Sales of the Century

In the first ever comprehensive of UK IPOs, Abigail Townsend and Chris Brock chart a dramatic and volatile eighteen months and look at which law firms are emerging as the market leaders


The South Seas Bubble of the 1700s is the nearest thing you can get to this." This is Freshfields Bruckhaus Deringer's corporate finance partner Tim Emmerson's opinion of the UK's initial public offering (IPO) market over the last 18 months.

Perhaps this opinion is extreme, but there is no doubt that the UK IPO market has been dramatic, volatile and lucrative for issuers, advisers and investors.

And while IPOs are traditionally big earners for investment banks, it has also been a profitable time for the law firms that have taken advantage of this bumper period.

Since January, there have been 107 IPOs on the London Stock Exchange, including techMARK (the London Stock Exchange's answer to Nasdaq) and dual listings, but excluding the Alternative Investment Market (AIM). Strong economic conditions go some way to explain the buoyant market, but the other driving factor behind it is technology.

John Crompton, managing director and co-head of European equity capital markets at Morgan Stanley, says: "The last 18 months have been a period of tremendous excitement about the new economy, and not just for the UK market, but for the world of equity markets and for the major developed economies.

"What is particularly interesting about the new economy is that it's intrinsically bound up with capital markets. We saw a steady rise in technology, media and telecoms IPOs as a whole, and fund managers were chasing these stock prices up."

There have, though, been several other contributing factors to the UK market's performance during the last 18 months.

In August 1999, retail giant Dixons floated its internet service provider (ISP) Freeserve. It was advised by Linklaters & Alliance and was the first dotcom to be floated that year. The IPO involved lengthy discussions between the banks, including legal advisers Linklaters, Shearman & Sterling, Herbert Smith and Brobeck Hale and Dorr and the London Stock Exchange, because it fell foul of market rules (see box, p19).

After the company floated, Chapter 25 was added to the London Stock Exchange's rules. It allows a company to float with less than three years trading, providing it has a minimum market capitalisation of £50m and sells at least £20m worth of new or existing shares upon flotation. It must also undertake to report quarterly (as opposed to every six months) and to comply with enhanced prospectus disclosure requirements.

The same year also saw the launch of techMARK. In a bid to halt the tide of companies floating on the more flexible, technology-orientated Nasdaq, techMARK was designed for new and already listed companies looking to exist solely within a technology-focused market.

The rush to take advantage of both investor trends and relaxed market rules meant that more and more companies were floating, despite fears that some were not economically viable.

The collapse of online retailer, although not a listed company, challenged investors' perceptions about the long-term viability of the new economy, in particular business-to-consumer dotcoms. Proof that this brave new market was as vulnerable to the same pitfalls as the old world shook investors, specifically the high-net individuals who had been, in the words of one corporate finance partner, "bunging money" at this sexy sector.

Shortly after's collapse came the extraordinarily high flotation of the Linklaters-advised at £571.3m, which caused another set of problems (see box, p19). By spring the market had peaked and, in the minds of many, not before time. Freeserve, for example, was at one point worth the same as Dixons, despite not having assets, a product or even a unique selling point (USP).

Many intended flotations have now been scrapped. For example, Japanese internet investment company Softbank has decided to shelve plans to list five subsidiaries. And many planned IPOs that were even further down the line have also gone the same way. Clifford Chance, for example, has worked on 15 deals over recent months that never made it to flotation, a couple of which were only days away from listing. Freshfields has also suffered, having worked on several listings, only for them to also collapse. Even Linklaters is understood to have lost an estimated £1m in fees through postponed new media IPOs (The Lawyer, 17 July).

Fee income can be hurt by changes of minds and market fluctuations, although it is dependent on how far down the line the potential listing has progressed.

Freshfields corporate finance partner Tim Emmerson says: "Sometimes IPOs are shelved and sometimes they're scrapped altogether, and then you get paid less than your normal fee. But if it's an important investment bank client, you're not going to turn [work] away lightly. You can lose between £50,000 and £60,000, and if this happens five times it becomes quite a lot of money."

Since January 1999, there have been 19 dual listings (listing on the London Stock Exchange and at least one other exchange). It follows then, that firms with global capabilities are going to be the ones cleaning up. Linklaters, for example, acted on 21 IPOs, a third of which were dual listings. Of these, five were done solely by Linklaters and two were done alongside non-domestic firms.

But corporate finance partner Casper Lawson concedes that simply having a global presence is not enough: "You need to greatly build up the confidence that the investment banks have in your ability. You deal with them on every single IPO, either for them or next to them, and we're all sitting in the same room trying to achieve the same thing."

Because, ultimately, the relationship between the firm and the bank is the all-important factor when it comes to winning IPO work, the banks will appoint their own advisers and will have the last say on who advises the issuer.

Relationships are built up between bankers and partners. Morgan Stanley's Crompton says: "Ninety-nine per cent of the work we're looking for is non-crisis work. The time when legal input is incredibly important is when extremes are reached. We tend to build up relationships with firms and individuals at the firms that give us confidence. We need the right person looking after us if we run into trouble."

The concept of a one-stop global law firm, therefore, does not appeal to many bankers, despite current business trends.

Crompton continues: "The global investment banking industry is moving into consolidation. Capital markets are becoming more international and more global. We have a pan-European market here, but our tendency is to pick horses for courses. We still work with US lawyers and would have a US firm advise us. We have not moved to a one-stop shop as underwriters looking for counsel."

Because of these relationships, the "up times" in capital markets can be a double-edged sword. For a start, how much time and resource should a firm give to IPOs, particularly when fee income is invariably higher for cross-border M&A work?

Allen & Overy recently responded to the increase in IPO work by establishing a separate equity capital markets group, headed by partner Richard Cranfield (The Lawyer, 11 September).

But Freshfields' corporate department has been divided, in basic terms, into three groups of partners – corporate finance, M&A and those which straddle both. During the last 18 months, there were times when all corporate finance partners where working at full capacity, as were those doing both M&A and corporate finance.

Emmerson says: "All of the firms, including ourselves, reached the point where we could not take on all of the work coming to us. The M&A practice is terribly important and you have to have enough partner resource to keep that alive."

But this itself brings another set of problems; namely the fear that, should you tell the investment bank you are unable to do the work, it will allow another firm the window of opportunity to start developing its own relationships.

Andrew Dauber, head of corporate banking at SG Securities, says: "We rely on personal relationships and trusts that have built up over a period of time. But there's never just one law firm – we're never scratching around for someone we know and like. The firms are pretty proactive and don't like turning the work away. They'll not want to see the business go elsewhere because, in quieter times, it may stay elsewhere."

It appears that a lot of firms are taking advantage of this. Allen & Overy, for example, is purportedly talking to all the investment banks in a bid to forge new relationships. The firm has certainly had a good 18 months in corporate finance, working, for example, on three separate IPOs for UBS Warburg.

And while the magic circle tackles the IPO market in its own way, a range of other firms have also attacked the market with gusto.

The mid-tier have had their fair share of work. Gouldens' long-term relationship with Investec Henderson has seen it work on several smaller deals. Corporate finance partner Hilary Winter explains: "We value the business that comes through the banks. We act for most of the smaller corporate finance houses and they provide a lot of deal-flow."

Nabarro Nathanson has also carried out a lot of work, again off the back of Investec Henderson. Head of corporate Rhidian Jones says that, for this summer alone, the firm worked on IPOs with a collective value of £600m, and that overall, IPOs have "significantly contributed" to the rise in fee income reported in The Lawyer 100 Survey earlier this month.

Eversheds has worked on a handful of IPOs, all of which were for the issuer. Regional firms will often work closely with a company during first and second-round funding and develop an in-depth knowledge of the client.

But there is often a conflict between the wishes of the investment bank and the company. Emmerson says: "Often, the company comes in with a local firm, and the banks will want a City firm. Sometimes the issuer will be told who to use and sometimes someone is brought in under particular terms.

"There are a lot of firms that can be brought in, but a lot depends on relationships between underwriter and counsel. The banks have got to go wherever they can get the service. They worry quite a lot about who is acting for the company because that's where the powerhouse of the deal is."

Bankers will therefore have to be convinced of the benefit of retaining a particular firm. Dauber believes it will only work if there is a lot of due diligence. "Otherwise it is artificially sharing out the work just to retain a regional firm," he says. "We need to make sure the firm is going to have the experience to negotiate the City. It's going to take a lot longer if they don't – they'll put everything back to square one because they don't have the parameters. You need to be able to have a sensible conversation with them."

So what is the future for the IPO market and the firms that service it? With the increased amount of capital raising, the next boom is likely to be in M&A – has already made a major European acquisition.

Follow-on M&A is a bonus for firms which have acted for the issuer. Linklaters first represented on its flotation and has since been retained by the company to advise on the Degriftour deal, effectively displacing primary adviser Bird & Bird on a fee-heavy deal. While acting for the bank will provide a good deal flow, working for the issuer brings ongoing work. And if the predicted M&A boom happens, this can only be a good thing for firms, particularly bearing in mind the hike in fees that comes with M&A.

It is therefore easy to see why Clifford Chance opted to keep its eye on M&A developments rather than succumb totally to the IPO boom. As reported in The Lawyer earlier this month, the firm has acted on only a handful of IPOs during the last two years. Corporate partner Mark Carroll told The Lawyer at the time that, while the firm is careful not to hinder any existing relationships, its main interest lies in taking advantage of M&A work (The Lawyer, 4 September).

Lawson says: "If you act for the company, you act only for the company. If you act for the banks you get the greater deal flow, but you don't get the client. There is a trade-off."

But the IPO market is expected to recover. While a handful of technology companies recently fell out of the FTSE 100 (Freeserve is another currently facing demotion), they were replaced by old-economy companies that the market now appears to be remembering exist, and is acting accordingly.

And all is not lost for technology. For those companies with a solid product offering, or a business-to-business focus, the future is bright. Or orange. Due to float by the end of the year in London, Paris and the US, the Orange telecom float will be the largest IPO in history, and is creating a huge amount of interest throughout the market. Likewise, Psion's planned float of Symbian is getting the market all aflutter.

For firms such as Freshfields and Linklaters, which have already made a name for themselves in the technology IPO market acting for either issuers or banks, this will be a continuing boom. Who the losers will be is another matter, and one only the market, the banks and the investors will be able to determine. For the firms that are doing the legwork and juggling IPO and M&A practices, it is a question of waiting and seeing what the next 18 months bring.

l Part two of The Lawyer IPO 2000 Survey will appear on 2 October