Author: Nigel Page
There has never been a better time to be an M&A lawyer in Europe – or to be advising on the financing of the continuing rush of mega-deals breaking out across the continent. With activity related to the new economy continuing to rise, M&A activity has accelerated sharply. The number and size of M&A deals are at unprecedented levels. The figures speak for themselves. The record $3.4 trillion worldwide deal value recorded in 1999 is set to be dwarfed by this year’s transactions, with $1.14 trillion of M&A deals racked up in the first quarter of 2000 alone. For once, Europe is claiming the lion’s share of the action, and is widely expected to outpace the US in total value of deals this year.
Amid this surge in activity, the obvious question is: who is financing these deals – and how? Shareholders can hardly be expected to stump up all the breathtaking sums required, and other financing routes are having to come into play.
There is evidence that more syndicated loans of over $10 billion were arranged last year than during the whole of the previous decade – with the $291 billion raised through this route in 1999 to 2000 eclipsing the $280 billion raised between 1990 and 1998. But even this is not enough to satisfy demand. So private equity is coming to the fore, with European private equity firms expanding and creating new funds, and US banks and investment banks moving into Europe in a more concerted fashion than ever before.
As a result of all these trends, the investor base is growing, and new structures are being created. To an extent, these ideas and structures are being borrowed from the US. But whatever their origin, the fact is that the new deal landscape in Europe requires new and more complicated structures, of which more examples are now emerging on a weekly basis.
Maurice Allen, head of bank finance at the London office of US law firm White&Case, newly merged with the German firm Feddersen Laule Ewerwahn Scherzberg Finkelnburg Clemm to become the largest US law firm in Europe, comments: “There has been a huge increase in general liquidity and the size of deals. Senior debt for transactions is increasingly being structured with non-bank investors in mind, and in addition to traditional high-yield structures, we are seeing hybrid funding techniques coming to the fore, especially high-yield. The entry of the non-bank investors underlines their greater sophistication in looking for new ways to invest, and deals are being tailored now to let them in because the volumes essentially dictate that borrowers must go outside the traditional market.”
The US has already been down this road. With the proliferation of equity funds and mutual funds in the US, they provided an ideal route for arrangers looking for new sources of liquidity. At the same time, the rapid consolidation of the banking sector has reduced the supply on that front. As a result of these trends, non-bank investors now account for as much as 40% of financing for the leveraged market in the US. With US private equity funds pouring into Europe, and European non-banking sources gearing up, the same could happen in the European timezone.
However, while much of this may reflect the US experience, there is no doubt that Europe is going its own way. In Europe, structures are being developed to allow financing offers to be available for longer periods than would typically be found in the US, but with fewer conditions attached. Similarly, Europe is seeing different types of investors from the US, given the more complicated layers of capital investment and the growing prevalence of structures to accommodate hybrid bank debt and bond financing. Such trends may well feed back into the US market, in a neat reversal of the traditional pattern.
The growing reliance on non-bank financing sources is already evident in the UK, and is beginning to make itself felt in Germany, as the famed Mittelstand becomes increasingly active in both M&A and restructuring activity. France is also set to follow suit. Following the usual trend of financial innovation, these structures are soon likely to be adopted in Asia as the wave reaches that region, possibly helping to kick-start the long-awaited M&A boom there.
This trend has engineered a major shift in Europe’s funding landscape. Private equity sponsors are having an increasing influence on how deals get done, and can no longer be treated as an afterthought. They often come to the arrangers with highly specific requirements in terms of the kind of participation they want, which is likely to involve just one part of the package. And banks themselves are getting much better at managing all the disparate elements of the package, and are looking for advice on aspects such as high-yield issues alongside the general M&A and lending requirements.
For lawyers, these changes have enormous implications. “Clients are telling us a lot of things,” says White&Case’s Allen. “First, you have to be a player in continental Europe, especially Germany and France, which are both key markets set for takeoff. In those markets, access to corporates (including the Mittelstand in Germany), and to private equity providers, is crucial.” And, continues Mike Goetz, a US lawyer recently transferred to London from White&Case’s New York office: “Banks are more important in London, where the European head offices tend to be based. So with a US and UK law capability in London, as a base for the banking practice, and Feddersen Laule’s established strength in corporate and private equity work allied to our practice in Paris, we believe we’ve now got the resources you need to match this trend.”
The big question for the so-called Magic Circle law firms in London is whether a traditional, UK-style banking practice alone is suited to this new environment – certainly White&Case’s strategy would suggest not. The incoming US private equity providers tend to prefer to have deals project managed out of London, and are likely to have a preference for US firms. With UK firms often having a less extensive record on high yield for historical reasons, some of the more forward-thinking US law firms may be looking at a very real opportunity. Allen adds: “What the banks and equity providers need from their law firm is an ability to execute M&A, senior debt and high-yield pieces of a deal under one roof. We are one of the very few law firms that can offer all three strands credibly.”
The underlying message for lawyers is that focusing all their attention on the views of just one constituency may no longer be the right strategy. White&Case, Feddersen partner Andreas Stilcken sums up his experience: “We are seeing much more private equity coming into the German market – reflecting the fact that the Mittelstand now trusts them as a source of funding,” he says. “Also, German corporates are actively restructuring, and M&A is taking off. Plus tax breaks on disposals are on the way.” For White&Case, Feddersen – as it is now known in Germany -the hope is that the opportunities in Germany will be just a taste of what is coming across Europe.
