Paul T. Schnell has worked on some of the biggest mergers announced this year, a period in which, he says, the business of buying and selling companies is in the doldrums.
“I’d liken the M&A market to getting over an earthquake and its aftershocks,” he said. “And we had the biggest economic earthquake in 80 years.”
It’s a state he has rarely seen in his three-decade career as a mergers and acquisitions lawyer at Skadden, Arps, Slate, Meagher & Flom. Four years after the financial crisis nearly shut down the markets, the mergers business has been slow to return to the heights it attained before 2008. Deal volume dropped 3.7 percent in 2012 from 2011, to $2.36 trillion, according to Thomson Reuters data.
Skadden, which emerged in the 1970s and 1980s as a powerhouse in advising on mergers and acquisitions, led law firms in the deal industry in 2012, having advised on 206 deals worth $326 billion as of Dec. 28. A year ago, it was No. 3.
Leading the law firm through this period was Joseph H. Flom, who died early in 2011. He built a specialty in M&A at a time when loosened antitrust laws and deregulation hastened a boom in corporate deal-making, especially on more controversial deals involving hostile takeovers and proxy fights.
On the back of its pioneering mergers practice, the firm expanded into other areas and geographies, becoming a model for the global mega-firm that today dominates the legal industry.
Schnell has been among the busiest lawyers at the firm, having advised on transactions like Anheuser-Busch InBev’s $20.1 billion takeover of the part of Grupo Modelo that it did not already own and Pfizer’s $11.9 billion sale of its infant nutrition business to Nestle.
A philosophy major given to professorial disquisitions — his ideal alternative job would be to teach philosophy in high school — Schnell ascribes the weak deal market to a collective battered psyche that is deterring many executives from going through on deals.
This year, there has been uncertainty over the presidential election, the economies of several European countries and the battle between President Barack Obama and House Republicans over tax and spending cuts.
“You’re still seeing a manic-depressive M&A market, one that’s reacting strongly to positive news and then to negative news,” he said.
And despite a flurry of deals in the last weeks of the year, it’s unclear whether the environment is picking up. Nonetheless, merger bankers and lawyers, an ever-optimistic lot, have said that the buzz among their clients for deals has been getting louder. The amount of deal volume announced in the fourth quarter is up 16 percent from the period a year earlier, though the number of transactions is down 26 percent.
Deals can be completed, Schnell said. Directors are increasingly asking their management teams about potential opportunities. And advisers are keeping busy: Schnell recalled having to cut short a family vacation in London this spring, with business forcing him to keep long hours. “I got to know the graveyard shift very well,” he said.
Still, many deals tend to be “bolt-on acquisitions” that add incrementally to an existing business. From June to August, for example, the dollar value of announced mergers plummeted to some of its lowest levels since 2007. Yet at 3,400, the takeovers were the second-highest number of deals since the summer of 2007, according to data from Standard & Poor’s Capital IQ.
“In uncertain times, it’s harder to do a bet-your-company type deal,” he said. “Bolt-on acquisitions are safer-sounding and are a safer kind of deal to do.”
Banks are willing to finance deals again as well, including takeovers by blue-chip companies and leveraged buyouts by private equity firms and riskier junk-grade buyers. And more permissive forms of financing, like so-called covenant lite loans that carry fewer limits, are creeping back into the market.
But lenders’ eagerness usually extends only to smaller transactions, restraining the ability of buyers like buyout firms to strike deals above $5 billion. Some industries have been buoyed by other factors as well. Oil and gas remains the busiest industry for mergers, accounting for 14 percent of all M&A activity in 2012, according to Thomson Reuters, driven by a seemingly limitless hunger for shale oil and gas properties.