The Credit Squeeze Fears on Mergers & Acquisitions Work at Law Firms

Article written by Melania Wenstrup

La crisi del credito causata dai mutui subprime statunitensi, ha avuto un forte impatto sulla pratica di M&A negli studi legali americani. Come ci spiega Melania Wenstrup, la diminuzione dei deal e le conseguenze che la crisi ha avuto sul mercato, ha portato molti studi a riposizionarsi, puntando su contenzioso, ristrutturazione del debito, ri-finanziamento e procedure di insolvenza. Ambra Di Tommaso

The fall down of the sub-prime housing market in the U.S. has had a ripple effect on the entire credit market. Law firms have started to see the impact of the global credit squeeze hitting their once flourishing mergers and acquisitions practices.

Many firms have seen a decline in deal flow since the beginning of the year. Deal volume fell off strikingly in the third quarter of this year, with some of the biggest deals of the year taking place during the first six months. In the third quarter, the global number of announced deals fell 40% to 3,086, from 5,101 in the second quarter of 2007, and the total value of deals dropped 5% from $897.8bn. to $852.6bn. (LegalWeek.com, October 11, 2007). We have seen a drop of global M&A transactions this third quarter compared to the same period last year.

We are now seeing a tightening credit market; tighter loan underwriting standards, decreased spreads, increased equity requirements, and delayed or cancelled transactions. Total debt in companies has been cut back amid sub-prime concerns and less favorable financing conditions have forced companies to be more cautious in corporate lending terms. Many attorneys are hoping for an increase in Initial Public Offering (IPO) activity as the affects of the credit crunch spill over into the public market. As debt becomes more expensive, some are predicting that private equity sellers could consider an IPO exit rather than a sale.

M&A work is a strong money maker for some law firms. As deal volume slows, law firms can expect to see profits dip as well. Some law firms, where the credit crunch is hitting hardest, will be forced to re-assign lawyers in other areas or let go of attorneys to stabilize profits. Recently, Clifford Chance, one of the worlds largest law firms, laid off a team of six structured finance associates in New York. The six associates exclusively worked on reviewing documentation related to mortgage-backed bonds, this section of the credit market has been hit particularly hard in recent months (Law.com, November 6, 2007).

In anticipation of slowdown in transaction-related work, we are starting to see law firms shifting to bankruptcy, restructuring, insolvency, workouts, and refinancing work for the short-term. A notable shift with law firms following the crises in the capital market is an increase in firms’ plans to invest in litigation. It is fair to predict that the credit squeeze is likely to trigger claims against participants and their advisers, and increase litigation between banking giants.

Opinion in the market remains divided. Optimists say many deals that were put on hold over the summer have been restarted. It is important to identify the dip in deal transactions is coming off one of the most extraordinarily busy cycles seen in years. Despite significant drops in deal transactions, many partners predict growth. The uncertainty created by the credit crunch has pushed law firms to look forward and strategically position themselves for Q1 or Q2 next year.

Article written by Melania Wenstrup, Wenstrup@BlankRome.com. Ms. Wenstrup graduated from Pennsylvania State University with a Bachelor of Science degree in International Business