M&A and Governance 2017: Trends and Conclusions
Throughout the world 2016 was a significant year: political upheaval and economic uncertainty were at the forefront of our respondents’ minds during our research, as the US elections and Brexit caused some concerns about deal activity. Although most were positive about the current and future state of the market, some regional and sector-specific concerns were noted. However, overall the legal market remains strong and the concept of a “non-busy M&A lawyer” continues to be somewhat oxymoronic.
The Global Market - A Snapshot
Given that over 72 per cent of global M&A activity in 2016 involved North American or European companies, according to Mergermarket, it comes as no surprise that our respondents were keeping a close eye on political developments in both regions. Indeed, the market seemed to take a collective breath in the latter part of 2016 as the full impact of the Brexit vote and the US elections became clear. Sources told us: “We are seeing US companies gathering their thoughts after the unexpected Trump win; we think that probably caused some CEOs to hit the pause button.” Despite this, others described a “fairly bullish outlook, with the possibility of activity in defence and health” in the US market. As one source stated: “Things will likely start up again once there is more certainty about Trump’s economic policy.” Brexit, too, had an effect, with one Belgian lawyer telling us that “people are reluctant to take risks since Brexit, and the second half of 2016 has been relatively quiet as a result”. Despite this, most were confident in the market more or less carrying on as usual in the year ahead.
Much of this commentary is reflected in the numbers: although deal values were down overall in 2016 by 18.1 per cent compared to 2015, this has to be put in the context of 2015 having been the biggest year for global M&A in the last decade. In fact, 2016 came in as the second strongest year since 2007, according to Mergermarket. In addition, despite lawyers’ perceptions of a quiet year-end, Q4 2016 saw the third-highest combined deal value of any single quarter since the financial crash, boosted by AT&T’s US $105 billion proposed merger with Time Warner. According to Allen & Overy, October 2016 was the highest monthly value of US deals on record. Many expect this upward trend to continue, with a survey conducted by Deloitte showing that 75 per cent of respondents anticipating a rise in deal activity in 2017.
An interesting trend identified by many of our respondents was the continuing rise in cross-border acquisitions, particularly by Chinese companies. As one lawyer put it, “It’s really accelerated – a fact of the world being more connected.” Outbound Chinese deals reached US$206.6 billion in 2016, a rise of 118.7 per cent on 2015, while domestic M&A dropped 21.6 per cent, with firms such as Fangda Partners skyrocketing into the top 20 firms in terms of deal value worldwide. However, this trend is likely to slow down after the Chinese government took steps to stem the flow of capital leaving the country for the acquisition of international businesses. A survey conducted by Mergermarket in late 2016 revealed that a slowdown in growth in emerging markets, including China, was considered by a majority of respondents to be a significant impediment to the international M&A market in 2017. However, China’s increasing impact on M&A globally remains a trend to watch over the coming year.
M&A and the Legal Market
The leading US firms continue to do much of the heavy lifting, with Mergermarket’s figures showing nine US firms in the 2016 global top 10 firms by deal value, with Freshfields Bruckhaus Deringer the only European entrant. Fairly uniformly, lawyers around the world reported that business was good, including in India, Uruguay, Sweden and Denmark; however, interviewees in Hong Kong and Belgium reported slowdowns. Nevertheless, the majority of lawyers reported busy years, with the complementary areas of private equity and IPOs strong in certain parts of the world – although one US lawyer described the IPO market as “terrible” there.
The legal market has seen a number of major mergers of its own in the past year, including Arnold & Porter and Kaye Scholer; Norton Rose Fulbright and Chadbourne & Parke; and Sutherland Asbill & Brennan and Eversheds. In addition, King & Wood Mallesons’ European arm went into administration, resulting in a significant number of lateral moves.
On an individual level, since our last trends overview, Scott Barshay has moved from Cravath Swaine & Moore to Paul Weiss, one of the highest-profile lateral moves in the US legal world in the past several years. Meanwhile, in the UK, Mark Rawlinson traded in his exceptional corporate practice to join Morgan Stanley as the chairman of its UK investment banking arm.
The Rise of the Machines?
Pressures on costs and the ever-more competitive legal market mean that the ability to do deals cheaper and quicker is a constant area of focus for both firms and clients. Sources told us, “What’s on everyone’s mind is how you can be even more efficient in doing M&A work, including various artificial intelligence (AI) systems. We think there will be a big change coming throughout the western world.” In 2016, all five of the UK’s magic circle firms and others (including DLA Piper and the like) have signed up to use various forms of AI for their contract and due diligence work, with possible implications across the legal world. Indeed, the trend is not just limited to the big players in the leading markets: Cyril Amarchand Mangaldas also announced the incorporation of AI into its work in January 2017, and various AI packages are increasingly being marketed to smaller and mid-market firms as well.
While AI appears a more efficient way of conducting this kind of work, it does lead to questions around the possible impact on the traditional law firm model, as some of the billable hours charged by junior associates are replaced by a cheaper and quicker computer system. However, for the moment, firms such as Baker Hostetler are insisting that AI “is not a way to replace our attorneys – it is a supplemental tool to help them move faster, learn faster and continually improve”.
AI looks likely to irreversibly change the legal landscape in the coming years, possibly leading to lower costs for clients in the long run (although the systems that firms are purchasing are far from cheap), while reducing the time taken for for due diligence. For certain, it is a trend that firms are taking very seriously, as they try to ensure they are not left behind by developments.
For the most part, the M&A market looks to have recovered from the worst of the 2007-8 financial crash, with figures in 2014-2016 comparable with pre-crash years. Despite some uncertainty from Brexit and the US election, most of those we spoke to believe that M&A activity will increase in the latter part of 2017. Some uncertainty lies ahead as lawyers wait to see the impact of technologies such as AI on their practices, but this is unlikely to have much of an effect on their deal flow. As such, all of our Who’s Who Legal-listed lawyers will undoubtedly remain extremely busy in the coming year.