds (see cover).
The same dichotomy might be applied to activist hedge funds themselves, and firms that see them as sophisticated M&A players rather than nuisance corporate raiders are more likely to applaud than heckle Ashurst's move.
Where these firms stand, however, depends on how they actually define the term 'activist hedge fund'. Allen & Overy, for instance, does not advise activist hedge funds, but is happy to advise a fund such as Och-Ziff - which is not unfamiliar with arbitrage or corporate agitating - on its M&A activity. It also advises the fund in its private equity-like activities, as it did last week when it backed ex-Asda CEO Archie Norman's £310m acquisition of tool hire company HSS.
There is certainly an embarrassment factor in admitting to having activist clients. Ashurst's decision, instigated by head of corporate Adrian Clark, is therefore important because it is an explicit move by a corporate-heavy City firm.
One magic circle partner's comments were typical of his peer group in relation to activist hedge funds. "We wouldn't be rushing to advise them," he said. "You don't want to end up on the front page of the Financial Times in connection with advising activist shareholders. It just doesn't endear you to your corporate client base.
"If anything, activist hedge funds are a huge opportunity for small US firms."
So it would seem. The London offices of Jones Day and McDermott Will & Emery both advise activist funds (Carousel and Polygon respectively, among others). The firms are not small in the global sense, but their London corporate client bases do not rival City firms'.
But just as activists used to be content with shaking up mid-tier corporates and now have bigger fish to fry, can we be surprised that top UK firms want a piece of the action when the deals in question are ones such as ABN Amro, Countrywide and Ahold, to name three that were instigated or affected by activist hedge funds?While the convergence between private equity and hedge funds that was predicted a year ago has not come to fruition, firms now realise that some private equity skills are easily transferable to the hedge fund sphere.
The potential for conflict with corporate clients is clear, and any firm considering advising activist hedge funds would have to be picky. Rather than the individual billionaire raider, it is the Polygons of this world, whose profiles are rising, that firms are beginning to think might make attractive clients rather than bothersome opponents.
With these caveats in mind, City firms have in fact been quietly advising activist hedge funds for a while - including Ashurst itself, which has long counted Cerberus as a client. Activism is just one realm of advice for garden-variety hedge funds, now a very established client base. It was never a question of whether top-tier firms would start advising activist shareholders, but when - and more to the point, when they would be open about it.
Clifford Chance and Travers Smith advised The Children's Investment Fund (TCI) in 2005 when the vehicle derailed Deutsche Börse's bid for the London Stock Exchange. This spring Clifford Chance found TCI responsible for potentially scuppering client Barclays' £80bn merger with ABN Amro when it called for the Dutch banking giant to be broken up, a strategy favoured by a rival bidding consortium.
Travers head of corporate Spencer Summerfield says: "I don't know if there used to be any snobbery about advising funds. It used to be simply that there wasn't much money in it beyond fund formation, and what funds then asked you to do wasn't really riveting. But now funds are doing a lot more and the advice they require is a lot more lucrative."
A Clifford Chance partner says firms were wary of activist hedge funds because, traditionally, they would call lawyers up angling for either free legal advice on targets or insider information. Even now "it's quite tricky to advise them - you can't give them commoditised advice," he says. Which would imply that good advice would be all the more precious (and expensive) to activist clients.
These days activist funds need advice on market abuse, reviewing public documents and how to steal a march on the market as well as buying stakes in IPOs, says Summerfield, who has advised SAC Capital Partners and Brandes Investment Partners. The latter bought a 12 per cent stake in Marks & Spencer when Philip Green's Revival Acquisitions attempted to take over the high street chain in 2004.
Jones Day corporate partner James Campbell, one of a few who have long advised such clients, explained that lawyers can also help on research and analysis of companies. "If the fund's proposing a company restructuring, lawyers advise on the viability of that, or perhaps on tax-related issues," he explains.
Hedge funds' new hobby of punting on distressed debt might also be an area where firms could get a foothold, advising funds on their favoured 'loan-to-own' strategies.
Freshfields Bruckhaus Deringer corporate partner David Higgins also points to litigation as a possible source of advice. Hedge fund litigation is popular in the US, but has failed to take off in the UK despite there being a limited right for derivative actions (where shareholders can sue a company director personally). The scope for derivative actions will become broader in the UK once the Companies Act is brought in after October.
"I'm not sure how successful derivative actions will be," says Higgins. "But as a sabre-rattling exercise they'd certainly be interesting for activist hedge funds."
And making enough noise is often sufficient to achieve a desired result for activist funds, explains Campbell.
Ashurst's review is not necessarily intended to result in the firm acting for activist hedge funds alone. The thinking is that the firm has to be close to funds in order to advise its plc clients efficiently when activist hedge funds attack. Don't forget that the companies hedge funds prefer to agitate are more likely to be the blue-chip ones that are also clients of top-tier firms; companies such as Vodafone, which have a low share price from being too big for even private equity to swallow.
Higgins agrees with this. "If you have a credible corporate practice it's absolutely vital to understand how activist hedge funds operate," he says.
Hedge funds might be performing more like private equity these days, but the parallel with private equity also stretches to strategy. Firms that were early to embrace private equity soon won prime mover advantage: Ashurst and Travers are both private equity powerhouses. Interestingly, both now have an open attitude towards activist hedge funds.
That said, how racy Ashurst is being depends on your definition. Even Slaughter and May - not the most radical of firms - has cottoned on to activist hedge funds. As corporate partner Andy Ryde points out, these vehicles call themselves different things.
So, are the US firms worried about City partners encroaching on their territory? "No, not at all," says one such partner. "I don't think the magic circle firms are particularly well set up to serve activist hedge funds. These clients want one or two top-level partners rather than a massive team; they certainly don't want a 20-page memo. So let the City firms approach the clients and give them 20-page memos - it only makes me look better."
The M&A landscape is evolving and hedge fund activism is expected to increase. Although Europe is still hostile to activism, that's actually a plus-point, because firms that facilitate activist funds in such a harsh environment will find rewards. Only certain international firms could take on such work. Firms would be smart to follow Ashurst and at least test the water rather than batten down the hatches.