China light

Mention of Chinese outbound investment always gets lawyers excited, so here is The Lawyer’s reality check on dealflow, highlighting Linklaters’ fantastic 2012.

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Nobel laureate and former World Bank chief economist Joseph Stiglitz recently praised China’s stellar performance during the global financial crisis.

“The emerging markets weathered the 2008 storm better than many of us thought they would. China was a resounding success,” he told delegates at the opening ceremony of the International Bar Association annual conference in Dublin this month.

However, he went on to predict that growth in emerging markets would not be strong enough to pull the EU and US out of the doldrums.

A similar observation could be made regarding the legal sector. Although Chinese investment in Europe has been growing in recent years, the great expectations of ­international firms have yet to be realised.


From 2007 to September 2012 Thomson Reuters recorded 245 announced deals involving Chinese companies acquiring targets in Europe. The total value of these reached $63bn (£40bn), indicating a rather modest deal volume considering the timeframe. In addition, the outbound market is dominated by small- to mid-cap deals. Around 20 per cent of the deals had a value exceeding $50m and only 15 were valued above the $1bn mark.

As a result, demand for substantial international legal services remains low. According to Thomson Reuters, the four magic circle firms – Allen & Overy (A&O), Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters – together scored a total of 20 transactions in which they acted as legal adviser to the Chinese acquirers. That is on average fewer than one deal per year for each firm.

Top performers

Baker & McKenzie, Freshfields and Linklaters have been the most active advisers. The data shows the three firms were involved in 12, 11 and 10 transactions respectively.

In terms of acting for Chinese acquirers Bakers and Freshfields are also in the lead, bagging nine and eight lead counsel roles respectively, while Linklaters is in third place alongside King & Wood Mallesons and Skadden Arps Slate Meagher & Flom, each advising on five deals.

The top international firms in outbound Chinese M&A transactions share a number of traits. For example, they all have an established and sizeable China presence. Bakers and Freshfields both entered mainland China in 1993 and are now among the largest international firms in the country.

Capability and reputation are essential in developing business in any jurisdiction, but cultural sensitivity is equally, if not more, important in winning Chinese clients.

“When I first worked in China it was striking how differently Chinese businesses work compared with those in the West,” says Freshfields partner Nicholas French, who spent two years in the firm’s Beijing office and came back to London last year.

Although his focus is on antitrust and competition, French also leads the firm’s China desk in London, which services Chinese clients investing in Europe. For the latter role he works closely with the firm’s China-based corporate partner Alan Wang, a Chinese native with international training and practising experience.

“Doing business in China is relationship-based,” says French. “It’s crucial to build personal relationships with the leadership in organisations. International firms not only have to present clients with a team they can work with, but also one that understands their language, cultural and internal sensitivities, and decision-making processes. Most of the relationship-building and day-to-day interactions with clients are managed by our team in China.

“Part of my job is to make sure our team here appreciates the nuances of working with Chinese businesses.”

To do that, Freshfields has a cultural training programme across its global network. It has also put in place a China Academy Programme, with the emphasis on recruiting Mandarin-speaking lawyers with qualifications in the UK and US.

Golden secondments

Although Bakers and Freshfields sit in the top two spots by total dealcount, Linklaters is the rising star of 2012. In the first nine months of this year it advised five Chinese companies on their acquisition of European companies. The smallest deal – China State Grid’s acquisition of a 25 per cent state in Portugal’s Redes Energeticas Nacionais (REN) – was valued at $508m.

By deal volume or total deal value, Linklaters has outperformed its City rivals this year, based on the data from Thomson Reuters.

Linklaters’ surge in Chinese outbound M&A work in Europe follows its decision to transfer two heavyweight corporate partners to China at the end of last year, with global M&A co-head Matthew Middleditch relocating from London to Hong Kong and Amsterdam corporate head Peter Goes moving to Beijing.


In addition to internal transfers Linklaters has forged stronger relationships with Chinese corporations through client secondment programmes. The firm’s mandates from China Investment Corporation (CIC) on two of its major acquisitions in Europe this year is a good example. The firm has seconded several lawyers to the Chinese sovereign wealth fund, including newly promoted Beijing partner Judie Ng Shortell, who went on a secondment to CIC’s Beijing HQ in 2010. According to the firm, its instruction in the Thames Water deal was one result of this.

“We have found secondments can deepen and widen our relationships with clients,” says Clodagh Hayes, a London-based corporate partner at Linklaters, who co-headed the firm’s team in Shanghai Bright Food’s $1.9bn acquisition of Weetabix this year.

Linklaters is not the only firm that seconds lawyers to CIC. International firms including Freshfields and Weil Gotshal & Manges have also placed their lawyers in CIC’s in-house legal department.

Price war

At the beginning of October, an event was hosted at the British ambassador’s Beijing residence with partners from several major UK firms present. According to an attendee, a lot of the discussions were about Chinese outbound investment and all of the partners agreed that pricing is tough for Chinese outbound deals, except a small number at the very top end.

“For central state-owned enterprises, selection of legal counsel for outbound deals must be done by competitive bid. Since all international firms shortlisted have the capability to do these deals, the firms can only compete on price. Since many firms are still buying into deals for their CVs, pricing is often cut-throat,” says Robert Lewis, international managing partner of Chinese firm Zhong Lun and the former Beijing managing partner of legacy Lovells.

“In the current market, one or two good outbound deals at the top end for a particular firm can produce significant revenue, more than justifying the related market-development costs. For most foreign firms, however, the current deal volume and fee levels will make this a continuing investment case,” Lewis continues.

Few would disagree with Lewis’ observation. It is common knowledge that Chinese companies are less used to premium fees paid in international transactions, and they generally request fixed or capped fee arrangements from firms. Large state-owned companies may be even tougher on fees because they know that many firms are trying to win their work. There is no lack of challenges for international firms to make good profits from Chinese outbound work.

A recent blog post by Lewis on highlighted a tender process by a state-owned Chinese company in which the winning firm, a top City outfit, bid at $700,000 with rock-bottom internal caps despite the deal in normal circumstances being worth around $1.5m in fees.

“Every market we operate in is competitive on price – it’s particularly true in China,” says Linklaters partner Iain Wagstaff. ”Whether the work will be profitable depends on us capping the fees at the right level at the bidding stage and staffing the team most efficiently.”

Freshfields’ French agrees on the price pressure on working for Chinese clients and admits that sometimes his firm has had to turn down certain instructions. However, it is an area where most firms would still be willing to put in a lot of investment.

“Although the price competition is fierce, this is an area that is still growing and promising opportunities for law firms in the future. You’d be mad not to look at China, an already very important economy that will become more important,” says French.

Chinese competition

International firms will inevitably face increasing competition from Chinese firms that have forged strong ties with domestic clients. Chinese firm King & Wood, which has rebranded as King & Wood Mallesons (KWM) following its March tie-up with Australian firm Mallesons Stephen Jaques, is a strong contender to international firms in Chinese outbound transactions.

KWM has acted as the lead deal counsel in five major Chinese acquisitions in Europe since 2007. In these, the firm’s Chinese partnership led and managed the client relationship.

Most notably, it advised long-standing client Weichai, a Shandong-based automotive and equipment manufacturing group, in two large European acquisitions in 2012. In both deals – involving Italy’s Ferretti Group and German forklift truck maker Kion Group – KWM, led by Beijing-based partner and corporate head Xu Ping, acted as the acquirer’s lead counsel, instructing and co-ordinating local counsel and other legal advisers.

“Our biggest advantage is the mutual understanding and relationships we have built with our Chinese clients through working with them on many domestic transactions,” says Xu.

The way Chinese firms deliver services in outbound deals is similar to international firms. Both require a strong relationship team on the ground and a capable technical team in the jurisdictions where the transactions take place. So the winning factors boil down to just two qualities – price and the ability to provide seamless services.


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