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Sullivan & Cromwell Tops Global M&A Advisers in Volatile Year

Robert Profusek, Jones Day Head of Mergers and Acquisitions
Robert Profusek, head of mergers and acquisitions at Jones Day, said, “The arithmetic of deal-doing right now is fabulous.” Photographer: Andrew Harrer/Bloomberg

Sullivan & Cromwell LLP regained the top spot among legal advisers on mergers and acquisitions in 2011 as deals rose by 3.7 percent in a year lawyers said was marked by volatility tied to European debt and regulatory enforcement.

The law firm ranked No. 1 last year with $325.7 billion in transactions, up from $243.4 billion in 2010, according to data compiled by Bloomberg. The New York-based firm participated in 14 percent of global mergers and acquisitions by market value. Skadden, Arps, Slate, Meagher & Flom LLP fell to second place with $287.4 billion in deals.

Companies announced $2.27 trillion of M&A transactions in 2011, up from $2.19 trillion in 2010 and $1.77 trillion in 2009, according to Bloomberg data. Concerns over the European sovereign debt crisis tempered the deal market in the second half of last year, lawyers said.

“If you asked me in June, I thought this would be a $3 trillion dollar year but $2.3 trillion is good,” said Robert Profusek, head of mergers and acquisitions at Jones Day, which ranked No. 1 by deal count, with 460, and 14th overall. “It’s about where we were in 2005. We had a good year despite this obsession with negativity that dominated the capital markets and the financial press.”

The overall pace of deal-making is 56 percent that of 2007, when $4.04 trillion in mergers were announced, according to Bloomberg data. Regulators derailed AT&T Inc.’s planned $39 billion purchase of Deutsche Telekom AG’s T-Mobile, scrapping what would have been the biggest takeover of the year.

‘Ups and Downs’

Last year “was really marked by pretty big ups and downs in the M&A market, which tracks the ups and downs in business confidence,” said Joseph Frumkin, managing partner of the mergers and acquisitions practice at Sullivan & Cromwell.

Deal lawyers said they expect significant improvement this year as companies sitting on large cash reserves will be able to more easily obtain cheap financing.

“The arithmetic of deal-doing right now is fabulous,” Profusek said. “The fundamentals are pretty good. We just have to get out of this emotional slump.”

Sullivan & Cromwell worked on 131 completed and pending deals for the year and half of the 10 largest, excluding the AT&T-T-Mobile transaction. Among others handled by the firm is Kinder Morgan’s $37.6 billion takeover of El Paso Corp., the largest deal of the year, and Express Scripts Inc.’s proposed $34.3 billion purchase of Medco Health Solutions Inc., the second-largest.

While companies will continue to do big deals “opportunistically,” there are constraints in the leveraged finance market to do acquisitions bigger than $10 billion, Frumkin said.

‘Bread and Butter’

“Overall you won’t see deals routinely at the size you saw in 2007,” Frumkin said. “The bread and butter will be deals in the $1 billion to $5 billion range.”

Eight of the top 10 legal advisers are U.S. firms. The Americas accounted for about $1.1 trillion in deals compared with $660.6 billion in Europe, the Middle East and Africa and $393.5 billion in the Asia Pacific, excluding Japan. Japan accounted for $105.3 billion in deals, according to data compiled by Bloomberg.

The collapse of the T-Mobile deal dropped New York-based Simpson Thacher & Bartlett LLP’s ranking. The firm, which led among legal advisers in the third quarter, fell to No. 3. Wachtell, Lipton, Rosen & Katz and Latham & Watkins LLP ranked fourth and fifth, respectively. Wachtell jumped seven spots from the previous year on $272.3 billion in deals, up from $128.5 billion in 2010.

Private-Equity Deals

Simpson Thacher, the year’s No. 1 firm for private-equity deals, advised on 177 transactions worth $273.9 billion, according to the data.

The vitality of the high-yield debt financing market remains a factor in doing leveraged deals, said Robert Spatt, a partner at Simpson Thacher and an adviser to private-equity firms including KKR & Co.

“As of year-end, the financing market was better than it had been at some points during the year and not as good as others,” Spatt said.

London-based Freshfields Bruckhaus Deringer LLP, which fell three spots to number eight by market share, led among cross-border announced deals, according to Bloomberg data.

“Law firms in general had a pretty good year,” Profusek said. “The bankers are a little more depressed than the lawyers’ side of M&A.”

Serious Threat

Upheaval in the European Union remains a serious threat to corporate confidence, Profusek said. Many expected a strong revival in the first half of the year when there were signs “that the animal instincts had returned,” Profusek said. Deal-making came to a halt in August and September particularly due to the uncertainty in Europe.

“The macro environment is really very good but we’ve had this period of economic nail-biting,” Profusek said. “Eventually we’re going to get tired of what Italy sold its debt for yesterday. It can’t be a story forever.”

The specter of more aggressive antitrust enforcement could also damp returning enthusiasm, lawyers said.

“I think the need for companies and their advisers to be sensitive to a more active federal antitrust and approval process is going to affect how people think about deals,” Frumkin said. “In deals where those issues are raised you’re going to have to give real consideration to the possibility that the government won’t approve them.”

Gradual Improvement

The consensus for 2012 points to a gradual improvement in deal-making with no huge jumps, said Stephen Arcano, head of the New York mergers and acquisitions practice at Skadden Arps.

“I’m not big on the projection business, but based on what appears to be an uptick in activity in the fourth quarter I would be hopeful that carries over into 2012,” Arcano said.

Skadden benefited from business in health care with Gilead Sciences Inc.’s $10.6 billion purchase of Pharmasset Inc. and Teva Pharmaceutical Inc.’s $6.2 billion acquisition of Cephalon Inc. Skadden advised on 234 deals for the year, participating in about 13 percent of the market. Among firms acting as advisers to buyers and sellers, Skadden ranked No. 1 globally.

In addition to its U.S. success, Skadden was the second-biggest adviser in China last year, up from the eighth spot in 2010. The firm, which has Chinese and American lawyers in offices in Beijing, Shanghai and Hong Kong, competed with so-called Magic Circle firms based in the U.K. to advise on a number of transactions in that country across a range of industries, Arcano said.

‘Very Fortunate’

“We’ve been very fortunate,” Arcano said. “China has been a vibrant market for us this past year.”

Beyond health-care transactions, 2012 will probably see continued business in natural resources and energy, Frumkin and Spatt said. Simpson opened an office in Houston in November to help expand its energy practice, Spatt said.

“We saw so much activity in the energy space,” Spatt said. “It made a difference to be there.”

The technology and medical devices sectors are also expected to do well with a recovery in real estate, said Arcano and Profusek, who predicted an increase in hostile takeovers.

“Expect a lot more shotgun-wedding kind of deals,” Profusek said.

Companies flush with cash will be under shareholder pressure to grow, and one way to do that is through acquisitions, Profusek said. He added that targets may be reluctant to sell and have to be pushed into mergers.

“In a post-financial crisis period we usually see a real surge of hostile stuff, usually after a correction,” Profusek said. “We haven’t had that yet.”

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