As Deals Plummet,
Law Firms Focus on New Opportunities

Noeleen G. Walder

As credit woes choke off leveraged deals, New York attorneys say that their firms increasingly are focused on other opportunities -- transactions involving foreign investors, sovereign wealth funds and corporations making strategic acquisitions with stock and/or cash.

Thomson Financial reported last week that the value of worldwide announced acquisitions had declined 24 percent in the first three months of the year, compared to the same period in 2007. The sudden nose-dive followed a record-setting year.

Frederick S. Green, co-chairman of Weil Gotshal & Manges' mergers and acquisitions practice, said that the downturn began late last summer. It was almost as if someone "turned off a switch," he said. "All of a sudden, all lenders got cautious," and law firms began to see a shortage of credit to finance leveraged acquisitions.

Sullivan & Cromwell Chairman H. Rodgin Cohen said that the firm's business "to date" has been "buffered" by deals "we had" and "other aspects of the firm's practice." However, he acknowledged that "nobody's going to avoid" the impact of the overall slowdown.

Several major firms saw a significant decrease in global M&A activity in the first quarter of 2008.

For example, Sullivan participated in 34 announced deals in the first quarter, down from 46 for the same period in 2007. Deals declined to 44 from 69 at Skadden, Arps, Slate, Meagher & Flom, to 60 from 98 at Clifford Chance, to 17 from 32 at Simpson Thacher & Bartlett.

Hunton & Williams, McCarthy Tetrault, and Sutherland Asbill & Brennan, spurred by the $113 billion spin-off of Philip Morris, took the first-, second- and third-place rankings for global announced deals in the first three months of this year, while stalwarts like Sullivan, Clifford Chance and Skadden respectively came in third, fourth and fifth on the Thomson list.

Thomson estimated that the value of targeted companies in mergers and acquisitions announced during the first quarter of 2008 was only $730 billion. That compares to $1.1 trillion in the first quarter of last year and a staggering $4.5 trillion for all of 2007.

MergerMarket, another deal-ranking service, commented in its first-quarter report that "mergers and acquisitions experienced something of a 'death rattle' in the first quarter of 2008."

Private equity firms, which Thomson pegged as a "major driver of worldwide mergers and acquisitions" activity in 2007, have been particularly hard-hit by the downturn.

Deals backed by financial sponsors, valued at $81.3 billion this quarter, reached their lowest levels since the third quarter of 2005 and were down from $191.8 billion over the same quarter last year.

Noting the same trend, MergerMarket observed that brokers in the United States "are widely forecasting that the equity markets have hit a bottom, or are very close to it." Meanwhile, law firms are looking for other opportunities.


Steven P. Buffone, an M&A partner at Gibson, Dunn & Crutcher, said that while large private equity deals are virtually nonexistent, there have been a "good number" of middle-market transactions in the range of $500 million to $750 million.

Brian Hoffmann, co-chair of Clifford Chance's M&A practice in the Americas, similarly noted that his firm is seeing "less headline stuff, [and] more middle-market" transactions.

Additionally, state-owned sovereign wealth funds, with significant resources from which to draw, are providing business for lawyers, Buffone said. Gibson, which represents Kuwait Investment Authority and has an "active practice" in the Middle East, is a "rare example" of a firm that has seen an uptick in transactional growth, he added.

While firms knew that these funds existed, "traditionally they [the sovereign funds] did not pursue control investments, but rather passive minority investments," Green said. "Now, they appear to be more willing to take control positions and of course, the size of these funds has grown massively, and so they are now potentially a formidable force in the M&A market," he added.

Hoffmann agreed that there has been an increase in sovereign wealth fund activity, since the funds are "better equipped" to make investments that "require a pure equity investment" and "are not susceptible to outside leverage."

Thomson reported that sovereign wealth funds, such as Singapore Investment Corp. and Kuwait Investment Authority, "took significant stakes" this year in Citigroup, Merrill Lynch and other U.S.-based banks. MergerMarket predicted that, given the "precipitous fall" of the U.S. dollar, which "is looking increasingly long in the tooth," overseas companies likely would "snap up undervalued U.S. targets" in the health care and technology sectors, once the volatile value of the dollar evens out.

So-called strategic, or corporate buyers, who can use their stock or rely largely on their own balance sheets to finance deals, are also a primary source of activity in this economic climate, Green said. Investment in distressed and financial institutions, which have the advantage of already being leveraged, has also climbed, Hoffmann said.

Following strategic opportunities, law firms have increasingly turned to transactions involving "cross-border" or foreign investments in the U.S. and sovereign wealth funds, "in that order," Green said.

"Cross-border inbound investors, as well as sovereign wealth funds, are areas of great opportunity for law firms, not only in the current market, but will continue to be good opportunities even after the credit markets return," Green noted.

And while no one can predict when the credit crunch will abate, Hoffmann said that he has witnessed a slight increase in activity over the past month.

While things were "quite slow" in the United States from December 2007 until February of this year, "it seems like things are picking up a bit," Hoffmann said. Sometimes, "somebody has to crash and burn before ... you hit bottom," he said. Some people think that with the demise of Bear Sterns, the market hit a bottom, he said. Then again, he added, "it could be a dead cat bounce."


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