Sector report: M&A

M&A activity has fallen by a massive 71% since last year but, writes James Baxter, all is not doom and gloom – law firms appear to be riding the storm by advising their large clients on smaller transactions

Call it blind optimism, but City lawyers appear distinctly unperturbed by the dismal scenario being painted by the M&A information providers.
While the oft-heard phrase “we have never been busier” is undoubtedly a mix of partner bravado and the fact that deals are being rushed through before the summer break, the hard data is undeniable.
European M&A activity fell 71% during the first half of this year compared with the same period last year, according to a survey released by KPMG last week.
The UK has been hit harder than most – suffering a 54% drop year-on-year – although last year’s figures were undoubtedly boosted by the large number of foreign companies that listed on the London Stock Exchange.
Nevertheless, a glance at the figures shows that, despite a slackening compared with the same period in 2000, most law firms have enjoyed a better second quarter this year compared with Q1, although the average value of deals has diminished.
Freshfields Bruckhaus Deringer has leapfrogged Linklaters & Alliance and Slaughter and May to top the table for European M&A, with 89 deals valued at £97.36bn for the first half of 2001.
The firm is clearly making the most of its Bruckhaus connections this year and its competitors in the City are beginning to voice concern that the firm is “cleaning up in Germany” at present.
For example, Freshfields, led by corporate partner Will Lawes, advised Powergen on its £9.6bn sale to German power group, E.ON, which is also a client of the firm.
Slaughters managed to secure a role on the deal, advising E.ON after Freshfields was conflicted out.
More recently, Freshfields was called in by Liberty Media to work alongside its long-standing adviser Denton Wilde Sapte on its proposed acquisition of six German cable television companies for an estimated £3.5bn.
While the firm has undoubtedly seen its fair share of big ticket M&A work, it has not been afraid to pitch itself into the mid- to lower end of the market with a high proportion of transactions in the £10m-£50m range listed on its deal sheet.
Comparing Freshfields with its closest rivals, it is clear that a high volume practice is proving key to weathering the economic storm.
Clifford Chance, in particular, has leveraged off its superior banking connections to land 96 deals worth £88.8bn over the first half of the year – moving up an impressive eight places on last year in terms of deal value.
Although the relatively thin market for top level M&A work is perceived to have lifted the firm’s rankings considerably, the results will provide a further boost to Clifford Chance’s corporate profile.
The firm has created industry groups to target particular sectors such as healthcare and life sciences, food and retail, communications, media and technology. It also remains acutely aware of the need to press home its natural advantage with the banks.
“We have always been very strong in terms of financial institutions,” says Clifford Chance global head of corporate David Childs. “But our strategy is to target the investment banks for corporate work in the same way.”
The firm’s big coup this year remains its on-going work for Lloyds TSB on its merger bid for Abbey National after the bank’s usual adviser, Linklaters, was conflicted out.
Other headline deals included advising GKN on its £5.4bn sale to Brambles Industries and acting for the Yell management on the £2.14bn buy-out of British Telecoms’ directory’s business Yell.com.
Clifford Chance, like Freshfields, was not afraid to grub around at the lower level, notably muscling in on Davenport Lyons’ client French Connection to advise it on its £23m acquisition of the 50% stake in its North American joint venture, Best of All Clothing.
Clifford Chance has also cleaned up off the back of its leading private equity practice, a strength which also pushed Ashurst Morris Crisp ahead of Slaughters by number of deals this first half.
Slaughter and May is in sixth place in the volume tables with 46 deals – less than half the number of Clifford Chance – and third for value, advising on deals worth £76.24bn.
Although Slaughters’ policy of concentrating its resources on the more lucrative area of advising corporates has served it well in the past, the firm may find it has to work harder to penetrate the private equity sector. The immediate beneficiary of the lacklustre performance of some of its competitors is Herbert Smith, which has put in a strong showing across most tables this quarter.
High profile deals included advising Bank of Scotland on its £10bn sale to Halifax and Taylor Woodrow on its £605m bid for Bryant Group.
“We are getting the impression that there are less mega-mergers around but that the level of smaller scale deals is still strong,” said Herbert Smith corporate partner Stephen Wilkinson. “These mergers are being driven by necessity – as opposed to the investment banks – with many sectors still ripe for consolidation.”
While the investment banks slash staffing levels to cope with the undoubted slowdown in high-value deals, law firms appear to be riding the storm by advising their large clients on smaller transactions.
One firm that might feel disappointed by the figures is Allen & Overy which has made a concerted effort to move its practice beyond acting for financial advisers.
The firm has dropped out of the top 10 for value, advising on 65 deals worth £24.8bn, although it has equalled last year’s fourth position in the volume tables.
Those firms with strength in active sectors such as utilities and media can expect to remain busy for the rest of the year.
“We are not kidding ourselves that we are as busy as last year,” says one corporate partner. “But the deal flow is buoyant with strategic deals and re-organisations at the lower level meaning there is more than enough work to go around.”