As the number of mergers and acquisitions and cross-border deals soars, lawyers face regulatory ad cultural issues, reports Cameron Timmis


After the post dot-com era meltdown, mergers and acquisitions (M&A) work is back in spades. According to global data provider Dealogic, the first nine months of 2006 saw the value of global M&A deals total $2,672 billion (£1,400 billion), just short of the all-time record of $2,680 billion set in 2000 for the equivalent period.



Two key drivers for this renaissance, according to M&A lawyers, are the abundance of cheap debt to finance deals, and the explosion in private equity deals. For example, figures from analyst Thomson Financial show that, in the first nine months of 2006, the total value of global private equity transactions reached $461.9 billion, double the previous record set last year and nearly one-fifth of total global M&A volume.



Typically, says Herbert Smith M&A partner Malcolm Lombers, private equity funds are looking to buy ‘local monopoly assets’ such as ports and infrastructure, which promise stable returns for investors. One sector currently being targeted in the UK is the water industry: over the past few years, several water companies have been acquired by overseas investment funds.



A related trend, observes Mr Lombers, particularly in M&A deals involving private equity funds, is the increase in consortium bids. By joining forces, buyers can share the risk and target larger acquisitions. In July this year, for example, private equity funds Bain Capital, KKR and Merrill Lynch Global Private Equity agreed to acquire US healthcare company HCA for $32.7 billion, in the biggest buy-out deal of all time.



Another key spur to M&A growth is globalisation, which has led to a corresponding increase in cross-border deals. According to Dealogic, in the first six months of 2006, the volume of global cross-border M&A deals was double that is the same period in 2005, and accounted for more than one-third of all global M&A volume.



‘I think generally companies are becoming bolder in terms of the type of deals they are doing and how far geographically they are prepared to stretch their tentacles,’ says James Burdett, an M&A partner at global law firm Baker & McKenzie. ‘It’s no longer just the multinationals which are doing cross-border deals. Even relatively small companies, which are operating in other countries or outsourcing their manufacturing, are doing cross-border acquisitions.’



English law firms are particularly well placed to capture cross-border M&A work, notes Mr Burdett: ‘The prevalence of English law for governing cross-border M&A deals is quite noticeable, which is why firms in London are very often involved in deals that have no other nexus to the UK, particularly in Asia, central and eastern Europe, and Russia. A lot of companies choose English law as a governing law for transactions even though they may not have any other connection with the UK.’


It is not just global law firms that are reaping the benefits of more cross-border work. ‘We are seeing a lot more international M&A in absolute terms,’ says Julian Smith, a corporate director at Birmingham-headquartered Wragge & Co. Around 90% of his work over the past two years has been on international transactions.


As cross-border M&A work has burgeoned, so have the challenges for M&A lawyers involved in international deals. In one recent survey of cross-border M&A, commissioned by City law firm Norton Rose, 54% of heads of legal interviewed reported that cross-border M&A has become ‘more difficult’ over the past five years (see 2006 Gazette, 14 September, 6).



Raj Karia, an M&A partner at Norton Rose who helped to compile the report, says that one barrier to cross-border transactions is the increase in regulation. In particular, he says, many developing countries such as China have recently enacted competition legislation.



He explains: ‘In the past in those jurisdictions, you probably didn’t need to worry about it, because there was no meaningful competition law. But the advice now from Chinese counsel is that this is becoming an issue.’ Similarly, within the EU, he adds, national competition authorities are ‘much more rigorous’ than before.



One upshot of the increasing pervasiveness of competition legislation is that lawyers are becoming indispensable in cross-border deals: ‘Certainly in a deal involving a European jurisdiction or the US, the competition lawyers are key,’ says Mr Karia. ‘If they know what they are doing, they can make a deal possible.’



Another barrier to M&A identified in the report is a growing level of protectionism. Last year, for example, Chinese oil producer CNOOC withdrew a £10.4 billion bid for US oil company Unocal, after it failed to get approval for the deal from the US Senate. Unocal’s board recommended a rival, lower-value bid from US company Chevron. Similarly, earlier this year, the acquisition of UK company P&O by Dubai Ports World (DPW) was also challenged by the US Senate, as it would have resulted in the Dubai company owning several US ports owned by P&O. The Senate argued that ports were strategic assets which should not be under the control of a Middle Eastern company. DPW subsequently agreed to sell P&O’s assets to a US entity.



Similar issues of protectionism arise in many other jurisdictions, says Mr Karia. He notes that France, along with the US and Russia, was voted in the survey as one of the most difficult legal environments in which to do M&A work. Respondents cited an ‘overly protectionist government’ and ‘complex labour laws’ as the main impediments. China was voted the toughest environment for M&A, whereas the UK was rated an ‘easy jurisdiction’.



For overseas companies acquiring UK targets, an increasingly common thorn in the side of transactions can be intervention by the UK Pensions Regulator. Following implementation of the 2004 Pensions Act, the regulator now has the ability to intervene either on a request from the trustees or on his own account if the target company has an underfunded pension scheme. Among other things, the regulator can require the target company to make payments into the scheme.



‘This is now a major issue in transactions involving a UK pension scheme,’ says Mr Karia. ‘From an acquirer’s point of view, the transaction can become more expensive… some transactions have failed because of this.’ In 2004, for example, private equity fund Permira abandoned its bid for WH Smith after discovering a substantial pension deficit at the company. WH Smith then laid out plans to tackle the problem, including a £120 million cash contribution.



Despite the plethora of legal and regulatory issues involved in cross-border transactions, most M&A lawyers argue that cultural differences often present the biggest difficulty.



‘If you are doing a straightforward deal with two sophisticated UK counterparties, UK banks and UK advisers, everyone knows what to expect,’ says Mr Lombers. ‘If you transport that to South America, France or the US, they have to get accustomed to a different commercial, legal and regulatory market. It adds a different dynamic to an ordinary deal.’



‘A deal can fall off the tracks if people don’t adjust their behaviour and are sympathetic to the culture,’ says Mr Smith. ‘It would be wrong to blunder in, in an English or American way – you can destroy the dynamic and chemistry of a transaction.’


There are also practical problems to contend with, particularly in developing jurisdictions, he says. ‘I think the biggest thing that makes life difficult is the diversity of client service delivery. There are countries where even among the very best lawyers you come across, you can’t take top-drawer service for granted. You do find it difficult selecting lawyers who are commercial and proactive and who have technical expertise.’


He adds: ‘To take an extreme example, we’ve been working on an African transaction which has involved some leading African lawyers. It’s not their fault, but they are working in an environment where the telecoms system cannot be taken for granted.’ As a result, he says, ‘people don’t get e-mails, calls are not returned’.



Another practical issue in cross-border deals that ‘people often get wrong’, says Mr Smith, is not being prepared to travel. In practice, he says, success often depends on ‘meeting with foreign lawyers early on, investing in time, making sure lawyers are all on the same page and understanding what needs to happen’.



When the stakes, and no doubt the legal fees, are so high, it is an investment clearly worth making.



Cameron Timmis is a freelance journalist