Niche deals are a speciality of dealmakers in the Midlands, but red tape is hampering them. John Duckers sees what the future holds for these gems.
Thank the Lord for the niche deal! While mega-transactions are becoming rare, those under £100m, the Midlands dealmaking speciality, are holding up.
True, the credit crunch and economic slowdown are hurting every sector. Professionals admit they are not as busy; bankers accept it is harder to come up with the money. As transaction prices edge down are they cutting charges commensurately?
Apparently not, according to David Grove, who runs a series of private companies and heads Birmingham-based engineering group Hill & Smith. He says the cost of professional fees is out of hand. He shells out a seven-figure sum every year, 90 cent of it to lawyers and accountants in the Midlands. And he blames over-regulation.
Grove says: “Legal fees are extremely costly and have outstripped inflation over the past 15 years. A lot of the work advisers do is a result of accounting standards and regulatory requirements that have no beneficial effect in terms of wealth creation and competitiveness.”
And, while they moan about taking on people to cope with changes, Grove says the accountants and lawyers are behind the rise in red tape: “It’s like putting Herod in charge of Mothercare.”
Paul Heaven, founder of Blue Sky Corporate Finance, a boutique that specialises in deals under £2m, is not buying the criticism. He says fees need subsidising.
He adds: “A £500,00 development capital deal won’t stand a £50k fee for corporate finance, due diligence and legal fees combined.”
To some extent Advantage West Midlands has recognised the problem, especially in attracting business angels. It subsidises certain deals below a £500,000 fund-raising, which can be the difference between a transaction being loss making and marginal.
Rob Carroll, managing director of Catapult Venture Managers, says: “Just as much work needs to go into a transaction whether it’s £2m or £20m.” And Andy Lyndon, investment director of LDC in the Midlands, adds: “Although some costs in putting a deal together are proportionate to its size, some fees will be specific to the size of the transaction.”
But Julian Smith, corporate partner, Mills & Reeve, believes something has to be done on fees. He says: “Although in the past they haven’t had much appetite for smaller deals, to cover overheads the larger law firms are courting these.
“Being forced to trade down is a tough pill to swallow: larger firms have high hourly rates and overheads. They’re having to accept reduced margins. As a result, horror stories are starting to emerge.
“There’s a concern that some law firms are low-balling on costs and then trying, once in the driving seat, to bill for work outside the scope of the original estimate.
“Law firms, particularly larger ones, are only able to deliver a Rolls-Royce job. This isn’t necessarily what a smaller client wants or is prepared to pay for. There’s a temptation to put more junior teams on the job with less partner input than expected.”
Paul Bennett, head of corporate at Black Country law firm George Green, agrees: “The difference between a small and large deal is the approach to conclude it. A smaller deal won’t withstand costs to the same level. It’s important to identify risks and key issues and prioritise resource appropriately.”