M&A | Summer 2018
The global M&A market is booming. Bill Mordan, general counsel at FTSE 100 drug-maker Shire, would know. Shire’s board recently recommended a £46bn takeover offer from rival Japanese pharma giant Takeda.
‘Money continues to be cheap to borrow and so it’s still easy to get funding from venture capital, as well as other speciality equity investments in new technologies,’ Mordan comments. ‘There’s a large quantum of assets out there available for acquisition.’
Mergermarket statistics illustrate the point. The research firm recorded $890.7bn worth of deals in the first quarter of 2018, up 18% on the year before and the highest value for a first quarter since 2001. This followed an ‘extraordinary surge’ in dealmaking at the end of 2017. Other high-profile deals include Vodafone’s €18.4bn buyout of a group of Liberty Global’s European assets, Novartis’ $13bn sale to GlaxoSmithKline (GSK) of its minority stake in their consumer healthcare joint venture, and British engineering giant GKN’s $6.1bn merger of its automotive business with US-based car parts supplier Dana. There is also the multibillion-pound takeover battle for Sky in the background and all the while the private equity boom continues.
Such an environment raises questions about in-house capability for handling M&A activity internally, with the area seen as one of the last, alongside litigation, for growth within in-house legal teams.
The In-House Lawyer spoke to the leaders of corporate in-house teams at some of the FTSE 100’s largest companies across telecommunications, energy, finance, and pharmaceuticals to understand how they operate and how their duties will evolve.
Do I really want this work?
‘To do all of a deal internally would be rare, due to the size and complexity of recent deals,’ says Vodafone director of legal corporate Alexander Deacon, who leads a team of four lawyers at the telecommunications giant.
The team’s size has roughly halved since Deacon first joined 16 years ago. Investor relations support moved from corporate to company secretariat at Vodafone, which boasts a 500-strong in-house legal team, and the type of work changed in the last decade from joint venture agreements to transactions. Deacon says the London-based team has been busy despite its downsizing, however. Highlight transactions include the recently announced €18.4bn agreement to acquire some of Liberty Global’s European assets, the 2016 joint venture in the Netherlands with Liberty Global and the merger of Vodafone India with Idea Cellular, due to complete this year, to create India’s largest communications business by revenue. Further back, Vodafone completed its takeover of Kabel Deutschland in 2014 and sold its US Group whose principal asset was its 45% stake in Verizon Wireless for $130bn in 2013, as well as completing its acquisition of ONO. Slaughter and May took the lead on the Liberty and India transactions, but Vodafone’s recently-rejigged legal panel also features Linklaters, Squire Patton Boggs, Hogan Lovells, Norton Rose Fulbright, Osborne Clarke and Wiggin.
Deacon leads from Vodafone’s side, with the negotiation and drafting on smaller deals done entirely internally. His colleague, Gareth Morgan, led the mammoth India transaction. When external counsel are used on larger transactions, Deacon pushes on where he and his team see the main value drivers and risks in a transaction. There is no obvious threshold for deals that are done in-house or externally.
Deacon elaborates: ‘The information that we get out of the M&A process shouldn’t just be used for the valuation, the go, no-go decision, and contract protection. It’s something we want to be of value to our business colleagues after we’ve done the deal.’
Fellow telecoms player BT similarly has a small number of M&A lawyers: using six internally in recent years within the larger in-house team of more than 500. BT Enterprise legal chief Jeff Langlands heads M&A, a London-based team within his broader in-house unit of 60 also covering commercial, compliance, tax, treasury, and bid management.
Langlands says M&A activity has moved with BT’s fortunes, buying frequently when he first joined 11 years ago before profit warnings in 2008/09 brought divestments. The same cycle occurred recently, with the team now assessing what is core to the business following a profit warning 18 months ago.
One of the six M&A lawyers will lead a transaction, alongside a professional from BT’s six-strong corporate finance team. External lawyers are often used, especially for overseas deals, but anything with less than £1m in value is likely handled entirely in-house.
Langlands says BT, which recently announced it would cut 13,000 jobs over the next three years, has been focusing on getting the right model and driving cost-efficiency in M&A.
He describes external spending as ‘lumpy’, mixing headline transactions like the £12.5bn acquisition of EE, led by Freshfields Bruckhaus Deringer, with average M&A deals worth between £10m and £100m. Savings are not about internal cuts, but who the business uses externally. Langlands comments: ‘Does the deal merit a Magic Circle or a top-tier City law firm? Quite often we’re finding not necessarily, because there’s a lot of capability across the UK that can handle a private, £50m M&A deal.’
As his peer at Vodafone noted, it is not just about the due diligence, but rather, the half-dozen issues flagged to the BT team for consideration. The broader in-house legal function also has a counsel management team of a couple of people who test fee estimates from both the external and internal sides.
Langlands says he has seen benefits from this in the last six months. External spend in M&A, which is on average less than £10m a year, has dropped between 20% and 40%. ‘With cost savings, is it the team, or is it what they spend? What I’ve been pleased about is that we haven’t broken relationships. Law firms haven’t been driven to a point where they question whether they really want this work? At that point it becomes counterproductive.’
Not going home
When Royal Dutch Shell and BG completed their mega-merger in 2016, Shell had to divest $30bn of assets to help fund the $54bn acquisition. The company is on track to complete its pledge by the end of this year. After 2018, Shell plans to continue divesting more than $5bn a year.
‘That [BG transaction] dominated a number of people’s lives for quite some time,’ notes Shell corporate associate GC Mike Ashworth, a company veteran of 18 years. ‘There was a very small in-house team working on that transaction up to the point of announcement: a couple of antitrust lawyers and corporate and that was about it.’
Ashworth has four lawyers in his team. Shell runs and resources most M&A transactions through lawyers in its business units – upstream, downstream, integrated gas, projects and technology – with the specific corporate team only becoming involved if a transaction is cross-business. This model allows the 825-strong in-house team at Shell to manage the peaks and troughs of M&A, with lawyers only covering it when needed.
Ashworth’s team is also involved in listed entity transactions, but will often rely on external counsel. Slaughters, for instance, led on the BG transaction. Otherwise, within integrated gas a unit called new energies has formed, looking at opportunities that require specialist advice. ‘There are certain areas we feel very, very comfortable doing it ourselves, but it’s harder once we’re acquiring a solar business or a wind business.’
In the last decade the broader Shell in-house legal team has looked to handle more internally – now about 60% – while its external legal spend is as small as the low $100,000s for some $1bn-plus deals. The company hired pricing analyst Vincent Cordo from Reed Smith a few years ago to push external advisers on fee arrangements. Ashworth comments: ‘We’re pushing for them to come up with a cross-model which isn’t basically hourly charge rates. We send out request for proposal (RFPs) to more than one panel law firm with a lot of the deals, and it comes down to experience and the individuals concerned and the type of transaction but also down to cost.’
At energy rival BP, managing counsel Natalie Abou-Alwan runs a legal team of 12 structured product lawyers who support the company’s London-based global oil trading business. Her role covers the trading and financial hedging of crude oil and oil products globally, together with structured deals involving full financing packages in a number of jurisdictions.
In-house corporate lawyers at some of the biggest companies are not just relying on law firms for broad M&A work, but coming to them in an increasingly surgical manner.
She comments: ‘We sit on the oil trading floor [in Canary Wharf], so there is never a dull moment. There are always live issues, as you can imagine with trading oil around the world. There’s always going to be a cargo that’s either the wrong quality or has been contaminated, or there’s an incident in a port that means your cargoes are delayed.’
Her work includes complex commodity financing deals, such as BP’s $2.4bn five-year syndicated pre-export finance facility with Rosneft in 2014, the largest oil-backed transaction in the CIS market that year. More recently, she led the team on a deal that saw US oil and gas company Hess sell offshore interests in Equatorial Guinea for $650m. The typical transaction size is in the millions but varies depending on the counterparty and asset. For larger deals external counsel will often be used, particularly for work in a different jurisdiction, such as West Africa, and to provide manpower.
‘I’ve done a few deals on ridiculously short deadlines, a couple of which require such a quick turnaround that I am not able to instruct external counsel given the tight timeframes involved. I can think of a couple of occasions where I haven’t gone home but had to work through to the next day to get the deal closed. You can turn up one morning and leave the next afternoon.’
Beyond buying ‘IBM’
The last five years for The Royal Bank of Scotland (RBS) corporate and structural change GC John Whitehead have been about change.
The corporate team of four permanent lawyers, headed by Emma Rees normally but currently led by Angus Davidson while Rees is on maternity leave, is now dealing with as many strategic investments, like joint ventures, as traditional M&A and disposals. It is also reducing reliance on Magic Circle advisers, with Addleshaw Goddard, CMS and Dentons among those gaining more work.
Such a shift is demonstrated by RBS’ recent acquisition of Edinburgh-based accounting software company, FreeAgent, for £53m. Whitehead says it typifies the sort of ‘innovative’ diversification the bank is looking at in the digital age. The M&A team has been looking at structuring deals in a different way and upskilling internally to gain expertise on such acquisitions.
He comments: ‘While there is still a big role for having a Magic Circle corporate counsel on the books, we are also reducing our reliance on Magic Circle firms in the corporate and M&A space. If we’re exploring fintech acquisitions and strategic partnerships we may well select a smaller, more specialised firm.’
The M&A team of four within RBS’ in-house legal team of 300 can double in size depending on activity, drawing on contractors and secondees. One of the team will take responsibility for a particular deal, of which some are done completely internally.
Most of the M&A work is in partnership with the bank’s strategy and corporate development team – dealmakers who help with negotiations. Ring-fencing reforms, separating the retail and investment arms of Britain’s major banks, add a new layer of complexity to M&A deals and Whitehead says it is critical for external firms to invest time understanding the intricacies of RBS’ new structure.
‘With the large cross-business matters, we will regularly unbundle elements of the transaction and use different law firms. We’ve had a few years of educating the law firms in this approach. From a pricing and quality point of view it is now working really well and the firms that we’ve stuck with are ones that have embraced the approach, for instance, partnering with other firms and LPOs and pitching for the parts that they feel are more in their sweet spot rather than expecting to be awarded all aspects.’
We know IP
Shire’s Mordan has a clear idea of the maximum transaction size his in-house corporate team, led by Boston-based Jeff Prowda, can manage internally: $100m. The corporate team has 46 people, a hefty chunk of the overall function’s 150, which handles contract negotiations, billings, operations and record management. Licensing opportunities, like technology patents, are also covered, mostly from the US but with presences in Switzerland and London. ‘We know how to do IP licences very, very well.’
Shire completes due diligence, market surveillance, financial analysis and modelling on prospective deals internally, in conjunction with its business development team of about 30 people.
It has invested in technology, which has automated transaction documents and is used for due diligence work, providing a searchable library of documents that need to be looked at for any litigation concerns. Developing this internally has helped it save money in an area where it used to hire an external firm, Mordan says.
This may be unique to the company’s industry, however, which deals in highly-specialised contracts and acquisitions. He says the average biotech product costs $1bn to bring to market but maybe one in 100 will be successful. ‘You’re dealing with often-small upfront payments, from several million to $10m-$20m. But the success of a particular product can result in many billions of dollars of payments, so they’re essentially options for the development of new technology where we take on the burden of running the clinical trials, the safety tests, developing the formulations and manufacturing methodologies. But it’s only worth something if it cures a disease, or helps to mitigate a disease.’
With M&A activity showing no signs of slowing, the relationship between in-house legal teams and external advisers is having to evolve. The teams highlighted above reflect how in-house corporate lawyers at some of the biggest companies are not just relying on law firms for broad M&A work, but coming to them in an increasingly surgical manner.
Of course, bigger companies are normally those at the heart of M&A activity, justifying the need for in-house transactional capacity. Take BAE Systems, however, in the top half of FTSE 100 companies by market capitalisation. GC Philip Bramwell only carries two lawyers in M&A and corporate and securities respectively, instead relying heavily on external counsel: ‘They second lawyers to us in both these fields and we also offer a corporate law training seat. Depending on deal flow, we will make greater or lesser use of external legal resource.’
The senior in-house corporate lawyers IHL spoke to all mention acquisitions, divestments, and consolidation as continuing themes at their respective businesses. External law firms will be looked to for resourcing these lean teams on big transactions, but there is increasing pressure to provide more tailored and in-depth advice.
Shire’s Mordan only sees one trajectory: ‘You’ll continue to see the rise in prominence of corporate lawyers in-house. Companies have often relied on external counsel for guidance and expertise on complicated corporate matters but they’ve realised they can get even better value and more cogent and clear advice relative to their industry by using in-house resources. You get tremendous value by having somebody on your team that understands your business and understands the nuances of corporate law.’
Risk v reward: A more careful kind of M&A boom
It is a strange deal market for in-house teams to get their heads around. Fired by cheap capital, 2018 has shrugged off persistent concerns over the global economy and international trade tensions to see an avalanche of substantive deals.
Yet by consensus from M&A partners at major law firms, general counsel have more need to be wary than in previous eras of rampant deal-doing, with increased pressure to manage risks in an increasingly fractious cross-border market.
Such an environment is leading investment decisions to become increasingly politicised and changing the direction of FDI, notably in China.
In particular tensions over global trade under the US Trump administration are often cited. Freshfields Bruckhaus Deringer global M&A head Bruce Embley cites rising protectionism as a key development: ‘Some of it is to do with national security concerns, some of it is to do with jockeying for political positions.’ But he noted that the Committee on Foreign Investment in the United States (CFIUS) recently approved a Chinese investment for the first time ‘in ages’, suggesting future positive relations.
Embley notes that in-house corporate teams must address the cross-border, cross-industry drive towards tougher regulatory enforcement when closing deals. He asserts: ‘The way regulators are looking at what deals mean in terms of consumer behaviour is changing pretty rapidly. If you are an in-house team with something that’s regulated it’s becoming very strategically important for you to think about it [transactions] more.’
Stephenson Harwood M&A chief Andrew Edge says that the robust flow of deals is putting process under pressure. ‘On some deals, buyers are skipping their due diligence. Where it is being done, the use of warranty and indemnity insurance has increased exponentially in part because the pricing is reasonable. Especially in private equity – it’s a competitive market and they have money to spend. They need to spend that money, there’s a lot of competition for assets.’
Herbert Smith Freehills’ global head of M&A Gavin Davies concedes that acquisitions are moving ‘very quickly’ but plays down potential pitfalls of less due diligence: ‘Clients are having to take an informed risk view on that [fast-moving transactions]. It’s not a case of just not having time, it’s a risk/reward decision.’ He adds that the savvy in-house lawyer should be engaged with what he calls ‘horizon-scanning’, due to an increased focus on reputational risk. Davies says: ‘Our outside counsel are always asking us about developments in other sectors that could potentially affect their business.’
As for other trends to watch, the continued development of shareholder activism is expected to migrate from the US to further impact European boardrooms. Greater use of data as an asset in transactions is cited by some advisers, while others note that 2018 looks on course to be a robust year for European M&A. As in recent years, energy and utilities and TMT look to be dominant sectors for deal activity.