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February

2012

THESQUARE

MILE

SHOCK, AUSTERITY AND DEBTThe Financial Crisis of 2008 and Beyond

Dear Readers,

This month's issue aims to provide insight into the complexities of thefinancial cirisis that has strickenglobal financialmarkets since2008.Whilstdeveloping this issue, our team's initial discussion focused almostexclusively on adopting a historical approach to understanding the crisis,with the idea that we would endeavour to provide our readers with acomprehensive overview of the significance of the turmoil thatcharacterised the last few years.

While it is certainly essential tohavea soundunderstandingof the trials andtribulations endured by globalmarkets, wemust be careful not to treat thiscrisisasahistoricalmatter -­‐ thepanichasnotceased, theuncertaintyhasnotsubsided. While new crises have emerged, they stem in large part from theturmoil of 2008. Any attempts to understand or explain the panic that hascharacterised the last few years must be prefaced by a declaration of thelimitations inherent in such an exercise: the causes cannot be explainedwhen the consequences have yet to be fully understood.

Accordingly, this issue of The Square Mile seeks to identify some of thepiecesof theshatteredpuzzlethat theglobaleconomyhascometoresemble.Rumen Zhechev brings us a concise look at the 2008 crisis, while NajibaSultana provides us with a timely overview of the Greek and subsequentEuro crises. Yoana Georgieva takes a historical look at the investmentbanking,whileacollaborativeeffortbyCAS'sLegalDepartmentexplains theLegal Services Act 2007 and brings us up to speed on importantdevelopments in legal practice in the United Kingdom. GianfrancoLombardocontributes twoveryuseful articles,witha rankingof the top fivedeals of 2011 and a primer on Mergers and Acquisitions. Velyana Borisovabrings us a wonderful reference compilation of financial terms.

Next month's issue will focus on the emerging markets. The CAS team willcontinue its endeavours to bring you unique and meaningful insights. Assuch, should you have any suggestions or topics that you would like to seecovered, please contact us. Furthermore, we would like to invite you tocontribute toThe SquareMile and encourage you to submit any articles andopinions which you would like to share with the entire CAS community.

Best wishes,David IsernChief Editor of The Square Mile

ca.square.mile@gmail.com

Welc

om

e...

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Be Ahead Of The Game....

..... Join Corporately Aware !

Corporately Aware Society is a career orientated society whose members are highlymotivated students from a range of degree disciplines within Queen Mary University ofLondon, and who are eager to learn more about the corporate legal sector.

We position ourselves as a professional student body group that acts as a bridge betweenour sponsors and members to facilitate the mutual exchange of ideas, knowledge andcareers information. Our aim is to educate about corporate awareness and equip ourmembers with the necessary skills and knowledge they require in order to enter thecorporate or corporate legal sector.

By joining Corporately Aware, you will be able to access information through a variety ofsources, including our monthly e-­‐publication and online blog, with the overall aim ofhelping you stay up-­‐to-­‐date and become as knowledgeable as possible. Not only will yoube improving your understanding of the complexities that characterise the corporateworld, but youwill also be formingopinions andactively engagingwith such information.

If you would just like to be a member of Corporately Aware, just send us your name andemail address to corporately.aware@gmail.com.

Many thanks,

Corporately Aware Society

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www.corporatelyaware.com

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Top Five Legal Deals of 2011By Gianfranco Lombardo

The Legal Services Act 2007By Jessica Abrahamson-­‐Flynn, Alice Edwards, Victoria Buckle

The 2008 Financial Crisis: A Very Brief IntroductionBy Rumen Zhechev

Greece and The Eurozone Debt Crisis: In a Nut ShellNajiba Sultana

CONTENTS

CORPORATE

AWARENESS

CAS INTERNAL

Once Upon A Time in The West: The History of Investment BanksBy Yoana Georgieva

Ever Thought About Working Within Mergers?By Gianfranco Lombardo

A-­‐Z in FinanceBy Velyana Borisova

Society Updates and Upcoming EventsBy Aryona Rexha

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Corporately Aware's Top Five Legal Deals of 2011

By Gianfranco Lombardo

TheleadingSpanishLawfirmandtherecentlyvotedbestEuropeanM&AteamalongsideSlaughterandMaycontinued its European prominence with a hugely significant restructuring of the Spanish bank La Caixa.

Surrounded in themidstof aEurozonecrisis, the restructuringof twoof themainSpanishsavingbanksandquestionable confidence in the Spanish capitalmarket, UriaMenendez navigated the La Caixa Bank and itspublicly-­‐listed holding company Criteria CaixaCorp, through a complex restructuring and asset swap tocreate a new listed banking group called CaixaBank.

The precedent setting transaction needed a sequence of highly complex intertwined deals to happenconcurrently in order for the banks activities to resume. The new bank as a result of the reorganization ofLa Caixa and CaixaCorp now has an estimated value of €20.6bn.

Sticking with financial restructuring, top American firm Skadden, Arps, Slate, Meagher & Flom made agroundbreaking restructuring scheme for Tele Colombus (a German Company) in UK courts.

The firm arranged a highly successful scheme of arrangement, which as a result of being processedwithinthe UK’s jurisdiction and under the Companies Act allowed debtors to make changes with at least 75% ofvoting creditors.The scheme enabled €1.1bn of debt to be effectively restructured and reduced TeleColumbus’s debt by around €400million.

The importance of such a deal is highlighted by the fact that the scheme allowed for a broadened range ofjurisdictions underwhich aUK schemewould be effective. Consequently as a result of the dealmany otherdistressed companies outside the U.K. have turned to the country’s courts to reduce debt to avoid localinsolvency proceedings in their own jurisdictions, prompting criticism frommany analysts to view theUKas a “bankruptcy brothel”.

Aquestiononmanypeople’s lips in2012andthesubsequent futurewillbewhetherLondoncanstillbeseenas the centre of global finance, especially within capital markets.

Judgingon the relative successof 2011, suchpessimismmaystill have towait. The IPOofGlencoreonto theLondon market was this year’s standout Stock Exchange deal in terms of numbers and one of the biggestIPO’s ever to hit the London Stock Exchange.

The flotation consisted of an estimated $12bn (£7.3bn)worth of stock on both the London andHongKongexchanges. After the deal, Glencore was valued at around $60bn (£36.7bn).

This deal and subsequent listings such as that of Polymetal, signifies the on going importance of LondonStockExchange, despite theemergenceofmarketswithin theAsia-­‐PacificRegionand in lightof the currenteconomic conditions.

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b

When many UK law firms sought to go global this year, these two large city law firms decided tomerge.Bycombing twoheavyweight insurancepractices intoone, the resultingmergerof the twofirms is viewed bymany legal industry observers, to be the formulation of the leading insurancepractice in the UK.

But perhaps more significantly about the merger was that it formed the largest ever unionbetween twoUKpractices.Thedealbetween the two firmscreateda legalpractice,whichhasnowover 1,000 lawyers and potential combined revenues of more than £300m, based on 2010-­‐11figures of the previous two entities.

Surroundingthemidstof theLegalServicesAct, thisdeal seemstobehighlightingwhatmanyviewas the future of the legal market in the UK, where many law firms who do not feel that they havethe capacity to offer a global legal service will now seek to specialise instead.

2011 will be remembered for a royal wedding, various high profile deaths, an unpredictableEurozone and turbulent political scenes witnessed in many Arabic countries.

Surrounding Egypt’s hostile climate was the merger, which took place between VimpelCom ofRussia and Wind Telecom of Egypt.

Themerger transformed VimpelCom from the 43rd largest telecoms group in the world to the 6th

largest with operations now in over 20 different countries and over 180million customers.

Apart from the fact that Akin Gump Strauss Hauer & Feld had to negotiate with over 20 differentjurisdictions,whatwassopoignantabout thedealwasthat it tookplaceduringarevolution,whichwas surrounded by legal and political uncertainty.

Tensions between Algeria and Egypt were particularly sensitive which meant that one of WindTelecomsAlgeriansubsidiaries,hadtobenegotiatedinamanner,whichwas lessriskeffectiveandthus encompassed the fragile political relationship betweenAlgeria andEgypt. A teamof lawyersatAkinGumpStraussHauer&Feld created a value sharing agreement,which allowed for any riskorprofit tobeassumedbyWindTelecom,overcominganyreservationsbyVimpelCom,whichmayhave halted any such merger.

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Alternative Business Structure

Pre-­‐LSA, the legal services market was less liberal,with only lawyers being able to own law firms. TheAct allows non-­‐lawyers to own and manage firmsoffering legal services via the introduction ofAlternative Business Structures. This could meanbig chains – from supermarkets to banks – usingtheir strong brands to offer routine legal servicessuch as conveyancing and wills and probatecheaply. As of January 6th, the SRA had acceptedthirty applications from businesses wanting tobecome an ABS.

TheCo-­‐operativehasbeenofferingprobateservicesforsometime in its roleasaco-­‐operative, and isnowextending its range of legal services. It has said thatbecoming anABS ‘will allow thebusiness toprovidea full suiteof consumer legal serviceswith theaimofbecoming the consumer’s lawyer of choice’.

Whether ABSs will be a success is dependent uponwhether the public trusts the company to deliversound legal advice. Despite concerns that thechangesmayleadtoadecreasedstandardofservice,as non-­‐legal professionals jostle to provide it morecheaply to clients on a larger scale, a poll conductedby YouGov indicates that 60% of people polledwould choose at least one of the sixteen identifiedretail and banking brands. This is a worryingoutcomefor lawfirmswhohave investedmuchtimeandmoney in recruiting, trainingand retaininghighquality legal practitioners in an attempt to attractclients.

The LSA will present significant challenges in thecoming years, particularly to high street firms, withtheareasof lawcoveredbythemcomingmostunderthreat. However, that is not to say it will have noeffect at all on larger firms; DLA Piper hasannounced a purchase of a minority stake inprospective ABS LawVest, thus suggesting that theAct’s implications will be more wide-­‐reaching thansome lead the industry to believe.

Options for Law Firms

The current economic climate encourages effectiveuse of resources. Oxford’s Said Business School’sreport on legal services led Professor Mari Sako tostate that ‘The corporate cost pressure to do morefor lesshas ledmanygeneral counsel in this study toconsider (and in some cases implement) aproduction-­‐line approach to legal service delivery.’

The Act promotes such efficiency and innovation in thefield andeconomiesof scale are increasingly viewedasaway of exploiting the LSA to firms’ advantage. Costs ofoffering legal services will be reduced by utilising theskills of paralegals and other administrative staff to dowork that has previously been the exclusive remit ofqualified solicitors.

QualitySolicitors, a national legal brand developed as aresponse to the new business schema, has raisedthrough equity funding a large sumofmoney in order todevelop a marketing strategy for its members. Thisenables relatively small firms to reap the benefits of anational strategy, the other economies of scale that sizebrings, and the ability to negotiate contracts as a majorplayer in the evolving environment.

In order to survive in an increasingly competitivemarket, firms will also look to expansion, possiblythrough a merger (indeed Espirito Santo InvestmentBank has said that this year will see an acceleration insuch activity in the sector) in order to expand the rangeof advice they are able to offer to clients.

Additionally, because of the Act’s provision for externalinvestment, firms who traditionally raise capitalthrough borrowing could instead seek equity funding,either by introducing outside partners with capital orthrough flotation, or they could indeed seek stock-­‐exchange listings. IrwinMitchell has already announcedits wish to seek external investment.

So...

Liberalisation of rules regarding ownership of law firmsand investment opportunities available to themrepresents a significant change to the way the legalservices market operates in England and Wales. Whilstthe Legal Services Act 2007 signals the introduction ofmany hurdles for the industry, it also providesopportunities for improvement, expansion andinnovation to those firms that are able, and willing, toadapt to accommodate its developments.

The full extent of the Act’s impact on market shareswithin the industry, as well as its effect on the calibre ofadvice available to clients, remains tobe seen. Law firmsare themselves businesses; the time has now come forthem to review their strategies if they wish to surviveand prosper in such a rapidly changing market.

LEGAL SERVICES ACT 2007

By Jessie Abrahamson-­‐ Flynn, Alice Edwards and Victoria Huckle

In 2004, the then European Commissioner for Competition Policy – Mario Monti – emphasised ‘the importance thatthe consumer plays in establishing Competition policy’. Though he was speaking about the pursuance of the SingleMarket objective, supporters of the Legal Services Act 2007 share his sentiment – increased competition benefits theconsumer through encouraging diversity and low prices.

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THE 2008 :A Very Brief Introduction

Prior to the year 2000, the only peoplewhocould obtain residential mortgages wereborrowers with a very reliable credithistory and a secure source of income,known as "prime" borrowers, whichtypically fell into the higher tax bracketsand on average, tended to comprise ofmiddle-­‐class professionals. Financialinnovation, however, in the form of bettercomputer technology, new statisticaltechniques and new financial instruments,created newways for evaluating the creditrisk for a new class of residentialmortgages,whichwere given to borrowerswith less-­‐than average credit ratings,known as “Subprime mortgages”.

The subprime mortgage market initially tookoff in theUnited States after amild recession in2001, aided by the surge of investment andnewly found liquidity from emerging marketssuch as China and India, which lead to the so-­‐called “credit boom”, during which many USand European banks increased the availabilityof credit to subprime borrowers to fund thepurchase of homes. This in turn, inevitablydrove up housing prices, particularly ashomeownerswere encouragedby the tailoringof credit products to their individualcircumstances and risk characteristics, and bythe low introductory interest rates on theirmortgages.

By Rumen Zhechev

Any analysis of the causes of the 2008 financial crisis must necessarily start with a very brief outlineof the background of theUShousingmarket inwhich the crisis developedandultimately spiralled outof control. A very brief summary would run something like this:

The availability of cheap credit was widelysupported at the time by economists,politicians and borrowers alike because thegrowth in the subprime mortgage marketraised US home ownership rates to theirhighest levels in history, and was in turn animportant source of employment, consumerspending, and government tax revenue.

The resulting housing price boom meant thatsubprime borrowers could refinance theirhouses with ever larger mortgages, as it waswidely perceived at the time that they wereunlikely to default because they could,presumably, always sell their house, whichwould appreciate in value, andpayoff the loan.This scheme in turn made lenders happy,because securities backed by cash flows fromthe subprimemortgages had high returns, andwere actively traded between banks and otherfinancial institutions. The growth of thesubprime mortgage market and theavailability of cheap credit in turn increasedthe demand for houses and so fuelled the assetbubble in housing prices.

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The resulting adverse business conditions anduncertainty sparked off a mild bank panic, asdepositors begun to withdraw funds frombanks which were known to have traded inmortgage-­‐backed securities, which were nowrapidly downgraded by credit rating agenciessuchas Standard&Poor's ,thus contributing tothe shortage of liquidity in the system.

A series of bank failures followed starting onSeptember 15, 2008, when, Lehman Brothersthe then fourth-­‐largest investment bank byassets size in theworld, with over $600 billionin assets and over 26,000 employees, filed forbankruptcy, after suffering substantial lossesin the subprime market. The collapse ofLehman Brothers, which was the largestbankruptcy inUShistory, sparked fearsof a so-­‐called "systemic risk", where the collapse ofone large institution, creates the risk for theentire financial system to follow, through theadverse impact it has on the other institutionsoperating in an integrated market.

These fears were partially realised when onSeptember 16, one of the largest insurancecompanies in the world -­‐ AIG, with assets over$1 trillion, suffered an extreme liquidity crisiswhen it was downgraded, and the FederalReservewas forced to bail it out by providing awhopping £85billion loan just to keep it afloat.

Soon afterwards, on September 25, 2008, theWashington Mutual, the then sixth-­‐largestbank in theUS,wasput into receivershipby theFederalDeposit InsuranceCorporation, after itfaced a run on its deposits. By the time when

Eventually, the housing bubble burst andthe full extent of the problem begun tosurface. A drastic decline in housing pricesfrom mid-­‐2007 onwards, led manysubprime borrowers to find that theirmortgages were suddenly in the red, sothat the value of their home fell below thevalue of theirmortgage, the situation beingalsoknownas “negative equity” .When thishappened, struggling homeowners hadhuge incentives to simply walk out fromtheirhomes,with theeffect thatdefaults onsubprime mortgages shot up through theroof, eventually leading to over 5 millionmortgages in foreclosure by the end of2008.

As a result, the value of mortgaged-­‐backedsecurities collapsed leading to ever-­‐largerwrite-­‐down at banks and other financialinstitutions. As the balance sheets of theseinstitutions deteriorated due to the hugelosses they sustained on these securities,banks begun to sell assets in an effort torestructure their debt obligations, but inthe process also limiting the availability ofcredit to both households and businesses.

Although the crisis originated in the US itsoon spread to Europe, whereinternational bankswhichhad traded inUSsubprime securities and now facing asimilar deterioration in their balance-­‐sheets stopped lending to each other. Thisin effect sucked the liquidity from thebanking system, leading to the so-­‐called“credit crunch” as banks limited theavailability of credit to consumers andsmall businesses in a desperate effort toavoid exposure to additional risk. Thedrying up of credit, lead to the first majorbank failure in the UK in over a century,when Northern Rock collapsed inSeptember 2008, as it had relied onwholesale short-­‐term borrowing ratherthan deposits for its funding.

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the Emergency Economic Stabilization Act was finally passed by the US Congress on 3 October2008, which provided for a $700 billion dollar recapitalisation of US banks, the US stock marketcrash had accelerated with the worst weekly decline in US history, dropping 40% per cent fromits peak just before the crash. The crisis then spread to Europewhere it was followed by a seriesof bank and company failures, and by a substantial decline of housing and asset prices across theContinent.

The resulting decline in bank lending and the collapse of the US housing market led to the USunemployment rate rising to above 7%by the end of 2008, and to the nearly 9%which it is today.The crisis lead to a slowingdownofproductivity andeconomic growthworldwideand tomassivegovernment bailouts of financial institutions, which have since then, raised the deficits of anumber of developed states to levels unprecedented in their peacetime history.

Whether the world is thus on track for a slow but steady recovery, or heading for a double-­‐diprecession remains to be seen, but one thing is certain: That the mismanagement of financialinstitutions and financial innovation in the subprime residential mortgage market provided thefuel, which the bursting of the housing price bubble ignited in 2007, to set in motion the chain ofevents which we would today identify as the 2008 Financial crisis. Whether the bankers,borrowers and politicians have learned anything from the crash remains to be seen.

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Greece and The Eurozone Debt Crisis:In A Nut Shell

By Najiba Sultana

It is fair to say thatGreece’s economicupheaval started farearlier than2011,andone significant causeis the economic reformswhich the Greek government undertook in order to abandon the drachma forthe euro currency in 2002.Deciding to opt for theEuro gaveGreece the ability to borrowmoney easilyand this, along with the Greek Government’s reckless pursuit of economic greed, led to Greece’seconomic downfall by paving the path for the country to carry on its somewhat juvenile andirresponsible financial behaviour which has huge repercussions internationally. So here we are, aculmination of events leading to a country drowning ina sea of economic debt, anda situationwithouteffective remedy could see other countries potentially being swept by its forceful currents leading to aneconomic disaster that will be felt far beyond the European territory.

How did Greece get into such a mess?

Greecehas livedbeyond itsmeansandspentmuchof the last twocenturiesdefaultingon itsdebts.The idea was that by it joining the euro it would ultimately put an end to Greece’s problems.Nevertheless, it only seemed to have exacerbated its debts and in effect made the situation farworse.

When the new euro was introduced in 1999, it was no surprise that the European Union initiallyrefused to allow Greece to be part of it. Greece’s debts were far too high and inflation seemedvolatile and unpredictable. However, somewhat suspiciously within a year Greece hadmanagedto hit the rather stringent euro criteria.

Having joined the euro, it suddenly enjoyed substantially lower interest rates paying ratesranging between 2 to 3 per cent, in comparison to the previous 10 percent or more during the1990s.

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What’s being done?

The first step was to provide Greece with a bailout package worth over 110bn euros which hadbeen put together by the Euro countries in 2010. However, this proved to be insufficient and asecondmeasure needed to be introduced. A so called ‘parachute’ amounting to about seven timesthesizeof thebailoutrescuepackagewassubsequentlycreated,whichis targetedatGreeceaswellas other countries which may show signs of financial weakness. The money given through this‘parachute’ scheme ismuch like themoney used to create the bailout package; it is on a loan basisthat is needed to be paid back. It was proposed that a state could only use thismoney providing itactsmore responsible financially in the future. The parachute is verymuch a short termmeasure,which will cease to exist in 2013.

After that, the European StabilisationMechanism (ESM) is to take effect. This ismadeupof a hugepot of money – European countries will contribute 80bn euros and have promised to further fillthe pot with another €420bn which can be lent to a country in crisis.

In addition, the European Central Bank (ECB) is lending a lot of money to Greece. This step wasintroduced as a necessity because private banks are very reluctant to give any more money toGreece. Although this measure runs against the basic principles of the ECB it is nonethelessquintessential in rescuing Greece.

Subsequently the Greek government became increasingly optimistic, recklessly living beyond itsmeans. It borrowed heavily, public spending rocketed and public sector wages increased byalmost two folds in the last ten years. Furthermore, the tax evasion endemic among Greece'swealthymiddleclassesmeant that theGovernment's tax revenueswerenotcoming in fastenoughto fund its outgoings. Subsequently Greece is now in 340bn euro worth of debt, which works outto be 31,000 euro per person in population of 11 million.

There isagapingvoid in theGreeknationalbudget, theextentofwhich ishugeandothercountriesthat are not performing very well financially need to be cautious in order to avoid being suckedinto it. Currently, all the Euro counties are trying to fill this deficit that exists in the Greek statebudget and the reasonbeing is that if one euro countrydeclares bankruptcy itwouldhave seriousrepercussions for other euro countries due to the strong network of economic relations.

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Lastly, the Greek government has devised a savings package. However, this measure has causedmuch anger from the public as they now have to pay the price for the poor management of itspoliticians. In addition, theGreekgovernmentwill alsohave to start privatising and theywill haveto sell shares of its state businesses, for example their postal service.

Onewould suspect all thesemeasureswould start to bring Greece safely to shore; nevertheless itis clear that the bailout package, parachute rescue package, ESM, credits from the ECB and GreekGovernment’s austeritymeasures involving financial cutswill not beadequate. A sixthoptionwasdiscussedandcausedmuchcontroversy; theoptionconcernedprovidingGreecewithEuroBondsas ameans of aiding its rescue.While some say that Greece should be savedwhatever it takes andif Euro Bonds will provide this – so be it; others however are convinced that such a measure willdo little to assist the situation but will in fact make situations far worse.

InOctober2011,EUleadersheldanemergencysummit inBrusselsaimedat tacklingGreece’sdebtconcerns and the eurozone debt crisis in general. In themidst of trying to resolvematters duringthe summit, itwas evident that thereweremajor fears that Italy andSpainwould follow theGreekdebt crisis. However, the summit proved to be an important stepping stone, not only foragreements to be reached but also exploring other potential relief strategies.

During thesummit,EUofficialsagreed thatEuropeanbanksmust raise106bneuros innewcapitalto guard them against possible losses to indebted countries; the European Financial StabilityFacility (EFSF), the single currency's 440bn-­‐euro bailout fund -­‐ is to be given more firepower(although therewas little discussion as to how thiswill be achieved) and lenders toGreecewill beasked to agree to much deeper losses than the 21%write-­‐offs.

Thoughmuch of the focus has been on Greece’s economic crisis, it is part and parcel of the widerissue, that being the financial crisis that is looming in the eurozone as a whole. Eurozone leadersduring the Brussels summit also discussed issues concerningways of tacking the eurozone crisis.Leaders agreed to a ‘fiscal compact’ the ultimate aim of which is to limit the governments’borrowing per annum to 3% of their economy’s output. Such tough new regulations are in aid ofpreventing the accumulation of surplus debt and act as an arm against another financial crisis.

How did the European crisis come about?Although it seems like theGermanproposed3%borrowing limitduringtheOctobersummit isonethat ought to be enforced, and a stringentmeasure thatwould be an effective starting point for alleuro countries to complywith, this 3% limitwas one thatwas agreedupon in1997when the eurowas being set up and was referred to as the “stability and growth pact”.

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So why are we imposing an ‘already operable’ rule?It was Italy and Germany that were the first big countries to break the 3% limit and soon Francefollowed. However, where Italy, Germany, France and later Spain broke this limit, Greece was inan entirely different terrain of its own. It never stuck to the 3% target and manipulated itsborrowing statistics in order to not disclose its real financial situation, which subsequently cameinto light only two years ago.

Given that Germany, France and Italy should be in trouble due to its reckless borrowing, Germanyis in fact ‘safe’ in the sense that markets have been willing to lend to it at low interest rates sincethe crisis began. Spain, although statistically the one country out of the big euro players that keptto the 3% limit is almost in as much risk at Italy.

Inessence, therewasanoverwhelmingaccumulationofdebts inSpainand Italyprior to2008, anditwas theprivatesector includingcompaniesandmortgageborrowerswhowere takingout loans.When southern European countries joined the euro, interest rates were incredibly low and thatencouraged a boom fuelled by debt.

However,while countries like Spain, Italy andFrancehadan increasedamount of imports comingin, Germany was selling far more than the rest of the world than it was buying imports andtherefore earning surplus cash on its exports. However, much of this money went into providingloans to southern Europe.

Debt wasn’t the only problem in Italy and Spain, during the more ‘prosperous’ years, wages roseexponentially in the south and in France. Yet the Germans remained steadfast with their wagesavoiding any increase. Consequently, Italian and Spanish workers are at a huge disadvantageregarding competitive price and this in effect is the reasonwhy southernEuropeans are unable toexport to the extent of Germany.

In essence, with the exception of Greece, government borrowing which increased post the 2008global crisis had little to do with creating the current eurozone crisis in the first place. So the 3%limit imposed on governments does not necessarily act as a defence mechanism to stop such acrisis occurring again.

The fact that no onewants to spend since companies andmortgage borrowers are busy repayingtheir debts, recession has consequently hit Spain and Italy. Furthermore, exports areuncompetitive andnowgovernments are in themidst of cutting spending in aid of salvaging theireconomy. However, Government spending cuts will only worsen the recession and will sure aidcountries to hit an economic nadir. It will essentially mean greater unemployment, lack of wagesmake it harder for individuals to repay their debts and they are likely to cut spending evenmoreso and it is unlikely low wages will increase export if European export markets are in recessionalso.

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Alternatively, if spending cuts are made, there is a risk of financial collapse all together. Marketsare likelyto loseconfidence inaneconomythat looksuncompetitivewithintheeuroandafearthattheir economy is simply tooweak to support the ever growing debt load. In themeantime it couldverywell be that other European governmentsmay not have enoughmoney to bail out countriesdrowning in a sea of loose change and the European Central Bank says it goes against its purposeand it would seem Europe is in a bit of a pickle.

Greece and the financial crisis within the Eurozone pretty much headlined news globallythroughout 2011 and verymuch took the limelight away from othermajor events that happenedthroughout the year, such as the tsunami in Japan and the Arab Spring. We are in 2012 and itremains a hot topic and forecasters are still trying to predict the economic climate for the yearahead, but withmatters yet to be resolved, it remains to be seenwhat the year aheadwill follow.

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Quitepossiblywhenyouhear theword ‘investmentbank’you instantlyvisualizeoneof thosehigh-classbuildings inaconcrete jungle full ofunscrupulousyuppieswithanaffluent stylewhogrin likeCheshirecats just to close awinning dealwith yet another gullible client. The aim of this article, however, is notto approve of or disprove this common conception- it is rather to explore the exciting story behind thecurtain of the complex creature called an ‘investment bank’.

Once Upon a Time in the West…or theHistory of Investment Banks

By Yoana Georgieva

The 18th and 19th centuries saw the rapidexpansion of the financial engines thatguide market tendencies under theumbrella of Europeanmerchant banks. Fora considerable time, the two big players onthe global scenewere theNetherlands, andlater Great Britain. They dominated thewaves of commerce in terra nova placeslike India and Hong Kong and this was, tosay the least, quite unusual at that time. Inthe context of the United States, the nameJay Cooke springs tomind-­‐ he launched thefirst mass-­‐market securities sellingoperation (ultimately amounting to $830million worth of government bonds). Thisoccurred during the American Civil Warwhen it became a practice for syndicatebanking houses to sell millions of dollarsworth of government bonds to a widegroup of individual investors with thesingle aim to help finance the participantsin the gruelling conditions to which theywere exposed to during the war.

At the same time the savvy Britishindustrialistssatisfiedtheir thirst forcapitalbyattracting a vast source of internationalinvestments through British banks such asWestminster’s, Lloyds and Barclays. In theUnited States, by comparison, in the Post-­‐CivilWar era, the country’s relentless strive toappear as a world power determined thetrajectory of investment banking. Theexpansion of railroads, mining companies andheavy industry, which in fact later became thedriving forces of American economy,presupposed amore ambitious approach thanthat adopted in already well-­‐establishedEuropean forces. The sea change, however,happened when the merchant banking modelcrossed the Atlantic and served a good favourto families of which we all have heard of-­‐ theRotschilds, the Barings and the Browns.

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The Panic of 1873, now known as the LongDepression, caused Britain’s stagnationand weakened its economic leadership intheworld. In theUnited States, the infusionof cash from speculators to the nation’slargest employer outside of agriculture,namely infrastructure, predicated riskyprojects with high yields butwhich offeredno immediate returns. To make mattersworse, the decision of the German Empireto ceaseminting silver coins forced theU.S.to enact the Coinage Act of 1873 whichmoved the country to a ‘de facto’ goldstandard. Essentially these developmentshad their grave implications upon majorcomponents of the U.S. bankingestablishments-­‐ Jay Cooke’s bank wasdeclared bankrupt and this set off a chainreaction of bank failureswhich culminatedin the brief closure of the New York stockmarket.

Germany was also hit by the panic anddepression-­‐ the euphoria over the militaryvictory against France in 1871, combinedwith influx of capital from the payment ofwar reparations encouraged over-­‐expansion in railways, factories, docks-­‐ inshort, Germany followed in the footsteps ofthe U.S. On the British landscape thesituation did not appear any more safer-­‐the construction of the Suez Canal forcedthe goods from the Far East to be carriedout around theCapeofGoodHopesince thesailing vesselswerenot adapted to take thestrong Mediterranean winds. Thus,bankruptcies, escalating unemploymentand major trade slumps were inescapable.

In the first decade of the 20th century twostrands of the private investment bankingindustry were instrumental to the processof capital formation in theU.S-­‐ theGerman-­‐Jewish immigrantbankersand the ‘Yankee’houses. The former had ties with German-­‐Jewish merchant bankers while the latterdealt with expatriate Americans, both inLondon.

Unsurprisingly, since modern banking inEurope and the U.S. was influenced by theRotschild family and theWarburg family, theircontribution was substantial to theestablishment of investment banks on WallStreet. Examples of the Jewish banking firmswhich became mainstays of the industryinclude Goldman Sachs (founded by GermanJewish immigrant Marcus Goldman who laterpartnered with his son-­‐in-­‐law, Samuel Sachs),Kuhn, Loeb & Co (known as the principal rivalof J.P. Morgan & Co), Lehman Brothers (thetraditional family-­‐only partnership), SalomonBrothers (what later becamepart of Citigroup)and Bache& Co (introduced the first employeeprofit-­‐sharing plan inWall Street history). The‘Yankee houses’ nomenclature denoted thetruly American origin of the banks and Drexel,Morgan & Co., later known as J.P. Morgan & Co.wasaprominent representativewhichbecamethe most influential investment bank inAmerican history.

Following from that at the turn of 20th centurythe Pujo Committee investigated the ‘money-­‐trust’-­‐ the monopoly of the dominant figure ofJ.P. Morgan and New York’s other mostpowerful bankers. A scathing report waspresentedandmanypartsof thepublicbecamedisappointed when they found out that acommunity of influential financial leaders hadgained control of major manufacturing,transportation, mining andtelecommunications corporations. Throughthe resources of seven banks and trustcompanies theempireof J.P.Morgancontrolledan estimated $2.1 billion while suspicions ofmanipulative control over the New York StockExchangeandbreachesof interstate trade lawsemerged.

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In the same vein, the stock market crash of1929andensuingGreatDepressioncausedtheU.S government to reach the conclusionthat financial markets needed more closeregulation in order to protect the financialinterest of average Americans, who in factbecame more conscious and subsequentlydisgruntledbythesocial inequalities.Attheturnof20th centuryWilliamJenningsBryanasserted famously that ‘you shall notcrucify mankind upon a cross of gold’. Hereferred to the financial supporter ofpresidents and political elite, namely J.P.Morgan and as Secretary of State underWoodrow Wilson, he implacably opposedthestrengthwhichhehadto ‘makeorbreaka politician’s career’. In the thirtiespoliticians fueled the public’s animosityagainst bankers and financiers who weredeemed to be the original sin for the 15million unemployed, the fall in the grossnational product, and the disappearance ofall forms of investment. The greatdepression and the outrage led to theBanking Act of 1933, also known as theGlass-­‐Steagall Act, which, amongst otherobjectives, separated commercial andinvestment banking. It was enacted inorder to rectify persistent problems in thebanking system, as well as to combat theimmediate banking crisis. The Morganswere split into three separate entities: JPMorgan continued to operate as acommercial bank, Morgan Stanley was aninvestment bank, and Morgan Grenfellestablished itself as a British merchantbank.

The major Wall Street investment bankswere active dealmakers, advisingcorporations on mergers and acquisitionsas well as securities. The transition fromdealmaking to trading became apparent inthe 1980s when the emphasis shifted tousingmathematical-­‐models todevelopandsuccessfully execute trading strategies.

In the late20th c, themetaphoric bulwarkof theGlass-­‐ Steagall Act was destroyed by its repealowing to the Gramm-­‐ Leach-­‐ Billey Act 1999which allowed a pick-­‐and-­‐mix approachbetween investment banks, commercial banksand insurance companies. The previousrelatively established framework on WallStreet was effectively discharged and thisGovernment step has been thought to be onewhichcontributedsubstantially to theseverityof the Global Financial Crisis.

I do remember the timeswhenmygrandfatherwouldtellmestorieswhile Iwascurledupnearhimlistening inastonishment toeverywordhespoke. These moments have, indeed, thoughtmethathistory illuminatesus,givesusbroaderperspectives and prepares us for what thefuture holds for each of us individually, and yetas a community. If the presented briefhistorical facts have achieved at least one ofthese objectives, then it is safe to say that wehave come a step closer to understanding thedeep-­‐rooted importance of investment banksand themajor role which they play in our day-­‐to-­‐day activities.

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Each month, Corporately Aware will be providing you with an insight into the different areas offinance both applicable to the roles of lawyers and bankers. This article and future articles willhopefully provide you with an informative understanding of the often complex but highly intriguingareas, which form part of the global financial world.

Our first edition of 2012 brings us to the area of Mergers & Acquisitions often seen as a glamorisedarea of the corporate world, which is subject to a high media focus and sleepless nights for thoseinvolved. Every year countless numbers of companies are participating in mergers and acquisitions(M&A’s here after), so why exactly do companies merge with or acquire other companies?

Ever Thought about working with M&As:

What exactly are M&As ?

By Gianfranco Lombardo

What’s the rationale behind a Mergeror Acquisition?

The main reason behind many M&A’s isthatsimplytwocompaniesputtogetherareworth more than two separate companies.Companies will often engage in suchpractices where the one company mightview a smaller company, as key to growthand therefore acquire such a company inorder to increase efficiency, market shareand competitiveness. This is done asalternative to starting a newbusiness fromscratch.

What is a Merger?

A merger happens when two companies,often of a similar size merge together toform one separate entity by mutualagreement. As a result of the merger bothcompanies' stocks are removed and a newstock is attached to the newly formedcompany.

Why might a company decide to mergewith another one?

The rationales behind such mergers are foundwithin the idea of “Synergy”. Synergy can beexplained as a notion that the value andperformance of two companies will be greaterthan the companies being separate, thusmeaning that prior to the two companiesmerging, there would be a lot of overlap of thesame costs, meaning the two companiescombined would be more efficient, get theidea?

What benefits may result from a Merger?

A successful merger may result in increasedeconomiesof scales, improvementof acquiringcapital, decrease of competition, increasedbrand awareness and the acquisition of newtechnology to improve efficiency andproductivity. However , the most centralreason behind a merger is that of an increasedmarket share, resulting in companies beingable to reach out to new customers andultimately maximise their profits.

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What are the different types of Mergers?

What is an acquisition?

This occurswhere one companypurchasesanother to form a new company. Theacquired company ceases to exist and sodoes its shares. The buying company keepsits stock.

Acquisitions: hostile or friendly?

An acquisition can be hostile whetherprivately or publically. Here the “hostile”purchasing company does not have theagreement of the target company, whichresults in thepurchasing company activelytrying topurchase shares eitherbyofferinghigher share prices or buying shares if theyare public on a stock exchange.

A friend takeover, however, consists of anacquisition where the target company’smanagement has agreed to be acquired,much less “hostile”, so to speak.

What happens if a company wants toavoid a takeover, what options could ittake?One option would be to take a so-­‐called“poison pill”. This would be the issuing ofadditional shares to shareholders but at acheaper price, making the acquiringcompany, view the takeover as lessattractive because of the dilution of thetarget company’s stock.

Another option would be to find a “WhiteKnight”.Here thetargetcompanyfindsanotheracquirer and the deal is done in a friendlymanner.

How are they financed?

The acquirer can use cash or stock, or even acombination of the two.

If the acquirer uses cash, the acquirer can takecash off its balance sheet, i.e. using its ownrevenues to fund the purchase of the targetcompany. The cash could also be financed froma bank loan, i.e. by using an investment bank tofund the acquisition or lastly be raised fromcapital markets, where the company couldissue bonds to raise cash to acquire the targetcompany.

If the transaction were by stock, an acquirerwould issue shares of its own company, newshares to pay for shares of the target companyin some form of an agreed ratio between thecompanies.

Subject to competition laws and antirust issues there are a variety of different mergers available*Vertical merger*This is amergerbetween twocompanies, typicallya supplierordistributorwhothenmergeswiththat company.*Horizontal merger*Two companies that are in direct competition between each other and have similar products andmarkets.*Market-­‐extension merger*Two companies which sell the same product however in different markets.

*Product extension merger*Two companies selling different but related products in the same market.

*Conglomeration*Two companies that have no common business areas.

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Examples of M&A’s

Exxon Mobil

In 1999, two previous giants (Exxon and Mobil) of the Oil industrymerged in what was estimated to be a deal within the $82 billion mark.

Under pressure from anti-­‐trust and competition issues, the FederalTradeCommissionandtheDepartmentof Justicescrutinizedthemergerat large lengths, forcing the separate entities to sell off around 2,431 gasstations, which made it one of the largest divestiture proceedings andcommission review’s seen to date.

However despite constant regulatory scrutiny, the new entity hasenjoyed increasing dominance and success.With recordmaking profitsin light of ever increasing oil prices, as of 2011 itwas listed as having thehighest market value and revenue in two financial quarters.

Pixar and Walt Disney

In 2006, two greats of the film industrymerged for an estimated$7.4 billion.

With the contract between the two companies set to run out, themerger made perfect sense. Combining the creativity of Pixarunder Steve Jobs and the brand power of Disney, each companywere both in a win-­‐win situation. Releases such as “UP”,“WALL-­‐E” and “Bolt” and subsequent releases of series films such as ToyStory and Cars have further justified the success of the merger.

Vodafone

In 2000 and at an estimated £112 billion, Vodafone purchasedMannesmann in what is currently the largest M&A to date.Interestingly the deal surrounded a hostile takeover onMannesmann by Vodafone, with Mannesmann rejecting severaladvancesbyVodafone. In theend theMannesmannboardagreedtoVodafone’s acquisition.Asa result of theacquisition,Vodafoneis one of the largest telecommunications provider’s in theworld,with yearly increases in profits and market dominance.

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These are some of the basic terms thateveryonewhowants to pursue a career in thecorporate sector should know. Every issuewill add on more words to this list so ourmembers can gain a good understanding offinancial terminology.

Alternative Investment Market (AIM)-­‐The lightly regulated share marketoperated by the London Stock Exchange,focused particularly on smaller, less well –established companies.

Articlesofassociation–Theinternalrulesgoverning a company. Can be unique to acompany.

Balance sheet –provides a picture ofwhatacompanyowned,what itowesandwhat isowed to it on a particular day in the past. Itsummarizes assets, liabilities and networth (capital).

Base rate – the reference rate of interestthat forms the basis for interest rates onbank loans, overdrafts and deposit rates.

Cartel – a group of otherwise competingfirms entering into an agreement to setmutually acceptable prices, output levelsand market shares for their products.

Cash cow – a company with low growthand stable market conditions with lowinvestments needs. The company’scompetitive strength enables it to producesurplus cash.

Dividend– that part of profit paid to ordinaryshareholders, usually on regularly basis.

Derivative–a financial asset, theperformanceofwhich isbasedonthebehaviorof thevalueofan underlying asset.

EBIT – a company’s earnings before interestand taxes are deduced.

Euribor – short –term interest rates in theinterbank market (very stable and safe bankslending to each other) in the currency of euros.

Fallen angel – debt that used to rate asinvestment grade but that is now regarded asjunk, mezzanine finance or high-­‐yield finance.

Flotation– the issueof shares inacompany forthe first time on a stock exchange.

GDP (nominal, real) – gross domesticproduct, the sum of all output of goods andservices produced by a nation. Nominalmeansincluding inflation, and real means withinflation removed.

Going long – buying a financial security (e.g. ashare) in the hope that its price will rise.

Hedge fund – a collective investment vehiclethat operates relatively free from regulationallowing it to takesteps inmanagingaportfoliothat other funds managers are unable to takee.g. borrowing to invest, shorting the market.

Horizontal merger – the two companiesmergingareengaged insimilar linesof activity.

Inflation – the process of prices risingresulting in the fall of the purchasing power ofone currency unit.

Initial margin – an amount that a derivativecontractor has to provide to the clearing housewhen first entering upon a derivative contract.

Joint venture – a business operation is jointlyowned by two or more parent firms. It alsoapplies to strategic alliance betweencompanies where they collaborate on, forexample, research.

A - Z in FinanceBy Velyana Borisova

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Junk bonds-­‐ low-­‐quality, low credit-­‐ratedcompany bonds. Risky and with a highyield.

Limited liability – the owners of shares ina business have a limit on their loss, set asthe amount they have committed to investin shares.

Liquidity – the degree to which an assetcan be sold quickly and easily without lossin value.

Merger – the combining of two businessentities under common ownership.

Mezzanine finance – unsecured debt orpreference shares offering a high returnwith a high risk.

Net profit – profit after interest, tax andextraordinary charges and receipts.

Niche company-­‐ a fast-­‐growing small tomedium-­‐sized firmoperating inaspecialistbusiness with high potential.

Oligopoly–asmallnumberofproducers inan industry.

Option – a contract giving one party theright, but not the obligation, to buy or sell afinancial instrument, commodity or someotherunderlyingassetatagivenprice, atorbefore a specified date.

PacMan defence – in a hostile mergersituation the targetmakes a counterbid forthe bidder.

Plainvanilla–abondthat lacksanyspecialfeatures such as a call or put provision.

Quota – quantitative limits placed on theimportation of specific goods.

Randomwalk theory – themovements inprices are independent of one another; oneday’s price change cannot be predicted bylooking at the previous day’s price change.

Redemption – the repayment of the principleamount, or the per value, of a security at thematurity date resulting in the retirement andcancellation of the bond.

Security–a financial asset e.g. a shareorbond.

Short selling – the selling of financialsecurities (e.g. shares) not yet owned, in theanticipation of being able to buy at a later dateat a lower price.

Tax haven – a country or place with low ratesof tax.

Tender offer – a public offer to purchasesecurities.

Universal banks – financial institutionsinvolved in many different aspects of finance,including retail banking and wholesalebanking.

Volatility – the speed and magnitude of pricemovements over time, measured by standarddeviation or variance.

Warrant–a financial instrument thatgives theholder the right to subscribe for a specifiednumber of shares or bonds at a fixed price atsome time in the future.

Whiteknight–a friendly company thatmakesa bid for a company that is the subject of ahostile takeover bid.

Yankees – a foreign bond, US dollar-­‐denominated, issued by a non-­‐US entity in thedomestic US market.

Zero coupon bond – a bond that does not payregular interest (dividend) but instead isissued at a discount and is redeemable at par,thus offering a capital gain.

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Wehave a rangeof different events in storefor our society members, which will helpwith that all important term ‘commercialawareness’, which we are all seeking todemonstrate. Our upcoming events willinclude talks from guest speakers, whereyouwill able to gain a first class insight intotheir experiences of working in thecorporate world as well as those allimportant tips to help further yourknowledge of the sector and further yourchances. Ourworkshops and talkswill giveyou a chance to network and make a greatfirst impression, and you never knowmaybeevenabusinesscard.Thoseofyouinyour first, second or third year who attend

our events will have the upper hand whenapplyingto lawfirms,bankingcorporationsetcas you will be able to demonstrate a genuineinterest in that particular law firm or bankingcorporation because you attended one of ourevents and were able to speak with arepresentative who is an employee there.There is nothing more boring than a genericanswer on an application form, and this iswhere we will be able to help you stand outfrom the crowd. With our interactiveworkshopsandchallengesyouwill alsobeableto sharpen those necessary skills and actuallydemonstrate how you did this in your jobapplications.

How Members will Benefit from Attending Our Events ?

By Aryona Rexha

Upcoming Events....

Guest Speakers The Ultimate Business Game-­‐ September 2012 -­‐

Are you up for a challenge? Do you havewhat it takes to be thenext Lord Alan Sugar or Sir Richard Branson? If you are, thenCorporatelyAware is the right place for you.Weare pleased toinvite you to participate in our first annual Business ChallengeCompetition, which is to take place during the 2012-­‐2013academic year.

It will challenge students to tackle a business task which willconstitute three separate stages. It is a work-­‐relatedexperienceandagreatopportunity todevelopenterpriseskillsthat will give you the competitive edge in today’s job market.

The aim of the Challenge is to:

*Createhighperformanceteamswithinbusinessenvironment

* Enhance leadership skills

* Develop problem solving and communication skills

You can register your interest in participating in the BusinessChallenge at corporately.aware@gmail.com

FebruaryInsight into M&AsDerek Cilliers

(ex M&A Integration & SeparationDirector of Deloitte)

MarchCommercial Awarness Workshop

by Mayer Brown

Commercial Awareness Talkby Accenture

INTERNAL

This Issue's Team

Velyana Borisova, Yoana Georgieva, Najiba Sultana, Aryona Rexha, Gianfranco Lombardo, Alice Edwards, Jessica Flynn, Victoria Buckle, David Isern , Rumen Zhechev

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