Call it a sign of the times. In May the Spanish government announced the results of its beauty contest for legal work on a €35 billion emergency fund designed to reduce regional government debt. Bidders for the work, which involved setting up the legal framework for the banks to disperse the funds to unpaid suppliers, included Spain’s three largest firms –Cuatrecasas, Goncalves Pereira; Garrigues; and Uria Menendez — and at least one Magic Circle firm, Clifford Chance. While it wasn’t surprising that Cuatrecasas, one of the oldest operating law firms in the Iberian market, ended up winning the work, what is shocking is the firm’s suggested fee: €1.
That wasn’t a fluke. Uria Menendez also volunteered to do the work for €1, and Garrigues and Clifford Chance offered reduced fees in an effort to land the prestigious assignment, which could lead to more work from the Spanish government. "Given the economic situation, we felt it was the right thing to do as a service to the government," says Cuatrecasas corporate partner Federico Roig. (Uria declined to comment. Garrigues and Clifford Chance confirmed that they offered a reduced fee, but say that it was a reasonable one.)
The economic crisis in Spain is now in its fifth year and shows little sign of abating soon. The country’s banking system, which accounts for 20 percent of Spain’s $1.49 trillion GDP, is on the brink of insolvency and will require up to a €100 billion ($123 billion) bailout from the European Union. And in order to comply with the E.U.’s conditions for the bailout funds, in July Spanish prime minister Mariano Rajoy proposed an austerity plan that would raise the Value Added Tax (VAT) on goods and services by 3 percent — increasing it to 21 percent — while also cutting unemployment benefits and reducing civil servants’ pay. Although the Spanish government clearly needed to take action to reduce the country’s deficit, the measures could stifle consumer spending and thus deepen the recession.
The prolonged downturn has affected law firms in the Iberian market, particularly those whose client base is primarily comprised of large Spanish companies. Although there’s been an uptick in labor, tax, litigation and insolvency work in Spain and Portugal, financing and mergers and acquisition work has slowed ­dramatically.
At the three biggest Spanish firms, revenues from 2010 to 2011 increased only incrementally. Garrigues, the largest of the triumvirate, posted revenue of €355 million ($495 million) last year, up just 1 percent from 2010. Cuatrecasas’ revenue saw a meager 0.4 percent increase during the same time period, with revenue of €241.7 million ($321 million) in 2010 and €242.6 million ($338 million) in 2011. And Uria Menendez reported a 1.5 percent increase last year, with revenue of €188 million ($262 million).
This year, things are looking even bleaker. Garrigues, the only firm in the region whose fiscal year ends on August 31, expects that its revenue will be down 2 percent to 3 percent for 2012. Global firms that work in the region, such as Freshfields Bruckhaus Deringer, Baker & McKenzie, Clifford Chance, and Jones Day, have been affected as well. While none of these firms disclose revenue figures for Spain, lawyers at the firms nonetheless admit that the crisis has affected their practice in the region.
In order to compensate for the loss of revenues from lucrative practice areas like M&A, firms have had to make critical changes: reducing operating costs, more actively managing their lawyers’ practices, restructuring compensation plans, and — in some cases — reducing their head counts. "We increased our numbers [between 2000 and 2008] because the economy was booming and we thought it would continue," says Garrigues managing partner Fernando Vives. "So now we’ve had to reduce and adapt our workforce."
Although the 10 lawyers interviewed for this article were publicly stoic about Spain’s economic crisis, in private conversations they were clearly worried about the effects of a continued downturn on their firms and their country. Nearly all expressed hope that the economy had bottomed out and would begin to turn around this fall. "We are facing the crisis more optimistically now, but not naively so," says Freshfields’ managing partner for Spain, Inaki Gabilondo.
From the late 1990s until 2007, Spain had the fastest-growing economy in the European Union. The country experienced a decade­long real estate boom; at its peak in 2007, construction accounted for 16 percent of the GDP. The thriving real estate market, coupled with a high volume of leveraged buyout and M&A deals, attracted U.S. and U.K. law firms to the region, and spurred the growth of domestic firms within Spain and abroad. Spanish M&A activity more than doubled from 2003 to 2007, and the value of the deals peaked at $194 billion in 2007. But then came the downturn, fueled by the collapse of the real estate market in 2008, which in turn resulted in the crash of the cajas, the small Spanish savings banks that were heavy on home mortgages and have little access to capital since they aren’t publicly traded.
The majority of the 45 cajas were forced to merge — there are now just 14 — and this helped generate enough work for big firms in Spain to weather the recession. But that work is drying up, and over the past five years M&A activity has declined steeply. "It’s not a good time for corporate transactions. There aren’t any takeovers or acquisitions," says Jose Maria Alonso, the head of Baker & Mc­Kenzie’s dispute resolution team in Madrid and the former managing partner at Garrigues. Alonso cites two large deals that have been put on hold because of the crisis: the privatization of Spanish airport operator Aeropuertos Espanoles y Navegacion Aerea (AENA), and the initial public offering of lottery operator Loterias y Apuestas del Estado (LAE), which would have been the largest IPO in Spanish history.
At Garrigues, revenues from its corporate transaction practices, which include M&A, finance, and corporate law, are down 5 percent this year compared to 2011, according to Vives. "It’s difficult to close deals. Financing is a problem," he says.
Lawyers at Uria Menendez, the third-largest of the Spanish trio, are having the same difficulties getting deals done. While the firm is currently representing Caixabank S.A. in its €980 million ($1.3 billion) acquisition of Banca Civica S.A., managing partner Luis de Carlos says that pending the E.U. bailout, the government has postponed two bank acquisitions the firm is working on. (The banks in question are Catalunya Caixa and Banco Valencia, but de Carlos declined to name the potential buyers.)
The deals that are getting done tend to be much smaller than before. Before the recession, deals like the €4 billion ($4.95 billion) merger of construction and real estate companies Fadesa Inmobiliaria and Martinsa in 2007 were common. Contrast that with two recent deals that lawyers say are more typical of today’s market: In June, Gomez-Acebo & Pombo represented Oman Oil Company S.A.O.C. in its €205 million ($256 million) acquisition of a 15 percent stake in Redes Energeticas Nacionais, the electricity and natural gas transmission networks owned by the Portuguese government. In mid-July, Greentech Energy Systems A/S, represented by Cuatrecasas, got the approval from Spain’s stock market regulator for a €56 million ($69 million) hostile takeover bid of Fersa Energias Renovables SA. One of the few larger deals that closed this year was the €400 million ($500 million) acquisition of Groupama Seguros by Catalana Occidente and Inocsa. (Cuatrecasas appeared for Catalana, Garrigues for Groupama, and Freshfields for the lender, Caixabank.)
Compounding the deal woes is a slowdown in outbound work. Deals such as the €2.4 billion ($2.96 billion) acquisition of Scottish Power by Spanish energy giant Iberdrola S.A. in 2006 and the €10.4 billion ($12.86 billion) takeover of British airport operator BAA plc by Spanish construction giant Ferrovial S.A. the same year are now few and far between. "Companies aren’t doing as many acquisitions outside of the country. And when it does happen, the process is much longer and the deals are much smaller," says Freshfields’ Gabilondo. Cross-border investment into Spain has come to a screeching halt. "Foreign investments have slowed way down. But it’s not just a Spanish problem, it’s also a Eurozone problem. We’ve had transactions that have been almost completed and were then suspended," adds Gabilondo.
According to Mergermarket, M&A activity in Spain from June 2011 to June 2012 dropped 47 percent in deal volume and an alarming 91 percent in deal value (from 135 deals worth €34.11 billion in YTD 2011 to 72 deals worth €2.98 billion in YTD 2012). But the loss of revenue from M&A work is only one of the factors putting the squeeze on firms’ finances. Much like their U.S. counterparts, firms in the Iberian market are under pressure from clients to lower their fees. "Clients are increasingly asking for a closed budget [a flat fee]," says Cuatrecasas’ Roig. "It’s a buyer’s market now." While firms are reluctant to reveal exactly how much of a haircut they’re taking, Roig says that in general, Cuatrecasas’ clients are getting a 10 percent to 30 percent discount, depending on the type of work. The managing partners at Garrigues and Uria Menendez say that clients have also been negotiating lower fees. "We have to adapt to the client and the circumstances," says Uria’s de Carlos.
For their part, the international firms are holding their ground on fees. "We are very clear that we need to stand still. We need to keep the fees at the maximum level. But we will lose, and have lost out, on some deals," says Freshfields’ Gabilondo. Baker & McKenzie’s Alonso says that his firm takes the same stance. "Clients discuss their fees, but they have to accept that you won’t reduce your price," he says. Regardless of whether or not firms are discounting their work, all of the lawyers say that getting paid on time is a rare event. "We are facing more delays in payment," says Alonso. "But you just have to accept that. You can’t abandon your clients in bad times."
The slowdown in work, coupled with lower fees and delays in payments, has forced firm managers to make some significant changes. Many firms have frozen attorney salaries and slashed bonuses. Most firms have a freeze on hiring, and the lateral market is essentially nonexistent. When partners leave, it’s unlikely that they’ll be replaced. And if the spot is filled, it is usually by an asso­ciate. "We lost [lawyers] through attrition, but we are replacing some senior lawyers with junior ones," says Ignacio Ojanguren, Clifford Chance’s managing partner in Spain. The firm had 170 lawyers in Madrid in 2007, and today it has 155. Freshfields’ ranks in Spain have dropped from 107 partners and associates to 85 over the same period of time.
The domestic firms, which have much larger teams and are more reliant on the Iberian market, have taken even more drastic action than their international competitors to curb costs. This year, Cuatrecasas moved to an all-equity partnership model, which can put pressure on underperforming lawyers to bring in new work, and Gomez-Acebo shed 10 percent of its 330 attorneys. During the last two years, Garrigues has reduced its attorney roster by 10 percent (down from 1,900 lawyers to 1,700), and last year it moved to an all-equity partner structure and raised its retirement age from 56 to 60 to reduce retirement-related costs. The firm closed its Bucharest office at the beginning of the year and is closing two of its 27 offices in Spain by the end of the year.
The dismal Spanish economy is also pushing firms to look abroad to healthier markets. Garrigues is contemplating the launch of offices in Peru, Argentina, Colombia and Chile, where it currently has alliances with local firms. "We are happy with this arrangement, but in the future we might merge with them or open our own offices in these cities within the next year," says Vives. In November, Gomez-Acebo will open its first U.S. office in New York, aiming to service U.S. clients that have a strong presence in Spain. "We simply decided that this was the right time to do this," says Gomez-Acebo managing partner Manuel Martin.
Amid the gloom in Spain, there are some bright spots for law firms. Litigation is the busiest sector in the market, in large part because of the economic downturn. "Financial litigation has expanded substantially," says Uria’s de Carlos. "The amount of nonperforming loans to banks has increased, so banks are trying to recover their money." Conversely, clients are suing banks for not properly disclosing the risks of the products they sold. "There’s been a lot of claims launched by consumers over preferred shares, derivatives and other high-risk products," says Freshfields’ Gabilondo.
And in some instances, the government is suing bank officials for mishandling or misappropriating funds. In July the CEO of Caja de Ahorros del Mediterraneo (CAM Bank), Maria Delores Amoros, and other bank executives were accused of concealing the bank’s weak financial condition when it was the target of a takeover by the Bank of Spain. (Gomez-Acebo represented the former CEO in the government’s ongoing investigation.)
As in the United States, IP litigation is growing in Spain. Clifford Chance’s Ojanguren says that during the past year his firm represented Pfizer Inc. in litigation over generic versions of Viagra, Samsung Group in its smartphone patent dispute with Apple Inc., and Oracle Corp. on antitrust complaints brought by the European Union. Clifford Chance also represents Pfizer in the Viagra generics patent infringement cases, as well as Nestle S.A. in its patent, trademark and unfair competition suit against Sara Lee Southern Europe S.L. for selling coffee capsules that are compatible with Nestle’s Nes­presso machines.
Not surprisingly, insolvency work remains strong. Gomez-Acebo is closing the largest bankruptcy case in the history of the Spanish courts: Real estate company and property developer Martinsa-Fadesa S.A. and six subsidiaries filed for bankruptcy in 2008 after the housing market collapsed and the company failed to obtain a €150 million ($185 million) loan. Garrigues is currently representing a number of lenders, including La Caixa, Spain’s third-largest bank, in the bankruptcy proceedings over toll operator Autopista Madrid-Toledo, which filed for bankruptcy in May with €523 million ($646 million) in liabilities.
Refinancing work is also keeping Spanish lawyers busy. In January, Clifford Chance represented a consortium of banks in a €4.9 billion ($6.3 billion) refinancing involving a 10 percent stake in Repsol S.A. that the oil company purchased from an indebted shareholder. The firm also represented Grupo ACS, a global construction company, in its €1.9 billion ($2.5 billion) sale of shares in 20 wind farms and several thermosolar plants to different buyers. In April, Cuatrecasas represented NH Hoteles S.A. in refinancing nearly €1 billion ($1.3 billion) of debt with Banco Bilbao Vizcaya Argentaria S.A.
Labor and employment work has increased, driven by layoffs and legislative changes, including reforms made to collective bargaining. Under the new rules, companies will have more input on contract duration and employee dispute resolutions when there is a labor dispute. "This is the best year for labor in the history of the firm," says Vives.
Firms are also getting more tax-related work, thanks to a tax amnesty law enacted in April that allows individual and corporate taxpayers to voluntarily disclose unreported income or assets and pay a 10 percent levy on undeclared assets until November 30, 2012, without incurring criminal or administrative penalties, surcharges or interest. "It’s a piece of work we didn’t expect, but it’s generating business for every tax department," says Martin.
And the banking crisis is still creating work. According to Freshfields’ Gabilondo, nonperforming loans are being repackaged and sold to distressed debt investors, and the consolidation among banks is still ongoing. "I think the mergers [among the cajas] will continue, and expect that within one or two years, there will be less than 10 left," he says.
While the new bank work won’t make up for the loss of revenues from M&A and financing work, which can account for up to 35 percent of revenue at firms such as Cuatrecasas, it can buffer some of the sting. "Litigation, insolvency and restructuring are growing areas. But they aren’t as profitable as corporate M&A because of the size of [M&A] deals," says Baker & McKenzie’s Alonso.
So when is it going to get better? All of the attorneys interviewed point to one factor that will drive the upturn: when investor uncertainty lifts. "Most foreign investors are stepping back and waiting for the uncertainty to pass. And once it does, there will be good bargains for investors," says Freshfields’ Gabilondo.
Companies and commercial properties are currently undervalued, say Gabilondo and Alonso, so attorneys expect to start seeing more acquisitions by foreign investors. Some attorneys predict that some government-owned infrastructure, such as energy networks, will go on the market to help Spain clear up its debt. Gabilondo also expects to see more straightforward asset disposals similar to the 2011 takeover of Spanish doughnut maker Grupo Panrico by U.S.-based distressed investment fund Oaktree Capital Management. (Oaktree paid $185 million for a 50 percent stake, and the outstanding loans were restructured.) "We are monitoring three or four of these types of situations, and I think there will be more," says Gabilondo.
In the meantime, attorneys in Spain are trying to maintain a business-as-usual demeanor. "We are just spectators. The government must solve the economic crisis," says Uria’s de Carlos.