The commercial year 2013-14
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Having an amazing ability to analyse pure theoretical law is all well and good, but you also need to appreciate the commercial context within which your clients are operating. Courtesy of just published Best in Law, this feature looks at some of the key themes in the commercial world in 2013-14 and gives you some pointers on how they are relevant to lawyers.
Every headline tells a different story and they don't always agree. Even a question as straightforward as whether the UK economy is well on the road to recovery or still in the doldrums generates arguments on both sides - so what's a prospective legal eagle to do when it comes to navigating the business landscape? Commercial awareness is less about regurgitating cold facts than about appreciating the myriad interlocking influences that make the world of commerce such a fascinating and sometimes frustrating place to work. It's about understanding that one person's economic fillip might be another person's zero-hours contract and that nothing happens in isolation.
As ever, we have taken some of the big stories from the last year and tried to take a 360º view on them to show you that there's more than one side to any story - where there are commercial interests involved, there can be millions…
Selling off the family silver
In October 2013 we saw a return to the public sell-offs of the 1980s and early 1990s when Royal Mail was privatised - the largest government flotation for nearly two decades. Strict limits were imposed on the number of shares that could be bought in an attempt to stop them being snaffled by speculators, with 10% given free to Royal Mail employees. However, the scrum for shares and subsequent rises in value - prices shot up by 38% on the first day of conditional trading alone - prompted some to accuse the government of mishandling the sale and giving taxpayers a bad deal. Business secretary Vince Cable defended the share price, arguing that it was reasonable given the very real threat of industrial action by postal workers at the time. In the event, the Communication Workers Union called off planned strike action on October 30 2013, eventually reaching a deal with the government in February of this year.
The sell-off of such a venerable institution followed years of economic woes as Royal Mail was squeezed by increasing competition on the one hand and a spiralling pensions deficit on the other. In March 2012 the government assumed responsibility for Royal Mail's debts and assets, rescuing it from the pensions black hole. After much internal reorganisation, in July 2013 Cable confirmed that Royal Mail would be floated, describing the decision as "a commercial decision designed to put Royal Mail's future on a long-term sustainable business".
There are no right or wrong answers when it comes to a flotation - much depends on the appetite for risk.
However, Labour has argued that the huge demand - the initial public offering was seven times oversubscribed - demonstrates that the shares were undervalued. Shadow business secretary Chuka Umunna denounced the government's handling of the flotation, describing it as "characterised by incompetence and attempted buck passing that will fool no one".
Certainly the government has a chequered history of privatising state assets - the last big flotation was British Rail in 1996, which can hardly be described as a success. Nearly 20 years on, the government is still subsidising the rail network - some estimates put the amount as high as £4 billion - while commuters face annual inflation-busting price hikes in their tickets. The speed at which shares were snapped up, plus the sharp price hikes, suggests that the initial price for shares may have been too low. However, too high and the market might have turned its nose up at them altogether. There are no right or wrong answers when it comes to a flotation - much depends on the appetite for risk.
M&A the hard way
May saw the spectacular collapse of takeover talks between US pharmaceutical giant Pfizer and UK-based AstraZeneca. Despite a £70 billion offer, AstraZeneca turned the Viagra inventor down, claiming that it had been significantly undervalued.
Despite much talk from Pfizer about how it wanted to pool innovative talents with AstraZeneca, it looks as though the desire for a merger may have been driven by more mercenary concerns. Pfizer revealed that the new mega-company would be incorporated in the United Kingdom, meaning that it would have to pay only US corporation tax of 38% on US earnings - the UK rate is much lower at 21% and due to fall to 20% next year. In addition, the UK ‘patent box' means that by 2017, companies will pay just 10% tax on profits from UK-held patents - a saving of 11% on current UK corporation tax and a whopping 28% on the current US rate.
You would think that the UK government would have been thrilled by news of Pfizer's interest, given that it had put all these tax breaks in place in order to entice international businesses. Alas, no. While the prime minister remained neutral, Cable's hackles were raised at the prospect of big job losses - AstraZeneca currently accounts for 2.3% of UK goods exports, not to mention employing over 7,000 people. There were suggestions that Cable might cite the Enterprise Act, which allows the business secretary to intervene in deals on the grounds of public interest. There was even talk that the European Commission might wade in on competition grounds. Elsewhere, scientists and trade unions also sounded warnings over redundancies (the former) and loss of scientific research in the United Kingdom (the latter). Investors, on the other hand, were cockahoop over the offer and AstraZeneca's shares shot up by 14%.
So a range of very differing reactions. Who was right? Well, it all depended on where you were standing (and what shares you owned). On any deal, you need to expect opposition from different stakeholders - it's a fact of life. However, rather than digging in your heels, it is usually more valuable to take the time to understand the contrary positions, even if you don't agree with them. In the event, AstraZeneca rebuffed the offer and talks collapsed - for now.
Payday loans - commercial opportunity or moral outrage?
Every crisis provides an opportunity for someone - and so the current economic downturn has proved. A combination of pay freezes and precarious employment contracts on the one hand, and sharp rises in food and energy bills on the other, has prompted more and more people to turn to short-term or so-called ‘payday' loans. These are usually relatively small - £500 is a typical amount - and for only a short time (as the name suggests, they are designed to tide the recipient over until payday). However, the interest rates can be eye watering, with 1,000% not unusual as an annual percentage rate (APR). Despite this, the popularity of these loans has rocketed, with estimates that 1.6 million people borrowed over £2.5 billion last year alone.
Unsurprisingly, payday loan companies have attracted fierce criticism, even being denounced from the pulpit when the Church of England condemned market leader Wonga as "morally wrong". The issue has become a political football and took centre state at the Labour Party conference in July. Significantly, for those looking at this in strictly legal terms, this is a pretty new area and therefore regulation is relatively light. Also significant is that the amount of criticism and the dubious morality of these loans means that this situation is subject to change - fast.
Currently, lenders must hold a licence from the Office of Fair Trading, which must take specific account of ‘irresponsible lending'. However, despite rules on how APRs must be represented in advertisements, there are currently no limits on interest rates.
If your sector is new and untested, expect colourful opposition and the possibility of big regulatory changes.
This may be set to change as the newly inaugurated Financial Conduct Authority (FCA) has proposed a new set of caps which would mean that a £100 loan repaid within an agreed 30-day term would attract only £24 in charges. Late payment fees would be limited to £15 and there would be a total cap of 100% or twice the amount of the original loan. A final set of rules is due to be published this November, following consultation, and could come into force as soon as January 2015.
While the cap could see loan companies lose up to 40% of their revenues, campaigners warn that the new rules still would not offer sufficient protection to UK consumers. Labour MP Stella Creasy argues that the proposed regulations will fall short of the protection offered in Japan, Canada and the United States. However, FCA chief Matrin Wheatley has pointed out that the last thing the regulator intends is to put payday lenders out of business, arguing that they do at least offer an alternative to illegal loan sharks.
A quick snapshot, then, of the travails of a young and volatile industry. What form the eventual caps take and whether they are enough to turn payday lenders respectable remains to be seen. But if your sector is new and untested, expect colourful opposition and the possibility of big regulatory changes.
A bigger bite of the Apple
If AstraZenenca was the deal that never was, then Apple's acquisition of Beats for $3 billion was a textbook example of how smoothly things can go when everyone is playing nicely together (and the price is right). Apple had to gain approval from both US regulators and the European Union in order to purchase Beats - inevitable for a deal this size. However, despite the smooth sailing, there has been no end of speculation as to what the deal means for tech-giant Apple - right down to whole articles analysing the body language of the main players (seriously). So why the different receptions?
On the face of it there is little story here. Telephone number purchases are common across the tech industry - witness Facebook's purchase of messaging app WhatsApp earlier this year in a deal worth $19 billion. But what is business as usual for Facebook or Google is not the usual *modus operandi* for Apple, which tends to develop its innovation in-house rather than buying it in.
Beats was founded in 2006 by hip-hop artists Dr Dre and entrepreneur and music producer Jimmy Iovine. The company has proved a triumph of canny branding, cornering the market in luxury headphones, often celebrity endorsed, before branching out into music streaming earlier this year. It certainly has this belief in branding in common with Apple - the question is, which brand will predominate now?
Industry commentators claim to be baffled by the move. There is speculation that Apple may have found itself left behind by the growth in subscription-based music streaming services, and the Beats acquisition is its attempt to keep up with the kids. One unusual aspect of the deal is that the personalities - Iovine and Dr Dre - have already been given visible executive roles. Apple boss Tim Cook has commented that Dr Dre and Iovine will "continue to create the most innovative music products and services in the world", including "products you haven't thought of yet" - surely a gauntlet thrown down to those who say that the deal shows Apple losing its way.
Is bigger always better? French-based Vivendi did not think so - selling its 13% stake in Beats to Apple in January was not its only sale this year. Following the announcement of a restructuring strategy, the media giant also sold its shares in game maker Activision for $8.17 billion and telecommunications company SFR for $23 billion. It now plans to refocus on music, TV and content development. Size is in the eye of the beholder - it depends where you're at and where you want to go next.
It's worthwhile looking at how smoothly the Apple Beats deal went through, but also understanding that you can never control the industry reception. While the reaction has not been downright hostile, it is clear that few can anticipate where Apple is going with this and will be awaiting its next move eagerly. Whether that is a deliberate and even canny move from a company transforming the way we use technology, we'll all just have to wait and see.
Fracking - what lies beneath
The saga over fracking - the controversial practice of drilling for shale gas by pumping water, sand and chemicals underground - took a new turn this year. Supporters of the practice say that it could be the key to economic growth, cheap fuel and increased energy security - of particular importance given the volatile international situation. Critics say that it will destroy the English countryside - citing horror stories of contaminated water supplies, methane leaks and even earthquakes in the United States - and lead to increased emissions of greenhouse gases. Last summer saw protracted protests centring on the Sussex village of Balcombe, which led to the arrest of MP and former leader of the Green Party Caroline Lucas, among others, amid accusations of heavy-handed policing.
This year the stakes were raised even higher when the new Infrastructure Bill was announced in the Queen's Speech - the bill would mean that fracking companies no longer need permission from the landowner in order to drill under a property. A cynic might characterise this as a move designed to check the green lobby's attempt to mobilise homeowners into registering opposition to drilling under their homes under ancient trespass laws. The official line is that it is designed merely to clarify an ambiguous area of law.
However, the fact that the bill is being pushed through so quickly - along with the raft of tax breaks being offered to drilling companies - is a clear signal of how important the government believes fracking to be for the UK economy. And despite die-hard opposition from many in the green lobby, there are suggestions that fracking may not be all bad from an environmental point of view. Several respected voices - including the Intergovernmental Panel on Climate Change - have suggested that shale gas could actually help to reduce emissions of greenhouse gases significantly by facilitating a switch between polluting coal-fired power stations and modern and highly efficient power plants.
This is a story where no one actually knows what's going on and both sides are guilty of peddling misinformation and using scare tactics. But then, that's what practising law commercially is all about - not rock-solid certainties and undisputed facts, but more often shifting sands, volatile situations, opposing viewpoints and a mountain of information that you have to make sense of.
Banking - plus ça change…
We couldn't finish a feature on commercial awareness without a banking story. In the United Kingdom, the LIBOR-fixing scandal rumbles on; but given the international, interconnected nature of banking, what about the bigger picture?
Germany betrayed signs of unease in July with four new bills designed to introduce a bail-in regime by 2015 - a year earlier than the European Union has stipulated. The new rules are designed to avoid situations where governments have to step in to bail out failing banks with taxpayers' money by obliging owners and creditors to dip into their pockets to prop up troubled institutions.
Unfortunately, the need for a shake-up to the existing regime was signalled only too clearly in August, when Portugal's central bank announced a bail-out of €4.4 billion for private bank Banco Espirito Santo (BES). Private no longer, BES was split into two new entities - ‘good' part Novo Banco and a ‘bad' bank, into which have been corralled all of BES's toxic assets.
Stretched credit, often as a result of risky investments, led to banks being unable to cover their debts
The bank's failure was sudden but not unfamiliar and echoed the familiar pattern set by the banking crisis of 2008. For those to whom this seems like ancient history, this was where US banking was brought to its knees in less than a week. After years where it seemed that the banking industry could spin gold out of straw using increasingly complex financial instruments designed to eliminate risk, all of its troubles came home to roost at once: in the space of a week Lehman Brothers filed for bankruptcy protection, stockbroker Merrill Lynch was taken over by Bank of America and the US government had to ride to the rescue of insurance giant AIG. Over here, the UK government had to bail out HBOS, following fears that the owner of the mortgage lender Halifax was in trouble. In the months and years that followed, the same pattern recurred throughout Europe in Greece, Ireland, Portugal (again), Spain and Cyprus. Stretched credit, often as a result of risky investments, led to banks being unable to cover their debts. Rumours led to a loss in confidence, which in turn led to runs on the banks, which led to governments having to step in and bail them out.
How feasible the new European rules will prove in practice remains to be seen. Certainly, it will be hard for governments to step aside and let banks go under, even when they deserve to, and there is little doubt that creditors will be aware of this. Some commentators argue that only a return to old-fashioned banking - such as the US Glass-Steagall Act of 1933, which was passed in the Depression and prohibited commercial banks from trading with client deposits in order to safeguard investments - is the only way to prevent future earthquakes in the banking world. Whatever your thoughts about regulation, international banking remains highly unsettled, with the potential for sudden pitfalls and rapid changes in the form of new legislation.
As this year's round-up shows, few headlines come out of nowhere. Most business stories have a rich and complex history, which can span the globe and encompass different commercial sectors. Your job as a lawyer is to make yourself as familiar with an issue as you possibly can - the broader your understanding, the better - in order to offer your client the best possible advice. Nothing happens in isolation and even the most secure-seeming industries can change swiftly and suddenly. It's not always possible to predict this in advance; all you can do is try to stay abreast of a swift-changing world.