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Law firms are suffering a dramatic decline in M&A work

Global value of M&A deals dropped by over a third in 2011

24 January 2012

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By Manju Manglani, Editor (@ManjuManglani)

Law firms experienced a dramatic reduction in M&A work in 2011. The year ended with a 19 per cent decline in volume and a 35 per cent drop in the global value of M&A deals year on year, according to a Thomson Reuters report.

Deal value dropped 23.9 per cent on the first half of the year as economic uncertainty, volatile markets and depressed stock prices took their effect on transactions in North America and Europe. The recent downgrades of financial institutions and the US government further dampened M&A activity.

However, the report suggests that there will likely be a substantial increase in deal flow once market volatility resides. It notes that some deals have been put on hold and companies are meticulously examining their balance sheets, perhaps to plan for future acquisitive strategies.

 

PE leads the way

Private equity was by far the brightest part of the M&A market in 2011. In particular, PE acquirers stepped up both their volume and value of deals compared to 2010.

PE acquirers also continued to rely on go shop provisions more than their strategic counterparts, with the proportion of PE deals containing go shops holding steady at 24 per cent in 2011 compared to 2010.

Matching rights provisions, which give buyers an opportunity to improve their bid in the face of a competing offer, continued to be included in the vast majority of public deals.

 

Sector trends

The highest performing sectors were media & entertainment and real estate, with a six per cent year-on-year increase in the number of deals. The sectors with the biggest declines in deal volume compared to 2010 were telecoms (down 27 per cent) and financial services (down 17 per cent).

The sector performance trends to some extent mirrored the level of contentiousness in M&A deals. The average number of days it took for telecoms and financial services deals to become effective was 77, compared to 40 for real estate. Technology deals averaged 46 days, followed by media & entertainment and consumer goods & services at 47 days. Hostile deals, withdrawn deals and level of complexity all contributed to the length of deal time.

 

Increase in reverse break fees

In response to the market uncertainty, companies increasingly employed reverse break fees to protect transactions. According to the report, 36 per cent of SEC-filed US public M&A deals (valued over $25m) had reverse break fees in 2011, up from 25 per cent in 2010.

Significantly, the trend toward reverse break fees was more pronounced among PE acquirers. Seventy-eight per cent of SEC-filed public M&A deals with a PE acquirer employed a reverse break fee in 2011, up from 53 per cent in 2010.

Regulatory and compliance concerns factored heavily into large and small deals in 2011. On the antitrust side, AT&T’s failed $39bn attempt to acquire T-Mobile stood out for the creativity of its reverse break fee, which was tied to regulatory approvals and its payment composed of a combination of cash, spectrum and roaming rights.

 

Regional variations

By number of deals, US M&A activity was almost flat between 2011 and 2010, while cross-border deals were down by two per cent. In the UK, domestic acquisitions by UK-based acquirers increased by three per cent, but cross-border deals fell by nine per cent.

The Asia-Pacific region bucked the trend in deal volume. Chinese acquirers made ten per cent more domestic deals and 11 per cent more cross-border deals than in 2010, while Japan had a 27 per cent increase in cross-border deals. Meanwhile, the decline in M&A activity by Indian acquirers continued, with a 44 per cent drop in domestic and a 32 per cent decline in cross-border deals. Overall deal value in the region declined compared to 2010.

The findings are published in M&A Trends & Insights for Lawyers.

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