Research Trends and Conclusions: Mergers & Acquisitions 2011
With the benefit of over 14 years of research and thousands of votes from clients and private practitioners, Who’s Who Legal takes a closer look at developing trends in the M&A legal marketplace worldwide.
The mergers and acquisitions sector was badly hit by the economic crisis. As reported in our last edition, many corporations faced a bleak diagnosis: weak balance sheets, sparse cash and a low deal volume. Forced into an austere position, companies tightened their belts by reducing workforces, diversifying into other areas and looking abroad for underdeveloped opportunities. Findings of The International Monetary Fund illustrate the extent of the downturn. In 2003 to 2007 global economic output grew at an annual rate of 3.2 per cent. Between 2008 and 2009 it shrank to 0.5 per cent. Last year growth was approximately 3.4 per cent and a precarious economic recovery is underway. It began in the last quarter of 2009, dropped off mid-2010 and returned in late 2010. The revival is expected to continue into this year, and China is expected to account for one-sixth and the USA for one-ninth of the forecasted 4.2 per cent global output expansion in 2011. Many lawyers we spoke to remarked that the world economy is bouncing back and M&A with it. What is clear is that the deal size and volume are better than they have been in recent years, but a far cry from what they were in the boom years of 2005 and 2006.
The uptick from the recent financial difficulties is a healthy volume of restructurings; strategic buyouts; hostile acquisitions and joint ventures. According to the lawyers we interviewed, the current financial conditions are generating high levels of distressed deals and insolvency-led M&As are providing the Asia Pacific region in particular with major deals.
Overview
After months of research we collected thousands of votes from lawyers and industry professionals worldwide, culminating in the selection of 618 of the leading practitioners in mergers and acquisitions law. There has been an increase of 38 lawyers from the previous edition of this guide, published in April 2010. The lawyers selected in the research hail from 77 countries. England and the United States, particularly New York with 42 entries, emerge as the countries with the most nominations in the research. We have seen a growth in activity in the Asia Pacific and parts of the Middle East, with the inclusion of a number of new countries and a renewed focus in business from the world’s leading M&A firms and lawyers. Skadden Arps Slate Meagher & Flom LLP fields an impressive 13 inclusions from four countries. From a worldwide perspective, the traditionally strong M&A firms and jurisdictions continue to record excellent performances; a testament to their consistent expertise and investment in regions that have been long known for raising finance.
The numbers in chart 1 on the preceding page demonstrate how the research has expanded in the last three years, signalling an 18.6 per cent increase in lawyers featured. This is a reflection of how the general M&A market has broadened into new areas of expertise and geographical locations, in accordance with the economic times.
New Jurisdictions
A number of new countries have risen to prominence, most noticeably outside the US and western Europe. Bermuda enjoys three listings as the demand for offshore work and desire for companies to reduce their tax liability and restructure grows.
Saudi Arabia and Turkey are new inclusions in the research. The Middle East is now represented by five countries. According to one Saudi lawyer there has been an increase in capital lending, and subsequently more deals. This year nine Turkish lawyers made a mark in the research. They reported on the increased corporate capability of a country that is widely considered as Europe’s gateway into Middle East.
In general Turkey is economically more prosperous now than it was before the crisis. In 2009 to 2010 the national government posted growth in employment of 1 per cent and in income of 2.7 per cent, which is an improvement on their pre-recession average. Turkey’s strong performance during the recession is attributable to the strict banking regulations created after it suffered its own banking meltdown in 2001 to 2002. The regulations were already in place to see off any problems generated by the recent global crisis. What has emerged is a resilient, dynamic M&A market.
Turkey has turned a corner in terms of its economic potential, and this is echoed in the types and volume of deals being done in the corporate marketplace. Its demographic is attractive to investors as there is a large, young population. The economy attracts foreign direct investment, particularly in the real estate, energy (renewables), retail and telecommunications industries. The government has stimulated M&A activity by implementing a programme of privatisation. Its aim is to transfer much of Istanbul’s electricity distribution, steel, cement and petroleum infrastructure into the hands of entrepreneurs and private companies.
According to one Turkish lawyer, project finance and private equity (PE) will grow in the coming years as the government invests in Istanbul to become a major financial hub and strengthen the bridge between Europe and the Middle East. Turkey enjoyed a number of IPOs last year; the public offering of real estate investment fund Emlak Konut was the biggest of the year and the fifth largest in Turkish history. It generated a lot of foreign interest in the country, which is expected to create further opportunities for IPOs in 2011, of a volume forecasted at 10 billion Turkish lira. Lawyers were quick to single out Turkey as a future market leader in the region and maintain a very optimistic outlook for its M&A sector.
Asia-Pacific
The legal landscape of the Asia Pacific is undergoing dramatic changes in the M&A and many other commercial areas. As one source remarked, “globalisation is getting more important, large deals can only be executed where law firms have capabilities all around the world”. Clients are increasingly demanding a trans-national service and top-notch local expertise, which is only to be expected as more and more companies flock to Asia. Our research identified the region’s market leaders as India, Hong Kong, China and Singapore.
There has been a 13 per cent increase in the number entrants from this region, as business becomes centralised in those traditional areas. During our research lawyers pointed out that the strong performance of Asia Pacific economies is due to a combination of cutting-edge innovation and booming export industries, which generates wealth and leads to investment prospects.
Singapore has seen a small but important increase in its research entries. According to one source, although there have been fewer PE deals the number of strategic purchases has increased, particularly in the telecommunications and financial services industries of other Asian countries. This is driving work for Singapore’s M&A experts and helping companies regain their clout in an industry dominated by takeovers. Lawyers are confident there will be a good pipeline of work in 2011.
In China outbound M&A has been most active, which has translated into a demand for local legal expertise. Chinese corporations are benefiting from relatively depressed western economies and gainful exchange rates. We see this most clearly and recently with PetroChina – China’s largest listed oil and gas producer – emerging as the country’s top acquirer in 2010, acting in many deals, five of which were worth US$12.2 billion alone. It is now building on this reputation with the proposed purchase of a strategic stake in Ineos, the world’s fourth-largest chemical producer. Chinese lawyers are responsible for 19 per cent of this year’s total Asian listings, an increase that puts China on par with Australia in terms of listing in the research. Lawyers expect China’s global recognition in these pages to continue expanding, as an increase in deal volume and deal size creates more work. Beyond the West, China has continued to focus on emerging markets such as Africa. In the latter half of last year, local firm King & Wood were involved in the partial acquisition by ICBC of Standard Bank Group, a South African enterprise listed on the Johannesburg stock exchange. One South African lawyer informed us that Chinese enterprise, particularly in the natural resources and telecommunications industries, has created a lot of business opportunities which drove some of the black economic empowerment programmes last year.
From a domestic perspective, local expertise is always highly sought-after to support the big deals, meaning more exposure and retainers for selected law firms. This is reflected in our research: despite the large numbers of resident lawyers in major foreign law firms with representative offices in China, 14 of the 15 Chinese entrants hail from local firms. Jun He Law Office was instrumental in the successful takeover of Wing Lung Bank by China Merchants Bank, worth US$4.7 billion, and Zhong Lun Law Firm took a key role in one of the year’s largest real estate deals in China, involving Citi Shen Jun Sinyao. There has been intra-regional Chinese investment, notably in South Korea and Malaysia, where the government has liberalised rules surrounding financial investments. Both countries have seen marginal gains but their numbers remain largely unchanged in our research (see chart 3.1 and 3.2), an indication of the wider ripple effect of China’s outbound M&A agenda.
The trend is certainly not new but the demand for local legal knowledge and the focus on China’s investment activity has accelerated in the past year. This is evidenced by investment banks acting to keep up with this dynamic marketplace, such as USB’s creation of an M&A team in China, and Citigroup’s three new China desks in London. As one interviewee remarked, China “plays the long game”, it has the strategy, access to capital, flexibility on deal structure and confidence to repeat, or even better, its 2010 performance. It is likely to be the country that makes the most acquisitions and investments in 2011.
In our research the Hong Kong contingent is dominated by foreign, international law firms. We feature 10 Hong Kong-based lawyers, (up from six last year), of which Norton Rose Hong Kong fields two. With the proposed merger with Ogilvy Renault LLP in Canada and Deneys Reitz Inc in South Africa, Norton Rose’s offices are strategically placed to facilitate more cross-border work between the resource-rich regions of Asia-Pacific and Africa.
As can be seen in chart 3.2 India sees a slight increase in the number of listings this year and maintains a strong representation in the research. This is unsurprising as India attracted close to US$71 billion in investment, making 2010 a significant year of M&A growth. An example is the purchase of Zain Africa BV (excluding Sudan and Morocco) by the Indian telecoms company Bharti Airtel, valued at US$10.7 billion. This deal was the largest ever cross-border transaction between the two emerging market players and was locally assisted by local firm AZB & Partners, who provided counsel to Bharti Airtel. The deal was heralded by lawyers as the first of many to come. This forecast is already coming true as large internal acquisitions are already on the horizon. iGate and private equity firm Apax Partners are to acquire a majority stake in Mumbai-based IT company Patni Computer Systems for approximately US$1.22 billion.
According to lawyers we spoke to, PE will underwrite a lot of the Indian M&A deals this year, as the country bucks the global trend of diminished PE levels. Better economic prospects and easier availability of financing have fuelled the key industries of natural resources, mining, telecommunications, IT and real estate, creating more confidence in the marketplace and thereby encouraging lending for further M&A transactions. Indian lawyers anticipate their busiest year yet.
Our research acknowledged the successful performances of the major Asia-Pacific countries in 2010 and 2011. The other side of the coin reveals the countries that have experienced limited opportunities and a slowdown in international interest.
Australia has seen a reduction in the numbers of lawyers included in our research this year. Their listing has dropped from 19 to 16 lawyers. Its M&A market saw less action with mid-sized deals and a distinct fall in foreign investment in the last quarter of 2010. The value of takeovers also fell, attributable to the high Australian dollar, and expensive exchange rate. However, Australian companies have utilised the high rate to fuel outbound acquisitions. In 2011 lawyers expect to see more outbound M&A transactions involving North America, mainly in the mining, natural resources and agribusiness industries.
The numbers for Japan tell a similar story. This year’s publication features half the number of Japanese lawyers from last year (see chart 3.1 and 3.2). Domestic M&A is not the problem: there have been significant deals being done in the real estate, insurance and electronics industries, and Japanese lawyers reported high levels of work within the country. However, external M&A tells a different story commensurate with our research. The number of cross-border takeovers are low and activity as a whole has been sluggish both before and after the global recession. Japan emerged from the crisis with a deflated economy and a downturn in capital intensive manufacturing and automotive exports. China spent US$120 million in the first half of 2010 acquiring Japanese enterprises, but Japan could not return the favour. Our research reflects this: lawyers, whose practice involves Japan, remarked on the need for domestic companies to modernise and attract international investment; essentially acquisitions in Japan are cheap but the deals are not yet right.
In conclusion, M&A lawyers expect more cross-border, outbound, strategic acquisitions by companies based in the Asia-Pacific area, to secure supply of more natural resources, technologies and branch out into new markets. Looking forward law firms are acting to keep up with the trend by enlarging their teams in the region: Allen & Overy opened three new offices in Australia to capture more Asian cross-border work. DLA Piper’s plans to fully merge with their Australian alliance partner DLA Phillips Fox is aimed at giving the firm a much larger footprint in that part of the world, and Clifford Chance are scouting for Australian partners to take advantage of the deals from Asia. Further, as can be seen in the ongoing attempts by the Singapore Stock Exchange to takeover the Australian Stock Exchange, lawyers anticipate more regulation. As cross-border deals get bigger and more politically sensitive, government agencies are expected to apply more regulatory scrutiny and protectionist measures to prevent too much unequal access into their home markets.
Firm Analysis
A closer analysis of the leading firms over the past four editions demonstrates an altered M&A landscape. The past two years have shown better performances from firms compared to when the economic crisis was coming to a head in 2007 to 2008, which reflected the uncertainty and downturn in work at the time.
Skadden consistently outperformed its rivals in the last three editions, but Freshfields was similarly well presented in 2008, and has continued to maintain a world-class transactional practice over the last four years. The strategic positioning of the offices of both firms, particularly in the major centres for this kind of work - England, New York and key European cities, undoubtedly aided their ability to weather the economic storm and react to a changing marketplace.
In the US the pattern is similar. The chart demonstrates the number of US-based lawyers featured in the research from these firms. What is most visible from the numbers in 2010 and 2011 is that all the firms have raised their profiles over the years and are doing more work than in preceding years. This is a sign of the expansion undertaken into new areas of expertise within the market and geographically. By the dominance of New York-based firms in the top end of the research, it is easy to conclude that New York remains the M&A centre of North America and the world.
In England the analysis illustrates a smaller picture and suggests a difficulty among firms to establish an international presence on par with some of the American firms. Slaughter and May takes the lead across the four years. The lawyers we spoke to reported a fall in PE-funded work, but this is counteracted with developments in the business marketplace, primarily concerning alternative sources of financing, such as high yield bonds. This is contributing to an uptick in activity levels, and is expected to prompt more cross-border work between the US and the UK. Sources have remarked that the English market has cash-ready portfolios waiting to be utilised, but until market conditions demonstrate medium-term stability many businesses will continue to hold back.
In summary, the figures generated by the research confirm the increased geographical expansion of some of the world’s best lawyers and law firms. Over the years their performances have strongly reflected changes in the economic times. The findings this year demonstrate the recent recovery in the M&A market, both from a domestic and global perspective. Traditional centres for leading M&A lawyers, such as New York and England, continue to take the majority of the listings this year, and new jurisdictions in the Asia Pacific region enjoy clear rises in the level of international recognition their lawyers receive.