Focus: M&A, Spreading the load

The M&A market is yet to show signs of a full recovery, but what work there is is now being spread more evenly between the magic circle and its rivals

 If this is a recovery, it ­certainly is not a spectacular one. Figures from Thomson Reuters for the first quarter of 2010 show that the M&A market has stayed flat over the past 12 months in terms of both deal volume and value. But corporate mandates are now being spread far more evenly as the gap between the magic circle and the chasing pack appears to have contracted.

It probably is not too shocking to learn that the end of the recession, if it has indeed come, has not yet been reflected in increased M&A activity. Traditionally, there is a lag between economic recovery and trans­actional activity.

Of more interest, and possibly more concern to some, is the ­relatively poor performance of the top City firms in the latest tables.

Last year it looked like the ­recession had meant that corporate work would coalesce around the magic circle.

Figures from January to March 2009 showed Freshfields Bruckhaus Deringer, Linklaters and Slaughters occupying the top three positions in value terms and three of the top five spaces for volume.

Allen & Overy (A&O) was not far behind, with only Clifford Chance of the top five firms lagging behind.

It is all change this time round, as a clutch of US firms now ­dominate the upper echelons, while mid-ranking UK firms tussle with their magic ­circle peers further down the table.

Behind the headlines

The total value for all M&A deals with UK involvement up to and including 23 March this year was just shy of $75bn (£49.74bn) across 754 transactions, compared with 769 deals worth $81bn for the full first quarter last year.

But while 2009 saw Freshfields, Linklaters and Slaughters all claim roles on at least $60bn – around 80 per cent each – of the total work ­available, the story was different this time around.

Freshfields appears the worst hit, claiming only $1.1bn worth of ­available deals and acting on 11 ­transactions compared with 15 last year. Slaughters kept its top five place but was listed as adviser on only four transactions, as opposed to a table-topping 18 in 2009. The firm saw its position boosted by landing a ­mandate on the only spike deal announced this quarter – Prudential’s $35.5bn play for Hong Kong’s AIA Group.

Linklaters was not on the ­Prudential deal and, with nothing else on the UK list topping even the $4bn mark, it saw its standing suffer accordingly. However, the firm would have led the way without the distorting impact of Prudential and it also kept out in front in terms of deal numbers, with 14 mandates.

The firm secured roles on the three biggest deals with UK ­elements away from Prudential: the demerger of Cable & Wireless; ­Babcock’s takeover of VT; and JPMorgan’s acquisition of Royal Bank of Scotland’s ­commodities venture, Sempra.
But in a market with so few big-ticket deals around, it seems the raw numbers might not tell the
whole story.
“M&A’s still pretty thin, and in a thin market these things are pretty meaningless,” says Freshfields ­London corporate head Mark ­Rawlinson. “It’s like looking at the Premier League after four games and Hull City are top.”
Levelling the playing field
Rawlinson acknowledges that the ­different types of deals now being done have seen the work distributed in a more even way.

“We can’t argue that there’s more of a spread,” he continues. “I’d worry if there were a lot of big deals and we weren’t involved, but that’s not the case. It’s not the market for crunchy M&A deals – when you start getting north of £1bn you need a lot of banks to be involved and that’s difficult at the moment.”

The fact that deal value and ­volume, taken as a whole, are steady would suggest that the market is more or less in a similar state to 2009, but again that is where the data does not give a complete ­picture.

Commercial debt is still hard to come by, especially compared with the lending maelstrom of 2006-07. This means that the recovery has ­necessarily started lower down the food chain.

A&O London corporate chief Andrew Ballheimer is another who is apparently unconcerned by his firm’s temporary slide down the M&A table.

“There’s probably more [being done] in the mid-market, which isn’t surprising as mid-market transactions are more strategic than ­opportunistic,” he explains. “With the more complex ­transactions there’s still a flight to quality. In terms of the mid-market there are maybe more opportunities for other firms.”

DLA Piper and Travers Smith are two of the firms to have benefited from the levelled playing field, both making the top 20 on the back of ­private equity house Kohlberg Kravis Roberts’ (KKR) acquisition of the Pets at Home business.

It was a deal on which Clifford Chance, traditionally one of KKR’s go-to advisers for buyouts, missed out as the house turned to Simpson Thacher & Bartlett after former ­Clifford Chance partner Adam Signy joined the US firm. Signy’s arrival gave Simpson Thacher an English M&A capability for the first time, meaning KKR, which has a longstanding relationship with Simpson Thacher in the US but had ­previously just used its UK arm for the financing of deals, used the firm for the entire transaction. This helped the US firm move into the top 10.

However, the more substantial recovery of the private equity market as a whole compared with corporate M&A has helped boost Clifford Chance’s standing. It has also ­bolstered several of the US firms that have muscled their way into the list, with Weil Gotshal & Manges leading the way on the UK and global tables.

Clifford Chance corporate chief Matthew Layton admits that the kind of transactions now happening have helped the magic circle firm stage a recovery compared with a poor ­showing in Q1 2009, when activity in its core areas disappeared overnight.

“The first quarter last year saw a lot of government intervention in ­financial institutions,” says Layton. “Now, some private equity is coming back, which is good for Clifford Chance and for the US firms. Some of the larger [UK] firms are not so strong in a particular space.”

Another magic circle corporate partner echoes the sentiment. “The fact that Weil are busy reflects the fact that private equity is busier, and that’s true for a number of US firms. The magic circle firms at the high end of the market are more ­corporate-oriented and that’s also reflected in the stats.”

Locale interest

Private equity’s bounce certainly accounts for Travers’ strong ­performance, but DLA Piper’s UK corporate head Charles Severs believes a more fundamental shift is taking place.

“We have to look at what ­corporates are looking for now,” he argues. “There’s an increasing ­globalisation of work and we have a platform that’s better [for that] than anyone else. There’s no question that we’ve seen more work and we would’ve expected the market as a whole to show a ­similar uptick, but it hasn’t.”

Severs’ emphasis on globalisation suggests that the locale of the work is as important as the type, with UK corporates slowest of all to show signs of recovery and the magic circle’s standing suffering as a result.

“The interesting thing is that US firms seem to be doing much better,” says Weil London managing ­partner Mike Francies. “Whether that’s because of a general trend or not, you’d have to have another look in six months’ time. History tells us that America comes back before the UK and we follow on. Some US banks have started to loan billions again.”

The global tables reflect the trials of the top five UK firms, with each seeing their deal volumes cut in half while their US rivals have, at worst, remained on an even keel.
Linklaters’ outgoing corporate chief David Barnes believes the quicker recovery in the US has skewed the stats.

“The US market usually recovers first and maybe their international elements are done by US firms. The past few months have had a bit more bias towards them.”

Unblocking the pipes

But a global recession suggests a global recovery, and the view from the City is that the deals are starting to come back, even if they do not yet show up in the figures.

“There’s a slow but steady ­improvement,” says Ballheimer. “I’m not that surprised by the drop in ­volume across the market. I think it has plateaued but the pipeline’s ­better than a year ago. If you look at the announced deals and the pipeline together I’d say we’re somewhat busier. I’m not sure that one quarter makes a year and I think people are generally busier across the piece.”

Hebert Smith is another of the firms below the magic circle that has seen its relative stock rise in the latest tables. But incoming corporate head James Palmer does not think the ­figures for the first quarter suggest a move away from the top firms.

“I don’t really think the leading firms are suffering,” he says. “When we look at the pipeline it’s very strong and the big firms are still cleaning up on the big-size deals. The general trend has always been for work to go to the major M&A firms and if you scratch the surface it’s the same now – the true M&A roles still go to the same places.”
Clifford Chance’s Layton is ­equally bullish about the magic circle ­maintaining its hegemony.

“The pipeline’s a lot stronger than it’s been for some time,” he adds, “and the firms we’re seeing on deals are the ones you’d expect.”

So, the relatively poor performances this quarter may just be a ­statistical blip, but corporate departments should not be popping the champagne corks just yet.

“I’m always wary of seeking out false dawns from statistics,” warns Slaughters M&A chief Stephen Cooke. “It feels to me too early to be confidently detecting an upswing.”

It is a cautionary note echoed by Rawlinson at Freshfields. “There’s definitely more in the pipeline,” he says. “Whether it’ll ever see the light of day is hard to say. ­People aren’t feeling very brave at the moment.”


While analysis of the data on first-quarter M&A deals serves as much as anything to support Mark Twain’s well-worn axiom about “lies, damned lies and statistics”, there is something of an elephant in the room when discussing any ­potential economic recovery.

At least the looming general election would be an elephant in the room if it was not for the fact that everyone was talking about it.

What is less apparent is whether the country going to the polls is good or bad news for the fragile market. In terms of announced deals there may be little difference in the run-up to an election, but with the handling of the budget deficit at the heart of the political battle, most clients are pursuing a wait-and-see strategy.

“Normally people are sitting on their hands in the six months up to an election,” says Freshfields Bruckhaus Deringer UK corporate head Mark Rawlinson. “I’m surprised how much there is this time.”

“There’s definite uncertainty over the election,” agrees DLA Piper corporate partner Charles Severs. “The more polls we receive indicating a hung parliament, the longer the uncertainty will continue.”

However, the current weak position of the pound might not last if the markets like what they see on 6 May. For foreign raiders, that means UK deals might be at their most attractive while uncertainty reigns.

One corporate partner says: “If you think the equity markets are strong now then it’s a good time to get your deal underwritten. Why is everyone looking at Arriva? Presumably the bidders take the view that the value [of the pound] will go up.”