Excuses, excuses.

When it comes to trying to explain why the M&A market last year was as flat as a badly-cooked pancake, the bankers, lawyers and accountants have many theories: The American presidential election causing uncertainty in the US; the European debt crisis fuelling uncertainty on that continent; falling commodity prices; a high Australian dollar and lower than expected growth in China would make the top five list of external reasons cited as being beyond the control of everyone, even lawyers.

“It was a perfect storm really,” says Ernst & Young partner and Oceania M&A leader Peter Magill, who adds that a combination of all of the above caused both global M&A and equity markets to contract.

A cursory look at the major league tables makes for sober reading: The Bloomberg analysis showed that announced global transactions decreased 7.9 per cent from $US2.4 trillion in 2011 to $US2.2 trillion last year, and Dealogic found that Asia-Pacific M&A revenue fell by seven per cent.

Australia was not spared the pain.

Dealogic found that Australian investment banking revenue fell by a fifth, from more than $US2.35 billion in 2011 to $US1.9 billion last year.

The Mergermarket survey also found, as well as deal volume being down in Australia, its relative importance in the Asia-Pacific pecking order had decreased.

Bidders looking for a target in the Asia-Pacific region accounted for 414 announced M&A deals in Australia in 2012, totalling $US46.7 billion, third behind China and Japan.

This was down from $US79.3 billion the previous year, and was a fall of more than 50 per cent on the 2010 total of $US106.3 billion.

Mergermarket noted that M&A in Australia represented just 10.6 per cent of the region’s activity in value in 2012, down from 19.6 per cent the previous year and 22.9 per cent in 2010 — a year when Australia, incredibly, outstripped China in deals.

“In the early ’90s, it was definitely worse than now,” said King & Wood Mallesons (KWM) veteran David Friedlander when talking to Lawyers Weekly in December.

But even Friedlander, an eternal optimist, could not keep the stiff upper lip when talking about the level of business confidence, which he described as “pretty rubbish”.

In the two months since, any optimism for 2013 has been guarded and conservative.

“Talking to some of the investment bankers, there is some cautious optimism,” says Tony Sparks, an equity capital markets and M&A partner with Allen & Overy (A&O).

“Although, one of the bankers did say that the most bullish view for 2013 is that it is only one year away from recovery, which is not really what you want to hear,” he adds wryly.

Dog eat dog

Sparks’ firm, A&O, released a report in late January that described the global M&A market in 2012 as having fallen to its lowest level since “the dog days of 2009”.

When times are tough, law firms often have to play dirty to keep their place in the M&A pecking order.

Lawyers Weekly has been told of firms under-cutting, slashing fees, providing alternative fee arrangements and even offering their services on a pro bono basis for particular transactions in a bid to win the work in the short term and the client in the long term.

“Whenever you are talking to a client it is important to demonstrate the value of your service; not just the cost of it,” says Sparks, who notes, with characteristic English understatement, that firms are prepared to “quote competitively”.

“People are conscious of the costs and we need to be able to demonstrate that there are efficiencies and cost savings in going to a firm that has experience in those sorts of transactions.”

Despite A&O’s reputation as a firm from the top-end of town with the ability to charge accordingly, like all firms, they have not been afraid to get down and dirty to win work.

In January 2012, when Friedlander was a member of the partnership of a humble Australian firm rather than a partner with a global firm, he told Lawyers Weekly that “what has been fascinating is the extent to which the global law firms have been discounting to get the volume [of work]”.

“With some exceptions, they don’t have the expertise or depth for some of these transactions, so that has had no impact, but for the more vanilla work, it has had an impact.”

Fast forward 12 months and that pressure on fees has only intensified.

“It is certainly a buyers’ market so, to that extent, they do [seek different pricing structures],” says KWM partner Peter Stirling, who was the head of Blake Dawson’s corporate group in Melbourne prior to the merger with Ashurst. “I think clients use that leverage effectively and I think it is for the benefit of the sector as a whole that this happens and that we open our mind to alternative mechanisms.”

When the market is more like a bear than a bull, transaction lawyers and firms also need to ‘add value’ in other areas to keep clients on board and keep themselves in a job.

In December, Lawyers Weekly revealed that Clayton Utz and Ashurst had rolled out redundancies.

At KWM, which didn’t shed staff, the firm and senior M&A practitioners such as Stirling have been advising clients on various other business concerns, such as corporate governance, or helping in-house lawyers with client companies fulfil their professional obligations .

“It is one of the challenges of M&A practitioners when there isn’t a deal to be done, to stay in the mind’s eye of clients, and we do that by trying to do as much CLE as we can,” says Stirling. “We also bring other things to their attention – for instance, looking at deal structuring opportunities together with investment banks and mutual clients.

“I think it is imperative to be thinking of the next deal.”

Recovery rumours

While it is acknowledged that last year was a bad one for the M&A market, the optimists have some evidence to spruik a recovery.

According to Bloomberg, there was a 38 per cent increase in activity in the Asia-Pacific region in Q4 2012 as compared to Q4 2011.

Crucially, China and commodity prices have also rallied.

Falling commodity prices and the slowdown in China’s growth rate were major reasons for the decline in Australia’s M&A market in 2012, which, according to Bloomberg, saw the top 20 law firms’ share of revenue in the Australian and New Zealand M&A markets fall from more than $US150 billion in 2011 to less than $US90 billion in 2012.

“I think the major reason for the sluggish Australian M&A market last year was the dip in energy and resources work,” says Stirling bluntly.

The Reserve Bank of Australia reports that the index of commodity prices rose by 1.7 per cent in November and by 0.8 per cent in December.

China’s GDP growth in Q4 2012 was 7.9 per cent, which was 0.1 per cent above economic forecasts and a vast improvement on the 7.4 per cent growth rate for July to September 2012.

These factors mean that talk last year of the death of Australia’s energy and resources sector was grossly exaggerated.

“That was very over-hyped,” says Magill. “There was an expectation we would see a whole lot of mining services companies collapse and it hasn’t happened.”

It certainly hasn’t, and national and global law firms in Australia are increasingly shifting resources from the east coast to the west coast, or sending lawyers to fly off to the energy and resources hubs of Perth and Brisbane for specific transactions, which shows where the action is.

“Our leverage ratio is about right for the size of this market, particularly in Melbourne at the moment,” says Stirling, while he describes the firm’s offices in Sydney and Brisbane as having “an excess of demand over supply”.

Capital confidence

Speculation about a possible recovery for the legal sector certainly has an east and west coast dichotomy.

For the M&A teams in Sydney and Melbourne, the capital markets and private equity consortiums are being watched closely.

Confidence has partially returned to the domestic capital market thanks to an improved All Ordinaries Index over the New Year period, which has piqued the interest of ECM lawyers such as Sparks.

“If you look at the ASX index and the market, not only is it tracking quite well, it has done so fairly consistently over the last couple of months,” he says, noting that November and December felt like “business as usual for us again”.

However, Sparks adds that while there was a significant amount of activity for rights issues and placements, there was an absence of IPOs, which remain defiantly on the shelf.

With shareholder confidence starting to return to the capital market, the big law firms and accountancy firms are hoping it will flow through to the M&A market.

“Strengthening share prices absolutely help but you need a greater period of stability in share prices,” says Magill. “It is the volatility that makes it very hard from a transactional perspective, but as we sit here now that is all looking more and more positive than this time 12 months ago,” he adds, before (surprise, surprise) cautiously ending with “there are definitely companies out there that would like to go to market, but the conditions aren’t right, so there is more time to run on that side”.

While energy and resources remains the critical sector that attracts both foreign law firms and multinationals to Australia, M&A lawyers in Sydney and Melbourne can be buoyed by the emergence of new sources for deals, such as agribusiness, and the partial re-emergence of infrastructure work and Australia’s continued attractiveness as a source for foreign raiders.

“I have noticed renewed interest from private equity groups,” says Stirling, an interest that is often fuelled by the ability to pick up a distressed asset at a knock-down rate. “We think our pipeline is looking healthier this year then it has for a few years.

“Asset prices are still pretty low, debt is reasonably cheap, and I think as a consequence of those two things, combined with corporate balance sheets being reasonably healthy, there is a slightly higher appetite for deals than there has been.”

While the appetite is large, the deal pipeline still has a lot to digest before M&A lawyers can honestly say the dog days are over.