With each billion-dollar indignity, Western business grows more irrelevant. First, an obscure emerging market company outbid a U.S. private equity house for a sexy American brand, when a group led by Fila Korea Ltd. beat out Blackstone L.P. for Titleist golf gear in spring 2011. A few months later, an obscure emerging market bank outbid leading U.S. insurers for a coveted emerging market business, when Colombia’s Grupo de Inversiones Suramericana S.A. bought the Latin American pension assets of ING Groep N.V. But at least in those deals, America Inc. was in the game. The final insult came early this year, when China’s Jinchuan Group Ltd. beat out Brazil’s Vale S.A. for the South African miner Metorex Limited—and an emerging market company outbid an emerging market company for emerging market assets. Western multinationals could not have been more thoroughly sidelined.
But what about the Western legal industry? As more merger deals bypass New York and London, are U.S. and U.K. law firms still getting a piece of the action? A study commissioned from mergermarket by The American Lawyer says that the answer is emphatically yes, and suggests which firms are best positioned for the global economy of the future.
THINK GLOBALLY, ACT LOCALLY
Firms handling the biggest deals in 10 emerging markets.
At our request, mergermarket tallied all announced M&A deals of at least $50 million that involved an emerging market company as the principal acquiror, target, and/or seller during the two years ending June 30. All told, the data encompassed 950 deals worth $518 billion, involving the most active markets in Asia (China, India, Indonesia, Malaysia, the Philippines, South Korea, Taiwan, and Thailand), Latin America (Brazil, Chile, Colombia, Mexico, and Peru), the Middle East (Egypt, Morocco, and Turkey), Eastern Europe (Czech Republic, Hungary, Poland, and Russia), and Africa (South Africa).
Legal work from these countries is increasingly driven by clients from these countries, the mergermarket data shows. “Over the last three to five years, there’s been a very significant shift in focus from multinationals investing in emerging markets to clients in those economies looking to spread out of their home market,” says Paul McNicholl of Linklaters, whose firm racked up the most emerging market deals by volume in our survey. Ten years ago, $100 million was considered a big outbound deal. Now (in a deal still pending) China’s CNOOC Ltd. is bidding $15 billion for Canada’s Nexen Inc.
Indeed, outbound emerging market M&A is fast approaching the level of inbound activity. Over the two years studied, outbound deals represented $240 billion in deal value, or 45 percent of the total for developing market cross-border deals.
To nobody’s surprise, the biggest transactions were dominated by China (accounting for 41 percent of the $83 billion outbound deals) and the natural resources sector (accounting for 45 percent). Brazil was the most popular investment target, attracting nine of the $57 billion inbound deals, and seven of those deals originated in other emerging nations. Thus, the prototypical emerging market transaction of the past two years was an energy investment from China into Brazil. Two perfect examples were the acquisitions by China’s Sinopec Group of a 40 percent stake in Repsol YPF SA’s Brazilian unit for $7.2 billion in late 2010, and 30 percent of Galp Energia SGPS SA’s Brazilian unit for $4.8 billion early this year.
Which law firms are getting these trendy billings? London’s Magic Circle nabbed four of the top five spots in mergermarket’s global emerging markets league table: Linklaters and Freshfields Bruckhaus Deringer were followed by Skadden, Arps, Slate, Meagher & Flom, Clifford Chance, and Allen & Overy. But the rest of the top 10 were American, and all six of the other international firms in the top 25 belong to The Am Law 100. A neutral judge might say that the United Kingdom won four gold medals, while the United States nabbed one gold, five silver, and six bronze.
On a market-by-market basis, U.S. law firms outperformed U.K. firms and emerging market firms in the top 10 league tables for China and the Spanish-speaking countries of Latin America. Local firms like Pinheiro Neto, AZB & Partners, Lee & Ko, and Werksmans lead in Brazil, India, Korea, and South Africa. Elsewhere, no nationality clearly dominates. In Russia and Eastern Europe, domestic firms are completely absent from the top 10 lists.
Three firms each scored a distinctive trifecta in the so-called BRIC nations: Brazil, Russia, India, and China. Linklaters appears in the top 10 in Russia, India, and China; Skadden in Brazil, Russia, and China; and Vinson & Elkins in Brazil, India, and China. Baker & McKenzie and Linklaters both rated a top 10 showing in China, India, and Southeast Asia. Skadden, Freshfields, and Allen & Overy grace at least half of the 10 regional league tables in the study. Linklaters appears everywhere except in Latin America.
Global M&A practice leaders agree that the key is to establish a long-term presence in each region. “It’s really been a 25-year-or-so effort to invest in becoming a global firm,” says Skadden’s Paul Schnell, an international M&A partner based in New York.
All firms mix and match expertise for each deal—and the biggest firms have more to mix and match. When Linklaters helped Korean Electric Power Corp. (KEPCO) buy the world’s second-largest uranium mine, in Niger, in 2010, it assembled Korean speakers from Hong Kong, lawyers expert in Francophone law from Paris, and lawyers knowledgable about the uranium sector from London. Freshfields—a close second in the global league table—stresses its world-class supporting capabilities when it pitches for emerging market M&A work. Expertise in tax, antitrust, arbitration, and corruption law can mitigate the risks for companies doing business on the frontier. “We don’t see emerging markets as purely an M&A battleground,” says Freshfields’s Julian Pritchard, a cross-border M&A partner based in New York.
Magic Circle firms argue that their lockstep compensation systems make it easier to spread their talent around the globe, because senior partners are less reluctant to leave Western capitals, and risk losing their client relationships there. U.S. firms reply that they have never found their partners reluctant to relocate. But it’s a fact that the percentage of partners outside their home country at a typical big U.S. firm is less than half the proportion found at the most global London firms ["Empire Builders," October 2011].
Latham & Watkins fields a smaller overseas army than the Magic Circle firms do, but that didn’t keep it from top 10 showings in Korea, Russia, and India. Practice leaders credit the wonders of cross-selling. Latham’s project finance work for Korean players like KEPCO earned it their allegiance when they went shopping for acquisitions abroad. A knack for capital markets attracted clients such as India’s Vedanta Resources plc mining group, which Latham advised last year on the purchase of a controlling stake of Cairn India Ltd. for $9.2 billion.
Houston-based Vinson & Elkins lacks the heft of either the Magic Circle or its closest U.S. counterparts—yet it tops the China chart. With 13 energy deal partners in Asia, Vinson has worked for all five major Chinese state-owned enterprises in the energy sector, starting with Sinopec, which bought Canadian shale explorer Daylight Energy Ltd. last year for $2.8 billion. Since Vinson opened in Beijing in 1997, the firm’s China practice has swung from 90 percent inbound work, mostly for independent oil companies, to 70 percent outbound work for Chinese clients. Chinese energy investments in Brazil have helped the firm to score high on the Brazilian charts as well. “Energy is the common denominator,” says V&E’s Hong Kong–based Jay Cuclis. “China and India need it, and Russia and Brazil have it.”
What other trends do the leading emerging market M&A groups see? In addition to gobbling up natural resources everywhere, Asian companies are busy buying iconic brands in the West. Think of Fila Korea buying the Titleist golf ball business, and Bright Food Group Co. buying Wheatabix Ltd. this May.
Meanwhile, with scores of Chinese reverse mergers in the United States tarred by fraud allegations, more than 30 Chinese companies listed in the U.S. have announced going-private transactions in the past 18 months, including Harbin Electric Inc. last year and Focus Media Holding Ltd. in August. Skadden’s senior M&A partner in Greater China, Michael Gisser, says that his group, which was retained by Focus Media’s CEO and Harbin Electric’s management sponsors, has more than a dozen such deals in the pipeline.
Africa is seeing deals that go beyond natural resources. Africa specialist Andrew Jones of Linklaters in London perceives a second wave of legal work to bring consumer goods and retail and financial services to the inchoate middle class, kicked off by the $5.5 billion investment by Industrial and Commercial Bank of China in South Africa’s Standard Bank Group in 2007. Linklaters, which is among the leaders in the region, said in August that it was working on an astounding 200 African deals involving 29 countries.
Within Latin America, observers note the creation of regional champions. “While U.S. and European investors keep busy with their own problems,” says Michael McGuinness of Shearman & Sterling, “we’re seeing the emergence of a new class of Latin American company capable of investing across the region.” Case in point: Colombia’s Grupo Sura, which beat out MetLife Inc. and Prudential Financial Inc. to buy the pension assets of ING Groep N.V. in five Latin American countries for close to $4 billion. McGuinness, who represented Grupo Sura, is already working on two copycat transactions, aiming to assemble pan-Latin groups in different industries.
Brazil in particular has seen an explosion of private equity in the last three to five years, according to Skadden’s Schnell. Now Schnell foresees the emergence of hostile M&A in Brazil, as the recent wave of initial public offerings has created a new set of companies that are vulnerable to attack because they lack a controlling shareholder.
Of course, no guru knows who will sell the next Wheatabix to China, or cater to the African middle class. No poll can predict which law firm will create the next Latin champion, or launch Brazil’s first hostile takeover. All that can be said with confidence is that the firms in mergermarket’s study will be competing for the work—and that the beauty contests won’t all be in London or New York.