In the U.K. mergers and acquisitions market, the favored narrative that pitches U.S. firms as merciless interlopers has lately been quieted, however briefly, with the Magic Circle this year unseating the storied Wall Street elite as the market's most active group.

The Magic Circle and other U.K. firms took the top six slots in 2018 for U.K. M&A activity, according to data gathered by Mergermarket for The American Lawyer affiliate Legal Week. The familiar top-of-the-table U.S. firms fell down the rankings for the first time since 2014. After taking the top three places in 2017, Kirkland & Ellis, Davis Polk & Wardwell and Skadden, Arps, Slate, Meagher & Flom dropped to 12th, seventh and ninth, respectively, last year.

The new-look top six sees Magic Circle titan Freshfields Bruckhaus Deringer claiming first place, having advised on 60 deals worth a total of $144.4 billion, with Slaughter and May ($119.6 billion), Herbert Smith Freehills ($116.3 billion), Clifford Chance ($86.5 billion), Allen & Overy ($83.1 billion) and Linklaters ($70.9 billion) in hot pursuit.

A Sudden Shift

The phenomenon has attracted comment from all quarters of London, with U.K.-based partners invoking arguments predicated on anything from market conditions and strategy to succession concerns and short-termism. Others, while agreeing the results give rise to important questions, warn against drawing rash conclusions from a single year's results.

Freshfields M&A co-head Bruce Embley says that as high-profile M&A deals come with ever-increasing layers of complexity, this “might play to the deeper bench and deeper expertise of certain firms.” Travers Smith corporate partner Aaron Stocks suggests the trend is a reflection of the market.

“I see the driver being a change of the active buyers rather than U.K. firms doing better at muscling out U.S. firms,” Stocks says. “The primary driver is who the purchasers are. U.K. firms have a stranglehold on listed corporates, and have a better reach in terms of non-U.S. overseas buyers. Listed corporates have a lot of cash and are busy deploying it.”

Some partners attribute the poorer turnout by U.S. firms to clients finding that they are ill-equipped to take on big-ticket public deals. One M&A partner at a Magic Circle firm, who requested anonymity due to ongoing relationships with U.S. counterparts, says a large proportion of big M&A in the U.K. has been public in nature, and most U.S. firms do not yet have the depth of infrastructure that such work demands, particularly regarding tax, antitrust and regulatory strength.

“Most of the U.S. elite have set up from the base of private equity—firms like, for example, Sullivan & Cromwell—and are geared around key client relationships, such as with Goldman Sachs,” the partner says. Turning in particular to the FTSE 100, the partner adds: “They simply don't have the depth of knowledge, in capability, in understanding what's required for those marquee public deals.”

A corporate partner at another Magic Circle firm agrees that, while U.S. firms enjoy a large market share in private equity, “they don't have anything like the same weight [as U.K. firms] when it comes to regular corporate clients.”

Bruce Embley of Freshfields.

U.S. firms, however, get deal credit, as there is a U.S. component to most public deals, and that has always skewed statistics on deal volume and value, the partners argue.

“U.S. firms will be on [private equity] deals, but there is less U.S. client inbound transactional work to the U.K.,” the corporate partner says. “And look at general corporate Britain. Market share among the U.S. firms would be tiny. They have a couple of listed companies, but compare that to the Magic Circle.”

M&A partners agree that, while firms such as Kirkland & Ellis and Weil, Gotshal & Manges are building on the private equity side, Latham & Watkins remains the only U.S. firm in London growing its deal credit on the corporate side.

However, Sullivan & Cromwell's London managing partner, Richard Pollack, is quick to debunk any suggestion that U.S. firms, particularly his own, lack ambition when it comes to big-ticket public M&A. “We have over the last 12 months been working on deals which are not public yet—these are some of the biggest deals in the U.K. ever,” he says.

And he shrugs off the accusation that his firm is heavily geared around any one client, arguing that, while Goldman is a “good client,” the firm continues to pick up important mandates for a slew of older clients, as well as newer ones, such as the Qatar Investment Authority.

Succession Problems

U.S. firms established in London have long faced an acute challenge in succession planning, but might that old story be behind this latest setback?

The firm cited by corporate partners more than any other as exemplifying this issue is Skadden, whose English law head, Michael Hatchard, retired in 2017. He went on to spend a year in the London office of asset management company Perella Weinberg Partners, and earlier this year set up his own consultancy.

“When looking at it from a public M&A standpoint, who you want to use on those deals tends to be a more specific list than it is for other types of deals, and Hatchard resigning has left a huge hole in that sense,” an M&A partner at a large London firm says.

Succession woes reach far beyond Canary Wharf-based Skadden, with several others among the U.S. elite cited by U.K.-based partners as having a cause for concern.

“The senior statesmen are on their way out,” the Magic Circle corporate partner says. “It's a generational thing that they, seemingly, hadn't foreseen, and they're having to rebuild.”

Scott Hopkins of Skadden.

Scott Hopkins, Hatchard's natural successor at Skadden, who is now co-head of the London office's M&A group, offers a retort, arguing that although Hatchard was “a huge personality” and it is only natural for observers to ask questions, his absence “has not affected our deal flow.”

“The reality is a lot of people are facing succession issues, including U.K. firms,” Hopkins says. “The great and good at the Magic Circle firms are transitioning, and we see that as an opportunity.”

Venturing to finally settle the debate, Hopkins underscores both his own and his firm's credentials as essential deal market players. “In 2017, I was second in the Mergermarket dealmaker tables, and there's been a big overlap between Michael [Hatchard] and I. I don't see where the [succession] problems are,” he says.

Hopkins notes that he and Lorenzo Corte, his co-head, “have a shared vision and feel we have an amazing opportunity for version 2.0.”

When it comes to appraising proficiency in the London M&A market, more often than not the spotlight falls on Sullivan & Cromwell's European M&A head Tim Emmerson, around whom rumors of impending retirement continue to circle. However, Pollack, while highlighting Emmerson's importance to the firm, says his firm is “not a one-man band” and that the firm is “very comfortable in terms of where we are today and in terms of succession,” adding that “the next generation is very strong.”

Besides, “Tim is fully engaged and continues to attract work,” Pollack says.

In a similar vein, Charles Currier, co-head of corporate at international law firm CMS, agrees that the retirement of one or two rainmakers is unlikely to shift the needle, adding that U.S. firms will always be “great at institutionalizing clients.”

Meanwhile, a London partner at a U.S. firm doesn't think succession is an issue.

“When people say succession will be the downfall of U.S. firms, to me it betrays the fact that most lawyers fail to be economically analytical about their own business. I'm not sure why, but as lawyers, we tend not to bring the level of acuity that we do in assessing client matters,” the partner says.

“Succession, while a challenge, is not something that can bring down firms with such rich, dynamic histories, with almost familial ties to clients, with juniors who have the kind of essential corporate experience that generations before wouldn't have,” the partner adds.

Similarly, Stocks says that even though U.S. firms may lack succession plans or bench strength in certain areas, they find ways to carry on.

“They've always managed to get the work from their existing clients,” Stocks says.

Bench Strength

One thing most partners agree on is that every top firm, both U.S.- and U.K.-based, has to negotiate the succession problem, and what matters even more is bench strength.

“Looking at the bench is key,” says the Magic Circle corporate partner. “Most clients want to see a full bench and recognize the value of a deep bench. Perhaps that might be playing in, and go some way to explaining why the U.S. firms are dropping off for the first time in years—the realization that maybe hidden behind those weighty players … is a real deficiency in bench strength.”

The Magic Circle M&A partner suggests a simple test: “If you've got big, complex M&A, looking at those big public deals, name me three M&A stars from any of the U.S. firms. If you can, I'll be pleasantly surprised. But do that for, say, a Slaughters or a Freshfields, and you wouldn't struggle.”

Hopkins, for one, is convinced that Skadden, with its London corporate group growing its associate cohort by half over just 12 months, is “punching above [its] weight” where bench strength is concerned.

Pollack, too, believes that with practitioners such as Ben Perry, Vanessa Blackmore, Nikolaos Andronikos and recent Shearman & Sterling hire Jeremy Kutner, among others, installed in London, Sullivan & Cromwell has “quite a deep bench.”

Will They Return?

Of course they will. There is little doubt among London-based M&A partners that U.S. firms will once again contend for the top spots in U.K. activity.

One London-based U.S. firm partner believes that the U.K. will see more foreigners buying up domestic assets, due to the perception that things are at their lowest point post-Brexit—a trend that would favor U.S. firms—while for Travers' Stocks, the fortunes of all firms competing for the top work depends as much as anything on President Donald Trump's approach to China.

Pollack says that all it takes is one or two large deals to “change the whole complexion of the league table.”

Setting out his stall for the London M&A market, Hopkins argues that more important than a specific deal ranking is featuring consistently in the top 10 and fighting to act on the largest deals London has to offer.

As he cautions against complacency among the Magic Circle, Hopkins believes that much of what has happened as Brexit looms is “defensive M&A,” and that as deals become more cross-border in nature, the market will see U.S. firms ascend back up the table, including his own.

“We will be aggressive in pushing our practice forward,” Hopkins says. “I don't think the Magic Circle's stranglehold on the FTSE 250 is inviolable.”

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