The rise of private equity and growth of regulation have seen the corporate market change beyond all recognition
If you are a corporate lawyer, the chances are that you have been fairly busy in the past two years. Much has been made of the recent M&A boom. But if you think you have been overstretched recently, spare a thought for the corporate lawyers beavering away in 1987.
According to the Takeover Panel’s annual reports, last year there were 143 deals over which the panel presided. Compare that with the 237 deals of 1987-88.
“We were really running around like headless chickens then,” recalls Ashurst head of corporate Adrian Clark, who joined the firm from Slaughter and May in 1986. “We really have never been as busy as in the 1980s.”
Law firms’ make-up was slightly different then, too. While it is typical now to have a leverage ratio of one partner to four – or even five – associates at City firms, that was not true 20 years ago. “Firms hadn’t geared up in leverage then,” explains Clark. “There was huge pressure on firms, which were working far harder than they wanted to be. Firms were out of kilter with the rest of the market.”
Partners who were cutting their teeth in the late 1980s also argue that, as well as quantity, there was a different quality to deals then too. If the scheme of arrangement has been the de facto deal structure over the past few years, then the hostile bid was really a beast of the late 1980s.
The Guinness share-trading fraud that came out of its £2.7bn takeover of United Distillers best embodies the cut-and-thrust of that time. Some of the biggest legal names worked on that deal, with former Freshfields Bruckhaus Deringer senior partner Anthony Salz leading for Guinness and Herbert Smith senior partner Edward Walker-Arnott opposite for United Distillers.
Sterling reputations were won and lost on Guinness, which resulted in chairman Ernest Saunders, among others, spending 10 months of a five-year sentence at Her Majesty’s pleasure.
Freshfields corporate partner Mark Rawlinson, who worked on the deal as a junior lawyer under Salz, recalls: “So many things in the Takeover Code changed as a direct result of Guinness. I think there were half-a-dozen points that were changed. I don’t know if it’s a good thing or a bad thing to have been on a deal that caused a regulatory change, but boy, what a learning experience.”
Increasing regulation has been a feature over the years, says Slaughters head of corporate Chris Saul. “Twenty years ago financial services regulation was in its infancy and there was no market abuse legislation – and the Takeover Code was much shorter,” he jokes.
Equally, there has been a formalisation of procedures. “It was much more laid-back then. It was based on everyone knowing each other,” Clark explains. “The panel just used to ring up the head of corporate finance at Schroders, for example, and he’d come round 30 minutes later. They’d chat through a high-level problem and that would be that. It was a fantastically flexible, person-based way of doing things that just doesn’t apply in the modern world.”
The modern world has more technological wizardry that has sped up deals’ timetables and made lengthy meetings an indulgence. “This is a real sadness for me,” laments Saul. “Twenty years ago we’d spend hours jousting in meetings and at the end of it all there would be intricately negotiated deals and some real friendships.
It is also easy to forget how much change the 1980s ushered in: the deals completed as The Lawyer first went to press were in the wake of the ‘big bang’ and of privatisation.
They ushered in a new era of regulation and internationalisation, the biggest changes of the past two decades, according to Slaughters veteran corporate partner Nigel Boardman. “The rise and rise of the regulatory burden, plus the strengthening position of London as the world’s financial centre and English law as the law of choice, are all key developments since 1987,” Boardman argues.
With that comes the internationalisation of law firms and their emergence as a multibillion-pound industry in their own right. Internationalisation of deals also meant the
invasion of US investment banks, the clients that would drive the profits of a new breed of law firm, the magic circle firm.
“The old names were still running the City,” says Clark.
“Schroders, Lazards and Morgan Grenfell. Goldman Sachs was really the only US bank present, and it was starting to make waves: people were surprised by that.” Goldman Sachs’ former president and chief operating officer John Thornton is cited as a pioneer among US M&A bankers in the late 1980s.
The Americans also influenced the way preparation for deals has been undertaken. “Due diligence really didn’t exist in the way it does now, and it was the influence of the Americans that kicked it off, as they required their lawyers to do it,” explains Travers Smith head of private equity Charlie Barter. “I was just senior enough to avoid the data rooms,” he jokes.
For Allen & Overy global head of corporate Richard
Cranfield, the rise of due diligence “is really linked to people’s aversion to legal risk. People are now averse to litigation risk.”
Surveying the M&A landscape of the past 12 months, perhaps the biggest change since 1987 is the dominance of private
equity. Think of Clifford Chance client Kohlberg Kravis Roberts’ (KKR) assault on Alliance Boots this year, the first time a FTSE100 company fell prey to private equity and one of the last highly leveraged deals to complete before the credit squeeze hit the markets in August.
In a neat historical cycle, KKR was the first private equity house to burst onto the M&A stage, earning notoriety as well as a fortune with the 1988 leveraged buyout of Nabisco for $31.4bn (£17.55bn). The size of this deal was rivalled only by KKR itself some 18 years later with the $33bn (£17.93bn)
buyout of Hospital Corporation of America.
But private equity has made its mark not just on the landscape itself, but on how deals are structured. “Twenty years ago the public deal was a press announcement and offer document with certain funds financing and no meaningful ‘outs’, while a private deal was a heavily negotiated 100-page sale-and-purchase agreement with lots of warranties and indemnities and a bucketful of ‘outs’ for buyers. They were very different transactions,” says Slaughters’ Saul.
“Nowadays public deals have increased somewhat in complexity, with implementation agreements and often, given the rise of private equity complex financing packages.”
One topic upon which our veteran lawyers do concur is the change in the role of the lawyer since 1987. Technical
brilliance has its place, but all the partners in our Hall of Fame share one characteristic: commerciality. “There’s real emphasis on lawyers being businessmen. The lawyers who get on are those who really understand their clients’ business,” says Rawlinson. But more than that, it is the lawyer’s position within the deal that has gained more prominence in the last two decades.
“Lawyers have taken control of the execution of transaction to a significant extent,” argues Cranfield. “Investment bankers – or merchant bankers as they were called in 1987 – have left execution issues, and it’s now almost entirely the prerogative of the lawyers. As a result lawyers own a lot more of the execution, giving them much bigger control.”
So to all those who in 1987 thought it odd for a publication to want to concentrate on the legal market: just call us prescient.
TWELVE LEGENDARY CASES, 1987-2007
Guinness’s £2.6bn takeover of United Distillers (1986)
Still going through the courts in 1987. Many City reputations ruined because of the deal. Ashurst head of corporate Adrian Clark says: “It was just the most dramatic thing, with appeals and hearings and full of lessons on how to operate. Market practices had to be analysed in its wake.”
Hoylake’s (bidding vehicle of Sir Jimmy Goldsmith, Jacob Rothschild and Kerry Packer)’s $21bn (£10.91bn) failed bid for British American Tobacco (1990)
The first major run by private equity for a UK company. Scuppered by the US authorities. Linklaters senior partner David Cheyne nominates this deal “for its sheer entertainment factor. It was perhaps a deal too far.”
SG Warburg’s acquisition of Rowe & Pitman (1987)
The target was one of the London Stock Exchange’s major brokers. Warburg built up a staff of more than 500 in New York in the wake of the 1986 Big Bang reforms. This, says Slaughter and May corporate partner Nigel Boardman, marked “a fundamental change in the structure of the City.”
Vodafone’s hostile £112bn bid for Mannesmann and Orange (1999)
Largest corporate deal in history at the time. A months-long
bidding battle saw bids, counter-bids, political involvement and union uproar.
Says Lovells senior partner John Young says: “Many thought it was difficult to get into Germany. This deal was taken as a symbol of the ability to take UK firms there.”
Royal Bank of Scotland’s (RBS) £21bn reverse takeover of NatWest in 2001
Bitter battle by NatWest’s smaller rival sparked a new round of consolidation in the sector and demonstrated that no FTSE100 company, “no matter how august, was immune from takeover”, according to O’Melveny & Myers partner Chris Ashworth.
Blue Arrow scandal (1987)
An insider trading scandal broke when NatWest covered up for the failed issue of £873m of new stock to fund the takeover of Manpower. Freshfields Bruckhaus Deringer head of corporate finance Barry O’Brien says the deal “demonstrated how easily things can go wrong and why lawyers earn their keep.”
The demutualisation and flotation of Abbey National (1989)
First of the UK building societies to do so. Heralded a huge change in retail banking. Slaughters head of corporate Chris Saul nominates the deal because it was a “complex and groundbreaking transaction, which really changed the shape of our financial services industry.”
RBS-led consortium’s €71bn (£50.74bn) takeover of ABN Amro (2007)
Beat Barclays to the prize: a cross-border break-up between three different parties. Allen & Overy head of corporate Richard Cranfield highlights it for being the “first competitive, hostile bid for a major bank in the EU.”
Barings’ collapse and subsequent £1 purchase by ING (1995)
Nick Leeson’s $1.4bn (£903.14m) speculation (and loss) on futures contracts brought down the UK’s oldest merchant bank. Weil Gotshal & Manges corporate partner Marco Compagnoni emphasises that “the effects of Barings’ end reverberated around the City for years.”
Kohlberg Kravis Roberts’ management buyout of Alliance Boots (2007)
The last successful mega-deal before the credit crunch and the first time that a FTSE100 company fell prey to private equity. Weil Gotshal’s Compagnoni nominates the deal because “it represented the high-water mark of deal and financing fever” of the most recent M&A boom.
KKR was the house that undertook the 1988 leveraged buyout of Nabisco for $31.4bn (£17.55bn) – the first time in the world that private equity really hit the headlines, rivalled in size 18 years later with the $33bn (£16.82bn) buyout of Hospital Corporation of America (another KKR deal). KKR-Nabisco gave rise to the book and film Barbarians at the Gate.