Switzerland’s commercial lawyers, buoyant with optimism only a year ago amid the growing corporate and private wealth that was pouring into the country, now look ahead with some uncertainty. Private equity deals, a staple of many Zurich practices, dried up at the high end during the latter half of 2007, as transactions that were close to being inked fell apart, victims of shaky investor confidence - or outright bolting.
Nevertheless, Switzerland’s lawyers are putting a brave face on the crunch, playing down the business they have lost and touting the practice areas that remain robust: M&A and arbitration, for example. Smaller-scale transactions show no sign of ebbing, firms say. And other practice areas are growing to fill the gaps - defence mandates are booming, thanks to an increasing number of corporate hostile takeover attempts in the market. Tax, competition and initial public offering (IPO) work remain healthy, bolstered by new legislation that went on the books recently. Some firms are growing their practices into niche areas such as energy law, or are looking at business beyond their borders - the courting of Russian private and corporate clients, who have money to spend, is a growing story in Switzerland’s legal market.
Is all this enough to help Swiss law firms weather the credit storm? They say so, and in at least one way it seems they are in a good position to do so: Switzerland is more the market of the small and medium-range transaction, which looks set to survive, for now. Firms in Switzerland have never been as dependent on the huge, syndicated private equity deal worth billions that is the backbone of many larger UK and US practices - the crisis is hitting those deals hard.
The mega-deal on ice
The credit crisis comes at a bad time for Switzerland’s economy, which seemed to finally be up and running following a slump earlier this decade. Last year the economy grew 2.7%, a substantial amount for a country of seven million.
But the sub-prime collapse hit Switzerland’s public banks hard, and none harder than powerhouse UBS, which has taken more losses than any other European investment house. To date it has announced nearly E10bn (£7.4bn) in write-downs for debt-exposed holdings and, on 14 February, is expected to ask shareholders to approve an E8bn (£6bn) capital bail-out, mostly from sovereign wealth funds in Asia.
UBS’ woes, and those of the large London and US investment banks, translated into a near freeze on any huge private equity transactions in the Swiss market during the second half of 2007. Still, two Swiss law firms managed to get in under the wire on a major deal just as the first wisps of the collapse were being felt across the Atlantic.
London private equity fund BC Partners unloaded Hirslanden Holding, the largest private hospital group in Switzerland, to South African hospital group Medi-Clinic Corporation for E1.9bn (£1.4bn). The deal, in which Zurich giants Homburger and Lenz & Staehelin were part of the teams advising the seller and buyer respectively, closed in August and was the biggest transaction reported in Switzerland last year. “Had it been September or October, I am not sure it would have gone through,” says Lenz partner Matthias Oertle (pictured).
Many other deals did not go through for Zurich’s major private equity practices - including Homburger and Lenz. “We have clearly had less interest and fewer mandates for private equity transactions since August,” Oertle admits.
Such work is down 10%-30% at Lenz. Baer & Karrer, another private equity leader in Zurich’s legal community, lost a dozen transactions worth between E5bn and E5.6bn (£3.7bn and £4.2bn) last year. Homburger advised Swiss real estate and retail group Jelmoli Holding on the sale of its real estate portfolio to Empario Holdings for E2.2bn (£1.6bn). Had it gone through, it would have been the largest transaction in the market last year. But Empario baulked at the last minute and walked away, saying it could not finance the deal (Jelmoli plans to sue Empario, with Homburger representing, according to managing partner Heinz Schaerer).
“It has been an intense year,” says Schellenberg Wittmer Zurich partner Oliver Triebold. “The sub-prime crisis is really slowing down the mega-deals, because they are in need of a lot of leverage.”
So, what are Switzerland’s law firms doing about this? Remaining upbeat, for a start. Lawyers say solid, consistent, mid-level client lists are reinforcing their core transactional work. “Even though some business did not come through, or there was business but it didn’t really materialise, it was substituted by other business,” says Niederer Kraft & Frey partner Francois Bianchi, citing corporate M&A, structured products and funds work. Niederer saw more than five large-scale private equity deals fall to the credit crunch.
But, says partner Philipp Haas in defence, “the way we are set up, we are not dependent on this work. It does not bother us. We have a very good service portfolio and client portfolio, so our experience during a downturn has always been that we can be very stable”.
For now, few of Switzerland’s law firms are making moves such as beefing up their insolvency practices, although Homburger, which is advising UBS on corporate restructuring, created an insolvency ‘working group’ last year - one of four - that consists of three partners and four associates.
“Right now, insolvency is not high on the agenda. But maybe it will be in two months,” says Homburger’s Schaerer.
Going on the defence
Continued, strong corporate tax work is helping matters, aided considerably by an ongoing trend that has seen major international brands such as eBay, Kraft and Google continue to relocate headquarters to Switzerland (Google moved its European headquarters to Zurich last year).
The Swiss market is seeing another trend, less easily anticipated a year ago, that is giving firms work - hostile takeovers. What was traditionally an unheard-of practice has increased in frequency since 2006, and peaked last year with as many as half a dozen hostile bids for Swiss companies. The cause was a loophole in Swiss banking law that allowed bidders to accumulate large stakes in companies through cash settlement options, which are not covered by the country’s disclosure rules. Last April, a Russian-Austrian consortium did just that, announcing suddenly that it controlled a 32% stake in Swiss engineering firm Sulzer (under Swiss law, the control of more than a third of voting shares is tantamount to a takeover bid).
The Sulzer case led to a Swiss Federal Banking Commission (SFBC) investigation into the consortium’s stake-building, and resulted last summer in an overhaul in the country’s disclosure laws. It also scared a lot of companies which realised they too were vulnerable. “Last year was the year of the defence mandates,” says Schellenberg’s Triebold. “Companies now know you have to be prepared. It is more standard that you are prepared for such a thing because no one is too big to be attacked - no-one is out of the loop.”
Schellenberg now has four lawyers in Zurich specialising in corporate defence, and two more in Geneva with further expertise. What is more, Triebold says it is a practice area that has growth potential. Niederer’s Haas agrees: “We are getting many more calls from listed companies. They call up and ask how to deal with these [hostile bidders].”
Baer & Karrer’s Eric Stupp (pictured) says corporate defence has always been a strong area of the firm’s practice. “We have a clear lead with one or two other law firms,” he says. Baer is representing Sulzer as the SFBC continues its investigation. The firm is also defending Implenia against an E378mn (£282mn) takeover bid by British hedge fund Laxey Investment Trust (Implenia is currently refusing to register Laxey’s full 34% stake in the company).
Taking stock of the Swiss exchange
Switzerland’s lawyers remain bullish on IPO work for the year ahead, saying that the Swiss Stock Exchange (SWX), the third-largest in Europe, is benefiting from changes in the European Union stock exchange laws that cut trading costs and streamlined the listing process.
A total of E2bn (£1.5bn) was floated on the SWX in 2007. That was down some 15% from 2006, reflecting a poor fourth quarter, when IPO valuations slumped in response to the credit crisis. Still, lawyers say the quality of offerings has improved, not just on the exchange’s equity listings, but in the debt finance area too.
Seemingly every major Zurich firm had some IPO work to tout, including Froriep Renggli, which advised on BFW Liegenschaften’s listing last summer, and the floating of shares in Italian pharmaceutical company Cosmo and Swiss investment company ENR Russia Invest, in which Lenz & Staehelin’s Patrick Schleiffer advised. Baer & Karrer advised the largest IPO on the SWX last year, Gottex Fund Management Holding’s E1.3bn (£972mn) float.
“Foreign companies are attracted to the Swiss exchange just like they are attracted to the London market - because it is less cumbersome,” says Lenz’s Oertle.
The Swiss Government is about to ease tax burdens paid by mid-range corporate shareholders, and is also debating the creation of loopholes in the country’s real estate regulations that would make it easier for foreigners to purchase real estate for commercial purposes - both of which could increase outsiders’ interest in Switzerland. “Foreign investors would also love to invest in residential real estate,” says Stupp.
Following 2006’s Collective Investment Scheme Act, which sought to help the country win back fund work that was traditionally lost to Luxembourg, some firms - notably Niederer Kraft & Frey - saw their fund work double. But Walder Wyss’ Enrico Friz says the legislation did not have the huge impact on the market that some expected.
Still, firms are not shying away from private client work, especially involving funds, in the wake of the credit crisis. Some are actively chasing such work, seeing a lot of money that is still waiting to be spent. Schellenberg made international private law specialist Manuel Liatowitsch partner this month, and is charging him to expand the firm’s private client list in Zurich.
“There is still a lot of money in funds to be invested,” says Triebold. “For example, private equity funds - they are loaded.”
To Russia with love
Could Russia be a source of private client work? Walder Wyss’ Friz thinks so. Increasingly, rich Russian corporations and private clients are looking to sink their considerable wealth into European investments, and Switzerland - as a tax shelter and emerging corporate centre - is becoming increasingly attractive. Friz heads to Ukraine early next month to give a talk to Russian investors about what his firm can offer them.
“All the talk used to be about China; that China would be the market to really take off. But we see now that China is not ready yet,” Friz says. “We see now that it is Russia.”
Many Swiss lawyers acknowledge an increase in instructions from Russian clients, especially in the areas of acquisitions and arbitrations. Swiss companies, particularly in the healthcare industry, are increasingly interested in investing in the Russian market as well, says Baer & Karrer’s Stupp, who recently hired a Russian speaker to join the firm. “If you asked me a year ago, I would say that interest in Russia did not exist. But as I have had two meetings just this week with Russian investors, I really think that is about to change. It is a trend to watch.”
But for now, Russian interests seems more of a niche practice for most Swiss firms - but it is these smaller practice areas that are helping some firms to distinguish themselves in what is a crowded legal market.
Take Vischer, a relative newcomer to the Zurich market, having formed in 2000. A practice area that partner Rolf Auf der Mauer reports is particularly robust these days is energy law. He says Vischer is perhaps one of only two or three firms in Switzerland to make energy law a core practice area. “Not many firms are active in this field,” he says.
Vischer’s resident energy expert, Stefan Rechsteiner, made partner this month. He cites the Federal Electricity Supply Act coming into effect in 2008, the decommissioning of several nuclear power plants and the continued restructuring of the industry to become more aligned with Kyoto protocols as developments that will keep the practice busy this year. “We are expecting further growth in this area, and there is potential for the work to spill over into other practice areas.”
It is unclear whether such niche practice areas will be enough for firms to grow in 2008 in an uncertain market. But Switzerland’s lawyers all seem to agree that if work elsewhere in their firms can remain steady, and if they can cash in on small and mid-sized transactional work, then the effects of the credit crunch will be felt considerably less than in the UK and US.