Brexit Vote Clouds Big-Firm Lawyers’ M&A Crystal Balls
On Friday, senior transactional partners at many elite U.S. firms were working the phones nonstop to advise clients on the legal ramifications of Britain’s stunning vote Thursday to pull out of the European Union.
But behind the frenetic client counseling, several lawyers said that they were bracing for a possible two-year drought in their most highly leveraged, profitable business: advising on cross-border M&A transactions in Europe and the U.K.
“This is going to have a negative effect on international M&A, at least through the end of the year,” said Cravath, Swaine & Moore corporate partner Richard Hall in New York. The lingering effects, Hall said, could last as long as two years, the time possibly required to untangle the U.K.’s regulatory regime from the EU.
Law firms were already coping with an M&A slowdown this year based on pre-Brexit jitters. Worries about the upcoming referendum have dragged global M&A markets down for several months. Overall global deal value has slid 27 percent from a year earlier, and the U.K.’s share of the global M&A market has plunged.
According to Dealogic, which released its most recent data on Wednesday, some $68.6 billion in U.K.-sided deals were announced this year, 65 percent below the first half of 2015. A year ago, U.K.-targeted deals were the biggest chunk of deals involving EU targets—“not a majority, but a significant chunk of EU deals,” said Scott Barshay, who earlier this year joined Paul, Weiss, Rifkind, Wharton & Garrison as global head of M&A.
Meanwhile, Reuters reported that bankers advising companies on takeovers and IPOs have all but written off big-ticket activity for the rest of 2016.
The impact on the bottom lines of firms heavy on cross-border M&A and capital markets work could be significant for 2016, said two firm heads, speaking on the condition that they not be identified. One sent a memo to their firm’s London partners asking them to study the impacts of Brexit on the firm and its practice groups, as well as identify any potential business opportunities created by an exodus from the EU.
“Our people in London are worried,” said the unnamed firm head. “Everything big and everything little is going to change. Increasing uncertainty is generally accompanied by a challenging business environment.”
U.S. law firms were also dealing with the traditional slowdown in M&A that occurs during a presidential election year.
“The markets get more volatile and M&A gets a lot slower, certainly coming out of Labor Day and the conventions,” noted Alan Klein, the New York-based co-head of Simpson Thacher & Bartlett’s M&A practice. “There was a window over the last few weeks [in which companies] were gearing up to get a bunch of deals signed up prior to the conventions.”
Klein said that Brexit-triggered volatility “may certainly cause some number of those deals to pull back.” For parties looking to ramp up deal activity in the fall, he added that the “leave” vote could now cause “a significant pause in activity earlier this year than would have otherwise been the case.” Klein, who once helped Simpson Thacher build up its now 100-lawyer London office, foresees a return to market stability by the beginning of 2017.
Some deals already in the pipeline may be delayed or even called off if Brexit is found to represent a “material adverse event,” or MAE, said Derek Meilman, an American M&A partner at Hogan Lovells in London and member of a 15-lawyer interdisciplinary, cross-border advisory group at the firm that has been preparing for a potential Brexit for six months.
And a few deals, including the proposed merger between Deutsche Börse AG and the London Stock Exchange Group PLC, were thought to be at risk in a “leave” vote because of heightened regulatory and political scrutiny and shifting valuations of both firms, according to The Wall Street Journal. The tender period for Deutsche Börse shareholders ends July 12.
But in the short term, all those merger contract reviews will mean a lot of fees for timekeepers. Meilman, reached Friday in New York between meetings advising clients on the Brexit vote, said that Hogan Lovells has been busy reviewing the MAE clauses for clients who have deals in the pipeline.
Likewise, Guy Lougher, head of the EU and competition law group at Pinsent Masons in London and leader of the British firm’s Brexit advisory team, told sibling publication Legal Week that he was already advising clients on the implications for “business-critical contracts.” Lougher added that “the sooner amendments can be agreed or terms negotiated, the more businesses can increase their sense of certainty.”
Other transactions will also have to be modified in the aftermath of the Brexit vote.
“All stock-for-stock deals that have been in negotiations are going to be reassessed,” said Shearman & Sterling’s co-head of global M&A, George Casey, who predicts a return to relative normalcy by year’s end or early 2017. “The dealmakers, the private equity firms, will reassess where they are in various transactions they are negotiating now, and then they’re going to resume activity.”
In the medium term, the decreased valuation of the British pound could prompt some investor interest in U.K. companies if their stock price or capitalization also drops.
“If you’re acquiring a U.K. target, it just got a whole lot cheaper,” said Hogan Lovells’ Meilman. “Will the drop in currency price result in an uptick in M&A? I doubt it. Will it mitigate the decreased activity? Potentially.”
Cravath’s Hall said that the opposite was just as likely to happen.
“At least with my client base, I’ve never found them to be particularly interested in ‘Oh, a country’s currency has collapsed, so let’s hurry and buy a company there now,’” added Hall. “The fact that the currency has collapsed may actually make them less desirable if their earnings are denominated in pounds sterling.”
But in the next year or two, Asian and EU investors may turn toward new markets, potentially benefiting U.S. firms.
“Given the turmoil from Brexit in Europe and the U.K., that may strengthen the desire of EU companies to broaden their footprint in the U.S. and North America generally,” said Davis Polk & Wardwell corporate head John Bick in New York. “Also, we’ve seen a lot of outbound Asian and Chinese deal activity into the EU and the U.K. in recent years. I’m just speculating here, but there may be more of a focus on the U.S. now as a safer bet.”