The Leader Column

When US firm Cravath Swaine & Moore billed Time Warner $35m for advising on its merger with AOL earlier this year, the envy over here was palpable. City firms might have balked at the risky contingency element that was part of that bill, but at the same time, many are increasingly chafing at time-based billing.

But how to make that premium? M&A deals have always generated the most cash. At the moment, the really big swinging corporate partners are regularly putting in bills of 200 per cent of actual time cost. Acquisition financing, on the other hand, is paltry in comparison. Take Vodafone. Linklaters & Alliance’s bill for advising Vodafone on the hostile bid for Mannesmann last year was £6.5m. Allen & Overy advised the banks on the jumbo financing of the deal – which, at the time, was the biggest ever syndicated loan, at euro30bn – and pulled in some £300,000.

Most syndicated loans range from £15,000 to £250,000 a pop, depending on complexity. It’s hardly premium billing. In fact, the only debt finance mega-fee in recent times was Clifford Chance‘s £3m bill for Olivetti, a figure which caused much gnashing of teeth in New Change.

Hence Allen & Overy’s idea of value-based billing – that is, a percentage of the actual value of the deal, like the investment banks themselves. According to two sources, Allen & Overy has pulled this off only once – on the financing of Elf’s Pacman defensive bid for Totalfina last year. In that deal sources say Allen & Overy agreed a fee structure that had a “very strong” element of percentage billing. But since then, its controversial initiative seems to have run aground. As an investment banker says: “Value-based billing? It’s a non-starter. Lawyers are taking a very different risk from us.”

Here’s the irony. In many ways, debt finance is still regarded as a commodity product, yet law firms are increasingly important to the very marketing of acquisition finance. Several investment bankers openly acknowledge that Allen & Overy and Clifford Chance’s names on the front of a document inevitably make it easier to syndicate. But it looks like Allen & Overy and Clifford Chance still have a long way to go to persuade clients that their brands are worth premium billing. Allen & Overy’s attempt may be doomed, but it was worth a try.