The Australian M&A market is caught in the bearish grip of a global slump. Justin Whealing reports.

The feeling in the corporate groups of the large law firms in Sydney and Melbourne at the moment is akin to a party with no music. No one really knows what to do or when the music will start.

Traditionally, M&A partners at the big law firms have been the rock stars of the firm. They pull in the big bucks, work and play hard, and walk with a strut and swagger through the corridors of law firms that would put Mick Jagger and Beyoncé to shame.

However, the M&A hits have been failing to chart in Australia recently. In the two largest markets, Sydney and Melbourne, partners and their teams are often left twiddling their thumbs wondering where the next hit will come from.

Some lawyers have taken leave, others have been made redundant, and the senior management at law firms has started to shift talent to where there is still a little bit of M&A music playing – and that is in Perth.

“Yes that’s true, firms are shifting more resources to buoyant markets like Perth, and also Brisbane, and away from Sydney or Melbourne,” says senior Ashurst corporate partner Bill Koeck. “I think the mining sector will be the strongest area for us and I think the next few years will be really good for value-driven M&A activity in that sector.”

If there is one ray of sunshine in Australia’s M&A market, it is the energy and resources sector. Global demand for Australia’s resources is still strong. In March, a report by global firm Squire Sanders found that a quarter of global deal value in the energy sector in 2011 came from Asian investors. This was a significant increase from 19 per cent of deal value coming from Asian investors between 2005 and 2010.

The report said that the Asia-Pacific deal flow is underpinned by the Australian mining industry, citing major projects such as Gorgon, Wheatstone, Pluto and the Northwest Shelf, which have drawn interest from major companies of the calibre of Chevron, ExxonMobil and Apache Energy.

“Perth is a focal point for the large multinational corporations looking to invest into the Asia-Pacific,” said Squire Sanders Perth-based partner Duncan Maclean when speaking to Lawyers Weekly about the report.

Indeed, Squire Sanders started its Australian practice with a single office in Perth last October precisely because of international interest in Australia’s resources.

Five months since the release of that report, the Australian resources sector remains buoyant. That is despite China’s growth dipping and no signs of recovery from struggling European and North American economies.

“I think the activity in the energy and resources area will continue as it has a number of drivers,” says Koeck, who believes that commodities prices falling to “more reasonable levels” is stimulating demand.

“There is a question as to whether it is easier for a company to develop its own resources or to buy them,” says Koeck. “You start to see that the cost of developing a coalmine might be greater than buying one that is already up and running.

“There are those sorts of decisions that companies need to make and there is alot of smaller companies that can’t compete at their present size and need to get bigger in order to be viable.”

The downward spiral

The release of the first half-year M&A league tables last month made for depressing reading for corporate groups globally.

Despite the resources sector remaining strong, Australia suffered a marked drop in deal activity.

According to Thomson Reuters, Australian M&A activity plunged more than 50 per cent in the first half (H1) of 2012 compared to the same period last year. Thomson Reuters found Australian H1 M&A activity amounted to $US49.1 billion in announced deals, down from $US98.4 billion in H1 of 2011.

The story for Australia wasn’t much better according to the mergermarket league table. Its analysis, based on transactions of more than $US5 million announced between 1 January 2012 and 30 June 2012, found that Australia recorded a 22.3 per cent fall this half, compared to H1 2011; the biggest year-on-year decline of any country in the Asia-Pacific region.

“There are fewer deals getting to the announcement stage, which is what those stats tend to back up,” says Sydney-based Allen & Overy partner Michael Parshall. “Things are patchy and boards are conservative,” he adds.

“While there have been opportunities that people have looked at, a lot of acquirers are less emotionally attached to the acquisitions.”

Parshall was one of the Allen & Overy lawyers involved in one of the biggest global M&A transactions last year: the $11 billion sale of Foster’s to the British company SABMiller.

In the current climate, it is unlikely that deals of such magnitude will be launched anytime soon.

“Boards are conservative,” says Parshall. “I wouldn’t discount those sorts of deals completely, as that is the sort of work we all aspire to do, but the strategic merits of any acquisition all need to stack up as they did with the SABMiller transaction.”

Koeck is similarly sanguine when talking about the appetite for multi-billion dollar deals.

“As a general observation, if the US economy starts to improve we will inevitably see a rise in confidence at company board level here,” he says. “When that will happen – and I don’t think it will be this year, that is expecting too much, but possibly next year – we will look at a pick-up in activity.”

While Australia’s M&A market is in decline, the equity capital market (ECM) is in an even worse state.
Parshall’s colleague at A&O, Tony Sparks, told Lawyers Weekly late last year that his work is evenly divided between the ECM and M&A sectors.

He said that for the first half of this year the ECM team at A&O, which the former Freehills partner was instrumental in building up, has been busy acting for underwriters on modest IPOs. However, he acknowledges that times are tough.

“It is evident from the league tables that the volume of ECM work remains compressed compared to historical levels,” he says. “With fewer M&A deals there is less need to raise funds through an equity raising to fund that. There is a connection, and one [market] follows the other.”

Distressed business

While the volume of pure transactional work has dried up, banking and finance practice groups with expertise in insolvency work have been kept very busy.

For law firms, this means that corporate groups are looking to beef up their expertise with regards to restructuring work. For corporate dealmakers like Bill Koeck, it also means there is an opportunity to act on deals where cashed-up private equity consortiums look to pick up struggling companies at a knock-down rate.

“Distressed investing is extremely active,” says Koeck, who adds the “loan-to-own” transaction market around struggling companies is very buoyant.

While global economic recovery is still some way off, there are small green shoots of recovery in niche areas offering hope to corporate lawyers.

The Allen & Overy M&A Index for the first half of 2012 noted the general feeling of doom and gloom by commenting that “in all but a very few markets, M&A activity remains at a low ebb”.

However, it noted that many companies have “strong balance sheets”, that market fundamentals are “actually a good deal better than they were in 2009” and, as Koeck noted, “there are plenty of good deals to be done at attractive prices”.

For corporate lawyers like Sparks, this means they are looking at the market through glass-half-full eyes.
“In the ECM space there were some predictions of a stable of the huge volumes of capital raisings that were a feature of the immediate post-GFC,” says Sparks. “That didn’t happen, partly because the state of balance sheet damage was not as significant, and that has to be a positive sign, despite not having the volume of deals to do.”