Mega-value debt-fuelled deals have been off the cards for a while, but M&A lawyers have been keeping busy with a steady flow of transactions of a different kind, writes Zoe Lyon.
The era of the mega-value debt-fuelled deals is well and truly behind us. But far from providing M&A lawyers with a respite, rapidly changing market conditions have required M&A lawyers to think on their toes and reposition their teams to quickly respond to emerging deals of a very different nature.
The current state of play
The latest data from Bloomberg shows that deal values, and, to a lesser extent, deal volumes, have slumped worldwide over the last 12 months. The value of deals globally in the first three quarters of the 2009 calendar year stood at $US1,185 billion ($1,332 billion), down 43 per cent from the same period last year.
Deal numbers have also fallen considerably, with a total of 15,490 deals on the scoreboard so far this year, compared with 22,222 at the same time last year.
Australia, while faring slightly better than the global average, has still taken a hit, with deal values falling 36 per cent over the last year ($US41 billion for the first three quarters of 2009 compared with $US65 billion in 2008). Deal volumes have also dropped, though not as drastically, currently standing at 713 compared with 898 last year.
The global drop in deal values has largely been the result of a drying up of the debt markets and business confidence brought about by the GFC. But while those high-value debt finances deals which characterised the market 18 months to two years ago have all but disappeared, the changed market conditions have been the impetus for the emergence of different types of transactions, which have kept M&A lawyers and their teams on their toes.
A different kind of deal
Mallesons Stephen Jaques partner Meredith Paynter says that during the first half of 2009 the firm saw a surge in equity capital market raisings, with entities looking to shore up their balance sheets in the face of tight debt markets.
Freehills partner Andrew Pike adds that this has involved an increase in cornerstone investment activity, pointing to the recent Warburg Pincus/Tran spacific, GIC Real Estate/GPT Group and China Investment Corporation/Goodman Group transactions as key examples.
While these transactions may lack the glamorously high price tags, Paynter explains that they're often required to be turned around very quickly, which presents an added challenge for the legal advisers involved. "They tend to be very short and fast transactions ... and what that means for advisers is that when you're working on these deals it's very intense ... there needs to be a lot of co-ordination to get it done in the timeframe," she says.
Pike agrees, saying the tight timeframes require legal teams to be nimble and highly organised. "Given the challenging economic times, we were getting calls saying: 'This deal needs to be executed in the next week or so' whereas two or three years ago that would have been something you'd have the luxury of a couple of months to do ... So you really need a depth of team, a co-ordination amongst team members, a clear understanding of what needs to be done and a clear understanding of what's important to the client," he says.
Allens Arthur Robinson partner Guy Alexander adds that the legal work involved in these cornerstone investment transactions can sometimes also be more complex than traditional takeovers.
"They're often far more intensive, from a legal point of view, because you've actually got to structure the cornerstone investment into the entity," he explains. "That's obviously got to look after what the cornerstone investor is trying to achieve, but also look after the interests of existing shareholders, and perhaps bring in some new institutional shareholders - so that's a more complex deal."
Pike believes that as a result of the growth in these equity capital-raising transactions, M&A lawyers have been required to become more flexible and perhaps step outside what they have previously considered their discrete area of expertise.
"You probably could have been a bit more specialised a few years ago, now you need to turn your hands to a lot of things. With some of these cornerstone deals, traditionally the work that was [done by] equity capital markets [specialists], but a lot of M&A private equity people are getting integrally involved, being assisted by people who are more specialised in the equity capital markets area," he says.
Alexander agrees that the current climate has called for an open mind on the part of M&A lawyers, and he says M&A lawyers from Allens have also been getting involved in other non-traditional areas of work, such as workouts and insolvencies. "I think, from the M&A lawyers' perspective, it has required some greater flexibility in terms of being able to deal with a broader range of transactions," he says.
Another trend noted by all the lawyers Lawyers Weekly spoke to is the continuing interest of Asian investors in the Australian resources sector, with recent deals having included the Felix Resources/Yanzhou Coal Mining and the Shougang Concord/Mount Gibson Iron/Fushan International Energy Group transactions.
Looking forward over the next six months to a year, Allens' Alexander believes that capital market raising for balance sheet repair purposes will trail off. "I think most of the restructuring of balance sheets which is going to happen has probably already happened, so I think there'll be less of that," he says.
Meanwhile, he's optimistic that the debt market will gradually open up and more traditional M&A activity will pick up again - particularly from foreign companies looking to make strategic investments in Australia. Pike concurs, saying that over the past year an issue preventing these strategic transactions going ahead has been a divergence in the price expectations of buyers and sellers. However, he believes this roadblock is now breaking down.
"The value gap narrowing is a key [issue]," he says. "In vendor land, there does appear to have been a realisation that the prices you were getting 18 months to two years are probably not on offer, and probably won't be on offer for a while if at all. This is the new reality.
So when we're acting for buyers who are going out and approaching companies we're certainly getting a lot more traction than we were 12 months ago. They're actually letting vendors in to do the due diligence and there's certainly a higher execution rate."
Paynter says it's difficult to predict future trends but she believes the outcome of the impending Myer IPO could have an influence on the market's future, because it will provide a strong signal of investor confidence.
"It's hard to know where we're going to end up ... because so much is dependent on mood and investor confidence," she says. "If [the Myer] IPO gets away at a decent price then you'll see a lot of confidence, and that will obviously help to set the strategic direction for a lot of participants in the market ... whereas, if it's less successful, then I suspect people might hunker down for the foreseeable future - at least until the new year when they reassess where we're headed as an economy, but I guess, more broadly, where our trading partners are heading."