Keeping a float

After a bumper 2000, last year was a tough time for IPO lawyers – except Linklaters. Caroline Davies reveals how the magic circle firm managed to put clear blue water between itself and its rivals

What a difference a year or two makes. The first UK initial public offering (IPO) survey conducted by The Lawyer, published in September 2000 and charting the period January 1999 to June 2000, spoke of dramatic markets, strong economic conditions and new money for new markets. The last 18 months, though, have seen the IPO market virtually collapse. A loss of investor faith in technology had an inevitable impact on the level of IPO activity and an even bigger impact on the firms that have carved out a name for themselves by acting for technology clients.

The latest IPO tables from The Lawyer cover the period July 2000 to June 2001. Additional research has been carried out to update the figures to December 2001, although these figures have not been accounted for in the tables. To many firms, the six-month period from June 2001 to December 2001 had no effect on the rest of the figures, as very few IPOs were completed towards the latter part of the year. In fact, the only two non-investment trust companies to float in the latter part of the year were bagged by Herbert Smith and Osborne Clarke. Herbert Smith acted for Friends Provident in July 2001 on a complex demutualisation and flotation, with Linklaters advising Merrill Lynch, which valued the company at the time at £3.7bn. Osborne Clarke did well in advising telecoms company Vanco on its £13.9m float in November 2001, with Ashurst Morris Crisp advising sponsor Williams de Broe. The amount of activity dwindled throughout the year, hitting a low in September and October 2001, when only two IPOs were recorded – and both were investment trusts.

The Lawyer‘s first survey reported that 107 IPOs were carried out in the nine-month period between January and September 2000, excluding AIM flotations. Between July 2000 and December 2001, there were just 122 IPOs, and only 44 of those were for non-investment trusts. Those firms that managed to secure IPO work that actually completed really had something to shout about. But value tables can skew the figures. Especially for Slaughter and May and Freshfields Bruckhaus Deringer, which both acted on the Orange flotation, the largest deal in the history of equity capital markets and worth between €9bn (£5.5bn) and €10.3bn (£6.3bn). And yet, the two firms managed to complete only eight flotations between them between July 2000 and June 2001.

So which firms maintained positions in The Lawyer IPO Survey 2001? The winner this time round – as before – is Linklaters. The Silk Street firm continued to fend off competition and maintained its primary position, clocking up a staggering eight deals acting for the issuer and five for the banks, representing a market share of 10.4 per cent and 12.8 per cent respectively. It forged a reputation for itself in 1999 by acting for Dixons on the flotation of its internet service provider Freeserve. Although the reputation it carved for itself in the technology market continued, with the firm acting on three deals in the technology and communications market in 2000 and 2001, it managed to shed its image of the champion of new-economy clients.

Star performers
***** Linklaters
**** Allen & Overy
Osborne Clarke
*** Ashurst Morris Crisp
Herbert Smith
** Brobeck Hale and Dorr
* Clifford Chance
Nabarro Nathanson
Norton Rose
Slaughter and May

Linklaters’ market share on volume of deals supports the firm’s decision a few years ago to go all-out on capital markets work. And if the first part of 2002 is anything to go by, this year it will also be a hard act to follow. The firm has jump-started the process with partner Charlie Jacobs advising new mining company Xstrata, which listed on 25 March and raised around £1bn (The Lawyer, 1 April). Mike Sullivan is also advising UK IT provider Dedica on the first IT sector float in a long time on a deal expected to value the company at up to £100m.

Linklaters’ ability to straddle both issuer and banking clients was not followed by Freshfields, which had a bad 18 months on the issuer side. No wonder it is keen to target growth companies that are likely to float (The Lawyer, 15 April). Right now the practice is skewed towards the financial institutions. It failed to act for a single corporate client on a pure IPO during the 18-month period.

Allen & Overy (A&O), which came out well in the last survey, performed nearly as poorly as Freshfields, acting for just one issuer. Where the two firms did match Linklaters was in acting for banking clients, all notching up a 12.8 per cent market share. And acting for the banks is no bad thing; via UBS Warburg, Freshfields got a piece of the action on one of the last IT floats of 2001, the £76m IPO of Marlborough Stirling, with Osborne Clarke advising the company. The firm is also acting on the recently-announced HMV float, acting for UBS Warburg with Mayer Brown Rowe & Maw acting for the company.

Clifford Chance, which fared abysmally in The Lawyer IPO Survey 2000, did not pull off any surprises last year either in the UK IPO market. It acted on a total of two IPOs from July 2000 to June 2001. “The last half of the year wasn’t very stellar either,” says securities partner David Dunnigan. But, he adds, Clifford Chance has a damn good excuse. “We’ve picked up more deals outside the UK,” he states. “If you look at the UK in isolation, it would give a different story of our capabilities.” Indeed, the majority of the deals that Clifford Chance did complete in 2001 were in Europe – France, Italy and Spain – such as acting for Telefónica Móviles in its IPO on the Spanish Stock Exchange.

Of course, acting for the banks provides the flow of deals, but when you act for the corporates there can be follow-on M&A work, which tends to be more lucrative.

Acting for the issuer can still bring rewards of between £600,000-£1m per float for the magic circle firms. This can be higher if restructuring is involved, and a combined US listing will always bump up the fees even further.

Maximum potential fees earned by firms
Linklaters £11.6m
Allen & Overy £4.6m
Freshfields Bruckhaus Deringer £3.6m
Herbert Smith
Clifford Chance £2.0m
Slaughter and May £1.6m
Norton Rose £1.6m
The above figures relate to potential fees earned by law firms when acting on IPOs for the period July 2000 to December 2001. The calculation is based on the assumption that a firm can earn up to £1m per float when acting for an issuer and up to £600,000 per float when acting for a bank. The table does not include fees earned on investment trust flotations. Norton Rose, for example, would have earned up to £3.4m extra on investment trust work alone from July 2000 to December 2001.

Acting for the banks is simply not as lucrative. If on the banks’ side, City firms are looking at between £300,000 and £600,000 a float. But as everyone knows, the banks are often the gatekeepers. Herbert Smith got the Michael Page float through a recommendation from Credit Suisse First Boston (CSFB). And keeping in with the banks also means lawyers have their fingers on the IPO pulse. “Banks have a good feel for which sectors will be issuing equity,” says Freshfields joint head of the securities practice Tim Jones. “This summer there’ll be a huge raft of things – retail, leisure… the old economy stuff.”

By contrast, investment trusts are nowhere near as lucrative. Acting for the company currently brings in fees of between £100,000 and £200,000. “There are no share option schemes, properties or employees to deal with,” says Herbert Smith head of investment trusts Nigel Farr. Acting for the sponsors, which tend to be placing brokers, is even less profitable with the going rate being just £15,000-£25,000.

Changing times

It made sense throughout the last 18 months not to have a dedicated equity capital markets team. Those firms that initially waved that banner hurriedly packed it away, advocating loudly that they had other strings to their bows. The truth is that those firms which set up specialist equity capital market teams in the boom period did so to mirror the investment banks, such as UBS Warburg and Goldman Sachs. “It allows us to face up to them and helps promote ourselves,” says A&O corporate finance partner Jonathan Lang.

A&O, if you recall, was one firm that established a specialist equity capital markets group, amid a flurry of publicity (The Lawyer, 11 September 2000), in an attempt to lure the investment banks into its fold and perhaps shed its image as a predominantly debt capital markets team. And it worked.

A&O acted on a total of seven IPOs throughout the period July 2000 to June 2001, and six of those were acting for the banks, which included the $978.3m (£680.3m) float of Michael Page International in March 2001, where the firm bagged the work for CSFB. During 2000 and 2001, A&O tended to act predominantly for CSFB, but did manage one IPO for Morgan Stanley & Co International, which acted as sponsor on the Riversoft float in December 2000.

The firm has spent the last 18 months cementing its relationship further with UBS Warburg, advising the sponsor on the $123m (£85.5m) listing of Zen Research, and also on the debt equity side, advising on the mammoth ICI £808m rights issue along with Freshfields.

But what is A&O saying now about its dedicated equity capital markets team? “It’s doing fine,” says Lang. “But our group has people who do all sorts of things, for instance debt capital market work. I do a mixture of everything from exchangeable and convertible bonds, as well as M&A work. If we’d been purely an equity capital markets team it would have been tough.”

One thing that still holds true since the 2000 survey is that firms with international capabilities are the ones cleaning up. There were 14 international offerings between July 2000 and December 2001, including Carphone Warehouse Group, Michael Page International, Marlborough Stirling and easyJet. For the likes of A&O, Freshfields, Herbert Smith and Linklaters, these are the deals that will stand them in good stead and gain them credibility. Even a US capability can make a difference – Norton Rose snagged easyJet because it was able to offer something on the US side.

It is something that Ashursts partner Steven Fox also acknowledges. Ashursts managed a respectable three IPOs from July 2000 to June 2001, two for the issuers and one for the bank, but more recently advised Williams de Broe on the Vanco deal in November 2001. Fox says that although the firm has good relationships with a whole strata of banks, it lacks a US capability, which can make a difference on some deals. So although the firm acted for Carphone Warehouse on its international offering in July 2001, it is beginning to suffer on the investment banking side.

“We’re acting less for banks now,” says Fox. “It’s very difficult to remain active advisers to the large investment banks without a US capability, because that’s what they’re increasingly looking towards.”

Taking the risk

Many floats failed to come off, and some even changed shape. For example, mmO2, the fixed and wireless divisions breakaway from BT, was planned as an IPO. Most firms spoke of a high level of IPOs that reached a high level of execution but did not happen. Take Slaughter and May client Cazenove, which shelved plans to float due to volatile trading conditions.

“The climate just wasn’t right for a lot of companies to come to the market,” says Lang at A&O. If deals do not come off, the firms lose out, but more so for those law firms that act for the investment banks, which traditionally only get paid if a deal is completed.

So what about those firms that are one step removed, advising the banks on a deal that suddenly gets frozen? The current sticky climate has meant that some firms have had to wave goodbye to what would have been chunky fees.

“It’s definitely an issue,” says Jones at Freshfields. “If the banks have managed to get a deal with the issuer which says we’ll all be paid, then fine. However, there’s a lot of competition for the banks to get work, so it may be part of the deal not to in order to attract the work. If there’s no agreement and no deal, then you can end up with a discount on the time you’ve recorded. Even if you’ve done the work you still have to take a percentage cut. Sometimes you don’t get paid at all. That’s why the deals that are coming up are better – they have a good, solid feel to them.”

Loss of investor faith, companies not ready to embrace the market, alternative options such as rights issues or straight trade sales, deals being cancelled and law firms losing fees at a time when most are unable to afford it. These issues would surely colour law firms’ outlooks on IPO work, perhaps preventing them from taking the risk in the first place.

Of course some firms, such as Slaughters and Clifford Chance, tend to view IPOs as part of the overall service they provide and which perhaps come second to M&A work. In Clifford Chance’s case, the UK IPO market is apparently not on its radar either, although one might legitimately ask how Clifford Chance is going to maintain an international equities practice with such a small market share domestically.

Looking ahead

If the start of 2002 is anything to go by, things are looking up. M&A activity is looking healthier and investment bankers are beginning to talk about a wave of activity for the next few months. So although there will not be another Orange float on the immediate horizon, the future is a definite shade of rose, with the Dedica float acting as a litmus test of investor sentiment, especially in the technology sector.

And while some firms may have had their ardour dampened by the recent IPO market, there is one school of thought that prevails. No matter what else is lost in a downtrodden market – fees, jobs and even sleep, Freshfields’ Jones pinpoints what keeps private equity departments going: “The bottom line is, there’s nothing like a flotation to cement a relationship.”

Investment trusts

Investment trusts have been the saving grace of law firms hit by the dwindling initial public offering (IPO) activity, although to some firms they are not true IPOs.

One thing is certain though – they do not suffer like the true breeds. There are not that many players in this niche market, but the ones that are dedicated manage to do well, clocking up deals whatever the weather.

Herbert Smith, Linklaters and Norton Rose have the most well-regarded dedicated investment trust teams in the UK. Guernsey-based Ozannes also appears high up on the investment trust tables, clocking up 12 IPOs.

Norton Rose’s investment trust team, headed by Tim Marsden, had the best year on this front. From July 2000 to December 2001, Norton Rose acted on 32 IPOs, with 30 of these being investment trusts. Its strong relationships with HSBC, Collins Stewart and UBS Warburg, which acted as sponsors on many of the investment trust deals, assisted in winning work.

The attraction of these specialist IPOs, according to Nigel Farr, who heads up the investment trusts team at Herbert Smith, is that they are engineered to withstand harsh conditions.

“The companies are designed to withstand fairly substantial falls without breaching banking covenants,” says Farr. “The market’s kept the lawyers busy. The deal flow is never slack whatever the market.”

But the downfall – and there always is one – is that the work isn’t as lucrative as straight IPO work. The market, says Farr, is also changing. Although he closed four deals in the space of two weeks in March 2002, he warns that there are regulatory problems on the horizon, with the Financial Services Authority taking a keener interest in investment trusts after the wave of damage caused by the stock markets has begged the question as to whether some products have been missold.

Market share by volume – main list
Adviser to issuer (%) Adviser to banks (%)
Ozannes 15.6 0
Linklaters 10.4 13.6
Norton Rose 1.3 2.1
Olswang 3.9 0
Osborne Clarke 5.2 2.1
Brobeck Phleger & Harrison 3.9 0
Clifford Chance 2.6 0
Ashurst Morris Crisp 2.6 2.1
Eversheds 2.6 8.5
Herbert Smith 3.9 2.1
Andersen Legal 2.6 0
Addleshaw Booth & Co 2.6 0
Bird & Bird 2.6 0
Skadden Arps Slate Meagher & Flom 2.6 4.3
Dechert 2.6 2.1
McGrigor Donald 2.6 0
Allen & Overy 1.3 12.8
Slaughter and May 1.3 2.1
Lovells 1.3 0
Dla 1.3 0
CMS Cameron McKenna 1.3 0
Denton Wilde Sapte 1.3 0
Hammond Suddards Edge 1.3 2.1
SJ Berwin 1.3 2.1
Pinsent Curtis Biddle 1.3 0
Berwin Leighton Paisner 1.3 0
Stephenson Harwood 1.3 2.1
Macfarlanes 1.3 2.1
Morgan Cole 1.3 0
Travers Smith Braithwaite 1.3 4.3
Maclays Murray & Spens 1.3 0
Dickson Minto 1.3 0
Cleary Gottlieb Steen & Hamilton 1.3 0
Jones Day Reavis & Pogue 1.3 2.1
Landwell 1.3 0
Brough Skerrett 1.3 0
Ward Hadaway 1.3 0
Nelsons 1.3 0
City Law Partnership 1.3 0
Nabarro Nathanson 0 4.3
Gouldens 0 6.4
Field Fisher Waterhouse 0 4.3
Percentages calculated from figures supplied by firms for period July 2000-June 2001.

INVESTMENT TRUSTS: It is important to note that the showing of several firms has been augmented by their work on a number of investment trusts, which tend to be of lower value and are considerably less remunerative for law firms. Norton Rose’s investment trust work has not been considered in the above figures.