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The deal economy might be said to have suffered an embarrassment of riches last year. Except that no one seemed embarrassed. Corporate America was delighted to throw around pots of cash and equity during 2005, continuing a mergers and acquisitions spree that began the year before. The value of M&A deals increased by some 32%, according to Thomson Financial. If that didn’t quite match the 47% boost in activity in 2004, it pushed the value of announced deals involving U.S. targets past $1.1 trillion, so no one was complaining. “The private equity market has probably never been more flush,” said Robert E. Spatt, a corporate partner at Simpson Thacher & Bartlett’s home office in New York. That expressed the mood across the board. The last time U.S. M&A activity exceeded $1 trillion was in 2000, when it hit $1.6 trillion. Cadwalader, Wickersham & Taft partner Dennis Block presided over a discussion with top bankers during a recent conference in New York and reported: “All of them believe 2005 was a terrific year and 2006 ought to be even better.” Block was one of the attorneys on the year’s biggest deal: He represented Procter & Gamble Co. in reaching an agreement to buy Gillette Co. for $57.2 billion. Spatt worked on that same deal, representing Gillette’s financial advisers. Spatt also advised financier Goldman Sachs & Co. in ConocoPhillips’s $36.5 billion acquisition of Burlington Resources Inc., an oil and gas holding company based in Houston, the year’s second-biggest deal. In fact, Spatt’s firm had a hand in three of the top 10 mergers and acquisitions in 2005, according to Thomson Financial. Simpson Thacher worked on 116 deals in all, worth $308.8 billion, making it the top M&A legal adviser of the year. Second-place finisher Wachtell, Lipton, Rosen & Katz of New York advised on 64 deals (including five of the top 10) worth $258.9 billion. [See chart, Page S11.] Simpson Thacher got a piece of the year’s biggest private equity deal, too: The leveraged buyout (LBO) by a consortium of private equity firms of SunGard Data Systems Inc., a Wayne, Pa., financial software developer, for nearly $11 billion. That was the biggest LBO since Kohlberg Kravis Roberts’ legendary acquisition of RJR Nabisco in 1988 (which, by the way, was another of Spatt’s deals; he represented the buyer). Seven of the 10 largest LBOs ever were announced last year, according to an analysis by Citigroup Inc. “Historically, as private equity firms spend the money in their funds doing deals, they go out and raise new funds. You can perceive the health of the market in how much money they can raise,” Spatt said. “It is striking that some blue chip private equity firms have recently raised or are out raising funds that are either around or in excess of $10 billion. The result could be a very powerful driver of M&A activity.” Last year saw a big rise in “clubs” or consortiums doing deals, he continued. This is not a new phenomenon, “but we’re seeing it with larger groups and bigger and bigger deals. Of course, there is some speculation that as the size of the LBO funds increases, we may see fewer consortiums, since the bigger the individual LBO funds, the bigger deals each one can do on its own.” Interest rates seem to be inching up, Spatt said, “but unless the increase is major it should be able to be absorbed and/or reflected in the price of the deal.” Finance experts report that there isn’t much refinancing of old deals going on to soak up the available capital, he said. “Most of the firms that needed to do refinancing have already done them in prior years. That means those financing dollars will be available for new deals.” Peter Lyons, co-chairman of the M&A practice at Shearman & Sterling in New York, pointed to “enormous liquidity in the debt markets right now” as a spur to dealmaking. “The bankers have plenty of money, there’s a lot of hedge funds investing in bank debt, and with interest rates still relatively low and companies performing well, there’s just a lot of money available,” he said. Companies find deals the fastest avenue for growth, he said. Many already have realized all the savings available from downsizing and outsourcing. “At some point you’ve cut all the fat. You’re down to muscle and bone. You’ve got to do something else to drive growth.” Shearman ranked third among law firms in the value of its M&A transactions last year, at $247.3 billion. It represented Boston Scientific Corp. in Boston’s pursuit of medical device maker Guidant Corp., and worked on the target-company side in AT&T Corp.’s acquisition by SBC Communications Inc. for $21.6 billion and Unocal Corp.’s $18 billion acquisition by Chevron Corp., to name a few. The energy and power sector was the most active, accounting for deals worth more than $170 billion, according to Thomson Financial. Financial institutions were the second most prominent sector, with deals near $153 billion. They included Bank of America Corp.’s acquisition of MBNA Corp. for $35.8 billion. Media and entertainment accounted for $133.7 billion in deals; health care for $116.4 billion; high technology for $93.5 billion; telecommunications for $88.5 billion; and consumer products and services for $88.2 billion. The biggest initial public offering of the year was for the Huntsman Corp., a global chemical company based in Salt Lake City that raised nearly $1.6 billion. Vinson & Elkins of Houston did the legal work. Other prominent initial public offerings included separate $900 million offerings for PanAmSat Holding Corp. of Wilton, Conn., one of the world’s largest communications satellite owners; and KKR Financial Corp., the Kohlberg Kravis Roberts real estate investment trust. Simpson Thacher worked on both those deals, in the latter case with attorneys from Washington-based Venable and Richmond, Va.-based Hunton & Williams. A number of top transactions attorneys credited the Sarbanes-Oxley Act for introducing a transparency into corporate accounting that inspires trust. “People are more confident they’re going to succeed with an acquisition,” Block said. “The Street has been more happy with the rationale being advanced about why one plus one makes three.” Transactions attorneys stressed the importance of confidence in building the climate for dealmaking-confidence in the overall economy, but also in a company’s leadership, in its books and in its core business. The trend is for companies to tighten their focus to their core competencies. “People just branching out into whole new fields to become a conglomerate is out of vogue. In fact, there are a number of conglomerate breakups going on,” Spatt said. “The deals you see when you go down the list seem for the most part in core or very related product lines. These are companies strengthening their competitive positions.” “Everything has become a commodity. You have to compete in a world market. Everybody’s being squeezed,” Block said. Manufacturers and customers alike have to tighten their focus to broaden their appeal, he continued. A firm selling one product to Wal-Mart is in a weaker bargaining position than a firm selling two. “It’s critical mass-how do you become more important to the people you’re competing to service?” he said. “If you can provide more products in one place, that makes you more important.” A major theme was shareholder willingness to rattle the cages. In hostile takeover situations, shareholders-hedge funds especially-aren’t shy about pressuring target boards. “They want management to make them money,” Lyons said. “All of this makes it more likely to do contested deals.” Block represented Washington Redskins owner Daniel Snyder in his hostile takeover bid against Six Flags Inc. late last year. Feeling Snyder could do more for them, some 60% of the target stockholders sided with him against the leadership then in place, he said, adding: “We removed the leaders on the board.” What all this means for law firms is the same kind of wealth, growth and convergence being visited upon the corporations themselves. “The corporate firms that are most successful-beginning on the West Coast-are increasing entry-level salaries for associates,” said law business analyst Joel Henning of Hildebrandt International. “That’s a sure sign they are desperate for bodies, because the size of law school graduating classes has remained stable while the need for lawyers has increased.” Henning sees opportunities in high tech and communications, as “cash-rich companies” like Google Inc. move into content. “We obviously are going to see more in the entertainment field and sort of the convergence of entertainment and delivery,” he said, citing The Walt Disney Co.’s recently announced $7.4 billion purchase of Pixar Animation Studios. Struggling automakers Ford Motor Co. and General Motors Corp. “may find themselves attractive to foreign auto companies.” Spatt cautioned that M&A depends not just on financial conditions, but also on the confidence levels felt by the CEOs and boards who decide to do the deals. “So instead tell me that the nation is at war, that people are afraid to go out, that terrorism has people staying at home in a big way; tell me about wild swings in oil and gas prices-all these things that create uncertainty-that’s bad for the M&A market, too,” he said. But for now, “I’m busy!” Lyons joked. “It means we are certainly going to look to allocate more resources to M&A.”

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