European equity: Stock picking

Author: | Published: 1 Nov 2006
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The London Stock Exchange's Alternative Investment Market (Aim) has raised $19 billion in 65 foreign listings this year. Freshfields says that more than half of its London listings in 2006 came from non-UK issuers. This is largely a result of a flight of capital from the US, driven by the expensive compliance requirements of the Sarbanes-Oxley Act (Sox). But how are US and UK law firms reacting to this boom in work?

Firms began by looking for issuer instructions, which are more attractive than nominated adviser (Nomad) work for brokers such as Collins Stewart and Peel Hunt. But the elite investment banks have also become interested in bringing bigger deals to the alternative market, justifying international firms accepting Nomad instructions. The top banks are careful about the deals they act on, says one equity lawyer, and they are prepared to pay higher fees. Also, while Aim is a big source of work for many law firms of different sizes, leading firms are finding that only the top Aim work is worth their while.

US firms have suffered as their UK counterparts have prospered. The success of London's alternative market in attracting foreign issuers came at the expense of New York's National Association of Securities Dealers (Nasdaq). Lawyers say that US authorities are aware of the need to review Sox, while London knows it needs to tighten its regime. Speaking at September's Live from the SEC event, Ethiopis Tafara, director at the Office of International Affairs at the SEC, said that capital markets are now internationalized and oblivious to borders. Tafara, who prefaced his comments with a statement that his opinions were his own and not those of the Commission, said that investors still demand protection and identified the need for greater cooperation between securities regulators in promoting market integrity. Issuers and investors both have an interest in the integrity of global markets, said Tafara, and the regulatory race should be one to optimality rather than the bottom. He had detailed similar opinions in the cover story of September's IFLR, arguing that regulatory standards around the world are converging towards Sox. At the time of writing, the London Stock Exchange is reported to be reviewing Aim's regulations and introducing a new regime next year.

And it seems the adage about the US sneezing and the rest of the world catching cold could no longer be true. Practitioners say that the influence of the US is not as great as before with China, Japan, the European Union and emerging markets becoming more independently viable. Lawyers see evidence of this trend away from US market dependency in the success of Aim. The New York Stock Exchange is reported to have commissioned consultants to answer why the exchange has lost ground to Europe and London in particular. "Most big deals include a Rule 144A tranche," says Nick Eastwell, global head of capital markets at Linklaters. "But Sarbanes-Oxley has led to a major decline in New York listings and SEC registrations." Foreign companies need only be rated by one of the ratings agencies to tap the US market through Rule 144A and the Section 4(2) exemption of the US Securities Act, which allows qualified institutional buyers to participate in the primary and secondary 144A market.

Lawyers are interested to see what the response from US firms will be to the success of European capital markets in attracting Chinese, Russian and other foreign issuers. Practitioners surveyed by IFLR have the impression that the elite New York firms, which do not have the spread of the big European firms, are not putting the same resources into global capital markets. Instead many of these firms are focusing on their home market. US firms are unlikely to change their business models due to a relative lack of size (compared to international European firms) and, most importantly, concerns about profitability dilution. But there are a variety of business models in operation at international US firms and European competitors are interested to see what firms like White & Case and Baker & McKenzie are doing in emerging markets.

Over the past decade the European capital markets have become deeper, broader, more integrated and more innovative. Management consulting firm McKinsey & Company predicts the global capital stock could rise to over $200 trillion by 2010 and Nick Eastwell thinks there has never been a better time to be an equity capital markets lawyer. "The role of the lawyer is becoming more important as increased regulation and high profile corporate failures have led to a more risk averse environment," he says.

Opportunities for firms to enter the equity market are scarce. Lawyers say equity is the most competitive market of all, more so than debt where the Eurobond market is sewn up by the top UK firms, with the exception of high-yield debt which remains a US product. "It's difficult for new firms to break into the market without major investment," says Eastwell. "The same firms that dominated the market 20 years ago are still the top firms today."

Linklaters has over 500 lawyers in its global capital markets group while fellow magic circle firm Allen & Overy has over 200 capital markets lawyers in London alone. But it is still not enough and firms are having problems staffing deals, leading to brutal hours for associates over the summer. Success breeds its own challenges and lawyers say that busy markets can pose problems when management's attention wanders from career development. "While we rarely lose people to our competitors, some associates are moving to banks that can offer an alternative proposition in terms of lifestyle," says Boyan Wells, who stepped down as head of Allen & Overy's international capital markets group in October following his appointment to the firm's board. Wells thinks that law firms must do more to strike the right sort of lifestyle balance and examine opportunities in flexible working.

It is difficult for practice leaders and managing partners to focus on career development during what equity lawyers term an explosion of business. Initial public offerings (IPOs) are buoyant and the main markets in Europe are characterized by the geographic diversification of issuers. Eastwell puts his firm's regular appearance at the top of the various rankings for IPO instructions down to the depth of the firm's international network. He also cites the introduction of Sox in the US as a helpful factor in driving foreign companies from the US to Europe. Linklaters is placed first in both Thomson Financial's and Bloomberg's second quarter 2006 European IPO manager advisers tables, both in terms of deal volume and number of issues. According to data from both providers Linklaters has more than double the number of instructions of its nearest competitor. DA