Take the ongoing debt crisis in Europe, add slowing growth in China, toss in the uncertainty of a presidential election in the United States, and finish it off with Congress tiptoeing to the edge of the fiscal cliff.
Doesn’t sound like much of recipe for a solid year in dealmaking, does it?
Given all the things stacked against the global economy in 2012, it might come as a surprise that the value of corporate transactions was up in both mergers and acquisitions and capital markets work. According to Thomson Reuters, the value of worldwide mergers and acquisitions in 2012 crept up 2 percent over the prior year, to $2.6 trillion; equity capital markets activity was up 1.5 percent, to $630.4 billion; and overall global debt capital markets dealmaking was up 10 percent, to $5.6 trillion, the highest mark since 2009.
What did this rise in work, coming after a long slumber, mean for transactional lawyers? The American Lawyer spoke with practitioners at a dozen firms to talk about the deal environment in 2012 and their early thoughts on 2013. Here’s what they had to say:
The Spin on M&A: Breakups. It was hardly a return to boom times in the M&A world last year, but with corporate boards and CEOs pressed to find value for shareholders in a slow-growth environment, there was a dramatic increase in the value of spin-off transactions. The worldwide value of spin-offs and divestitures in 2012 was about $1.2 trillion, or 47 percent of overall M&A activity. That percentage was the highest since Thomson Reuters began tracking that data in 1980.
Three of Mergermarket’s 10 largest deals announced in 2012 were spin-offs (or "de-mergers," as the London-based data provider refers to them). Among them were Abbott Laboratories’s spin-off of its AbbVie unit in a deal valued at $54.4 billion [ Dealmakers of the Year 2013: "The Spinmeister"]. That deal involved a complete capital restructuring for the split companies, including a $7.7 billion tender offer and a $14.7 billion AbbVie debt offering. Its bond offering was the largest dollar-denominated investment-grade debt offering in history, according to Thomson Reuters. Rounding out the list of top spin-offs were Mondelez International Inc.’s $26.3 billion spin-off of Kraft Foods Group Inc., and ConocoPhillips Company’s $20.8 billion spin-off of Phillips 66 Company.
Among the year’s notable divestitures, meanwhile, was a series of asset sales by ING Groep N.V. handled by Sullivan & Cromwell partners Mark Menting and William Torchiana [Dealmakers of the Year 2013: "The Sum of Its Parts,"]. The sales helped the Dutch financial services giant repay the Netherlands for aid it received during the financial crisis in 2008 and 2009. The deals included the sale of ING Direct online bank operations in the U.S. to Capital One Financial Corporation for $9 billion, the sale of ING Direct Canada to The Bank of Nova Scotia for $3.1 billion, and the sale of ING’s Latin American pensions, life insurance, and investment management businesses to Colombian bank Grupo de Inversiones Suramericana S.A. for $3.8 billion.
Divestitures and spin-offs may be less likely to make the front page of The Wall Street Journal than an unexpected, transformational acquisition, such as Facebook Inc.’s purchase of Instagram [Dealmakers of the Year 2013: "Circuit Breaker"] or a hotly contested auction, such as Dollar Thrifty Automotive Group’s [Dealmakers of the Year 2013: "Behind the Wheel"]. But spin-offs, in particular, can create plenty of work for transactional attorneys. "The sweet spot for the top New York M&A firms is either big public deals or complicated deals—and spin-offs are complicated," says Debevoise & Plimpton’s Jeffrey Rosen, a Dealmaker of the Year in 2004, 2007, and 2009. Eileen Nugent, the global cohead of Skadden, Arps, Slate, Meagher & Flom’s transactions practices, says that spin-offs amount to "a combination of a complicated asset or divisional sale deal and an IPO—a full exercise in corporate law."
Divisions being spun off often have grown naturally inside a company, complicating the separation. "There are all kinds of important pieces organically marbled through the organization," says R. Newcomb Stillwell, strategic development partner at Ropes & Gray. Figuring out how to disentangle divisions and formalize relationships between divorcing units is just the sort of complicated legal puzzle that top M&A lawyers are paid to solve.
Capital Markets: Finding Gold in Junk. Five years after becoming a household name in the global economic crisis [Dealmakers of the Year: "Change of Identity," April 2011], American International Group Inc. still loomed large in the global equity capital markets. Five of the top 10 equity deals in the U.S. last year were AIG stock sales by the federal government.
Although the U.S. was home to the largest initial public offering of 2012­—Facebook’s troubled $16 billion IPO­—only two other pure-play U.S. offerings made data provider Dealogic’s list of the top 10 global IPOs (as ranked by U.S. proceeds) last year: Realogy Holding and LinnCo. (A $4.1 billion U.S.–Mexico dual listing, of Grupo Financiero Santander Mexico SAB de CV, the Mexican unit of Spain’s Banco Santander SA, did make the list, at number three [Dealmakers of the Year 2013: "A Fistful of Pesos"]. The Grupo Financiero IPO was the largest ever by a Mexican issuer and made Grupo Financiero the only Mexican bank registered with the Securities and Exchange Commission.)
The real action in capital markets was in high-yield debt—"junk bonds." The total value of corporate high-yield debt offerings reached $389 billion, a 38 percent increase from 2011, and a sum that made 2012 the strongest year for high-yield debt markets since Thomson Reuters began keeping records in 1980. The Federal Reserve’s historically low interest rates brought corporate borrowers to the market, says Latham & Watkins capital markets partner Kirk Davenport II. "Free money from the government drove everything," he says. "Interest rates continued to come down, which meant that refinancings were cheap and plentiful. The low interest rates are effectively sugaring the economy, and we felt the effects of that in almost everything we do."
Given the boom in high-yield debt, it’s a bit surprising that private equity firms weren’t a bigger player in 2012. According to Thomson Reuters, buy-side private equity accounted for 12 percent of worldwide M&A during 2012 and was flat compared to 2011 levels.
What kept private equity buyers away? For one thing, the strong performance of the stock market left few public company bargains up for grabs. For another, says Ropes & Gray’s Stillwell, uncertainty surrounding the fiscal cliff negotiations left many private equity firms unwilling to take a risk. "No one wanted to be the guy who signed a deal right before Congress threw us back into recession," he says.
One of the more interesting private equity deals of the year saw an unusual combination of private equity firms and a publicly traded company team up as buyers in a club deal. Blum Capital Partners and Golden Gate Capital joined with publicly held Wolverine World Wide Inc. in a $2 billion buyout of Collective Brands, the parent company of shoe retailer Payless ShoeSource and owner of such product lines as Keds, Saucony, and Sperry Top-Sider [Dealmakers of the Year 2013: "A Foot in the Door"].
The low cost of debt also drove the real estate investment trust (REIT) market, says REITs practitioner J. Warren Gorrell Jr., the co–CEO of Hogan Lovells. "We were doing debt deal after debt deal in this industry," Gorrell says. There was also a relatively healthy market for M&A in the REIT industry. That was demonstrated by Sam Zell’s Equity Residential partnering with fellow REIT AvalonBay Communities Inc. in a joint $16 billion acquisition of apartment operator Archstone Residential from Lehman Brothers Holdings Inc.­—one of the 10 largest M&A deals in the U.S. last year [Dealmakers of the Year 2013: "The Taxman Cometh"]. Leh­man Brothers had acquired Archstone in an expensive 2007 takeover that played a part in the bank’s collapse; proceeds from the Archstone sale were pegged to help pay back the failed bank’s creditors.
Real estate’s nascent comeback was also on display in the $1.2 billion IPO of Realogy, the operator of Century 21 and other real estate companies. Leon Black’s Apollo Global Management had bought the companies for $7 billion in the spring of 2007, near the top of the real estate bubble. Stacy Kanter of Skadden, Arps, Slate, Meagher & Flom worked on extending the maturity of the company’s debt through a series of transactions in the run-up to the IPO [Dealmakers of the Year: "The Fixer-Upper"]. In a sign that the housing market may be poised for a comeback, the value of Realogy shares, which debuted in October at $27 in October, had risen to around $47 by mid March.
The Year Ahead. Perhaps the phrase "cautiously optimistic" has outlived its usefulness. Deal lawyers we contacted admitted that they’ve been using it to describe the mood in the market since the beginning of this decade, but dusted it off again anyway. "We have all of the ingredients for a fairly robust M&A environment," says Francis Aquila, cohead of Sullivan & Cromwell’s general practice group. "What we’re looking forward to is a year in which a lot of the issues that were concerns for both strategic buyers and private equity buyers are behind us." The U.S. election is over; we didn’t go over the fiscal cliff; China is growing, if more slowly; and Europe’s ills are substantial, but acknowledged to be so.
Simpson Thacher & Bartlett’s Alan Klein says he doesn’t expect to see a growth chart shaped like a hockey stick, but there are prospects for "healthy and sustained growth."
Still, uncertainty and a low appetite for risk are holding back the prospects for the M&A megadeals that had become the norm before the economic crisis. "Right now, nobody knows what things are going to be like just six months from now," says Klein, a 2012 Dealmaker of the Year. "It’s an environment where people feel very constrained as to the amount of risk they can take and feel like the market will punish them for doing something outside the box." Kirkland & Ellis partner Daniel Wolf agrees. Unless a critical mass of well-respected CEOs decide to enter the dealmaking arena full throttle, the market won’t turn a corner. "There’s going to have to be a catalyzing event that changes the dynamic," Wolf says.
Most of the deal lawyers we spoke to agree that the primary impediment that boards and CEOs cited for last year’s cautious approach—a lack of confidence in the long-term economic outlook—remains in place in 2013. At press time even the country’s lingering political and fiscal disputes had yet to be fully resolved, as Congress pushed back its debt ceiling debate. "Until you fix Washington, I think things are going to continue to go sideways for a while," says Gibson, Dunn & Crutcher partner Dennis Friedman. He says that certainty—even if it’s certainty that things don’t look so hot—puts boards and CEOs in a position to act. "What [certainty] does is allow you to plan, Friedman says. "You can say to your shareholders, ‘We know what is coming, and the decision we made was with full knowledge and with the intent to do what was best.’ " For now, the only thing that seems certain is more uncertainty.
Who are the Dealmakers?
The American Lawyer‘s Dealmakers of the Year are a handful of lawyers who played a pivotal role in some of the most notable transactions of 2012. Our goal is to spotlight innovation and creativity in mergers and acquisitions, capital markets, project finance, and bankruptcy work. A deal’s value is not a major consideration, but its complexity is.
We recognize that it takes scores of lawyers from multiple firms to bring a deal to completion. Our aim here is to feature the lawyer whose work was most crucial to the outcome. Sometimes this is the lead partner on a deal team, but often it is not.
We cull Dealmaker of the Year candidates from several sources, including suggestions from our reporters, on the basis of their work throughout the year. We also examine the Dealmaker of the Month and Dealmaker of the Week features in The American Lawyer and amlawdaily.com, respectively. (Designation as a Dealmaker of the Month or Dealmaker of the Week has no bearing, either negative or positive, on selection as a Dealmaker of the Year.)
In addition, every fall we invite Am Law 200 firms to send us a maximum of three lawyers to consider as a Dealmaker of the Year. This year we received 105 suggestions from 53 firms. All of the candidates were reviewed by an editorial team that consisted of senior editor Jim Schroeder, senior writer Julie Triedman, and senior reporters Drew Combs, Amy Kolz, and Ross Todd.