Square Mile - February Issue by Gianfranco Lombardo

THE SQUARE MILE SHOCK, AUSTERITY AND DEBT The Financial Crisis of 2008 and Beyond II February 2012

W e l c o m e...

Dear Readers, This month's issue aims to provide insight into the complexities of the financial cirisis that has stricken global financial markets since 2008. Whilst developing this issue, our team's initial discussion focused almost exclusively on adopting a historical approach to understanding the crisis, with the idea that we would endeavour to provide our readers with a comprehensive overview of the significance of the turmoil that characterised the last few years. While it is certainly essential to have a sound understanding of the trials and tribulations endured by global markets, we must be careful not to treat this crisis as a historical matter -Ââ&#x20AC;? the panic has not ceased, the uncertainty has not subsided. While new crises have emerged, they stem in large part from the turmoil of 2008. Any attempts to understand or explain the panic that has characterised the last few years must be prefaced by a declaration of the limitations inherent in such an exercise: the causes cannot be explained when the consequences have yet to be fully understood. Accordingly, this issue of The Square Mile seeks to identify some of the pieces of the shattered puzzle that the global economy has come to resemble. Rumen Zhechev brings us a concise look at the 2008 crisis, while Najiba Sultana provides us with a timely overview of the Greek and subsequent Euro crises. Yoana Georgieva takes a historical look at the investment banking, while a collaborative effort by CAS's Legal Department explains the Legal Services Act 2007 and brings us up to speed on important developments in legal practice in the United Kingdom. Gianfranco Lombardo contributes a very useful article, which is a primer on Mergers and Acquisitions. Velyana Borisova brings us a wonderful reference compilation of financial terms. Next month's issue will focus on the emerging markets. The CAS team will continue its endeavours to bring you unique and meaningful insights. As such, should you have any suggestions or topics that you would like to see covered, please contact us. Furthermore, we would like to invite you to contribute to The Square Mile and encourage you to submit any articles and opinions which you would like to share with the entire CAS community.

Best wishes, David Isern Chief Editor of The Square Mile ca.square.mile@gmail.com

Be Ahead Of The Game....

..... Join Corporately Aware ! Corporately Aware Society is a career orientated society whose members are highly motivated students from a range of degree disciplines within Queen Mary University of London, 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 between our sponsors and members to facilitate the mutual exchange of ideas, knowledge and careers information. Our aim is to educate about corporate awareness and equip our members with the necessary skills and knowledge they require in order to enter the corporate or corporate legal sector. By joining Corporately Aware, you will be able to access information trough a variety of sources, including our monthly e-‐publication and online blog, with the overall aim of helping you stay up-‐to-‐date and become as knowledgeable as possible. Not only will you be improving your understanding of the complexities that characterise the corporate world, but you will also be forming opinions and actively engaging with such information. If you would just like to be a member of Corporately Aware, just send us your name and email address to corporately.aware@gmail.com.

Many thanks,

Corporately Aware Society corporately.aware@gmail.com www.corporatelyaware.com

CONTENTS

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

The 2008 Financial Crisis: A Very Brief Introduction By Rumen Zhechev

Greece and The Eurozone Debt Crisis: In a Nut Shell Najiba Sultana

AWARENESS Once Upon A Time in The West: The History of Investment Banks By Yoana Georgieva

Ever Thought About Working Within Mergers? By Gianfranco Lombardo

A-‐Z in Finance By Velyana Borisova

CAS INTERNAL Society Updates and Upcoming Events By Aryona Rexha

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 that the consumer plays in establishing Competition policy’. Though he was speaking about the pursuance of the Single Market objective, supporters of the Legal Services Act 2007 share his sentiment – increased competition benefits the consumer through encouraging diversity and low prices.

Alternative Business Structure Pre-‐LSA, the legal services market was less liberal, with only lawyers being able to own law firms. The Act allows non-‐lawyers to own and manage firms offering legal services via the introduction of Alternative Business Structures. This could mean big chains – from supermarkets to banks – using their strong brands to offer routine legal services such as conveyancing and wills and probate cheaply. As of January 6th, the SRA had accepted thirty applications from businesses wanting to become an ABS. The Co-‐operative has been offering probate services for some time in its role as a co-‐operative, and is now extending its range of legal services. It has said that becoming an ABS ‘will allow the business to provide a full suite of consumer legal services with the aim of becoming the consumer’s lawyer of choice’. Whether ABSs will be a success is dependent upon whether the public trusts the company to deliver sound legal advice. Despite concerns that the changes may lead to a decreased standard of service, as non-‐legal professionals jostle to provide it more cheaply to clients on a larger scale, a poll conducted by YouGov indicates that 60% of people polled would choose at least one of the sixteen identified retail and banking brands. This is a worrying outcome for law firms who have invested much time and money in recruiting, training and retaining high quality legal practitioners in an attempt to attract clients.

The Act promotes such efficiency and innovation in the field and economies of scale are increasingly viewed as a way of exploiting the LSA to firms’ advantage. Costs of offering legal services will be reduced by utilising the skills of paralegals and other administrative staff to do work that has previously been the exclusive remit of qualified solicitors. QualitySolicitors, a national legal brand developed as a response to the new business schema, has raised through equity funding a large sum of money in order to develop a marketing strategy for its members. This enables relatively small firms to reap the benefits of a national strategy, the other economies of scale that size brings, and the ability to negotiate contracts as a major player in the evolving environment. In order to survive in an increasingly competitive market, firms will also look to expansion, possibly through a merger (indeed Espirito Santo Investment Bank has said that this year will see an acceleration in such activity in the sector) in order to expand the range of advice they are able to offer to clients. Additionally, because of the Act’s provision for external investment, firms who traditionally raise capital through borrowing could instead seek equity funding, either by introducing outside partners with capital or through flotation, or they could indeed seek stock-‐ exchange listings. Irwin Mitchell has already announced its wish to seek external investment.

So...

The LSA will present significant challenges in the coming years, particularly to high street firms, with the areas of law covered by them coming most under threat. However, that is not to say it will have no effect at all on larger firms; DLA Piper has announced a purchase of a minority stake in prospective ABS LawVest, thus suggesting that the Act’s implications will be more wide-‐reaching than some lead the industry to believe.

Liberalisation of rules regarding ownership of law firms and investment opportunities available to them represents a significant change to the way the legal services market operates in England and Wales. Whilst the Legal Services Act 2007 signals the introduction of many hurdles for the industry, it also provides opportunities for improvement, expansion and innovation to those firms that are able, and willing, to adapt to accommodate its developments.

Options for Law Firms

The full extent of the Act’s impact on market shares within the industry, as well as its effect on the calibre of advice available to clients, remains to be seen. Law firms are themselves businesses; the time has now come for them to review their strategies if they wish to survive and prosper in such a rapidly changing market.

The current economic climate encourages effective use of resources. Oxford’s Said Business School’s report on legal services led Professor Mari Sako to state that ‘The corporate cost pressure to do more for less has led many general counsel in this study to consider (and in some cases implement) a production-‐line approach to legal service delivery.’

THE 2008

:A Very Brief Introduction

By Rumen Zhechev Any analysis of the causes of the 2008 financial crisis must necessarily start with a very brief outline of the background of the US housing market in which the crisis developed and ultimately spiralled out of control. A very brief summary would run something like this: Prior to the year 2000, the only people who could obtain residential mortgages were borrowers with a very reliable credit history and a secure source of income, known as "prime" borrowers, which typically fell into the higher tax brackets and on average, tended to comprise of middle-‐class professionals. Financial innovation, however, in the form of better computer technology, new statistical techniques and new financial instruments, created new ways for evaluating the credit risk for a new class of residential mortgages, which were given to borrowers with less-‐than average credit ratings, known as “Subprime mortgages”.

The subprime mortgage market initially took off in the United States after a mild recession in 2001, aided by the surge of investment and newly found liquidity from emerging markets such as China and India, which lead to the so-‐ called “credit boom”, during which many US and European banks increased the availability of credit to subprime borrowers to fund the purchase of homes. This in turn, inevitably drove up housing prices, particularly as homeowners were encouraged by the tailoring of credit products to their individual circumstances and risk characteristics, and by the low introductory interest rates on their mortgages.

The availability of cheap credit was widely supported at the time by economists, politicians and borrowers alike because the growth in the subprime mortgage market raised US home ownership rates to their highest levels in history, and was in turn an important source of employment, consumer spending, and government tax revenue. The resulting housing price boom meant that subprime borrowers could refinance their houses with ever larger mortgages, as it was widely perceived at the time that they were unlikely to default because they could, presumably, always sell their house, which would appreciate in value, and pay off the loan. This scheme in turn made lenders happy, because securities backed by cash flows from the subprime mortgages had high returns, and were actively traded between banks and other financial institutions. The growth of the subprime mortgage market and the availability of cheap credit in turn increased the demand for houses and so fuelled the asset bubble in housing prices.

Eventually, the housing bubble burst and the full extent of the problem begun to surface. A drastic decline in housing prices from mid-‐2007 onwards, led many subprime borrowers to find that their mortgages were suddenly in the red, so that the value of their home fell below the value of their mortgage, the situation being also known as “negative equity” . When this happened, struggling homeowners had huge incentives to simply walk out from their homes, with the effect that defaults on subprime mortgages shot up through the roof, eventually leading to over 5 million mortgages in foreclosure by the end of 2008. As a result, the value of mortgaged-‐backed securities collapsed leading to ever-‐larger write-‐down at banks and other financial institutions. As the balance sheets of these institutions deteriorated due to the huge losses they sustained on these securities, banks begun to sell assets in an effort to restructure their debt obligations, but in the process also limiting the availability of credit to both households and businesses. Although the crisis originated in the US it soon spread to Europe, where international banks which had traded in US subprime securities and now facing a similar deterioration in their balance-‐ sheets stopped lending to each other. This in effect sucked the liquidity from the banking system, leading to the so-‐called “credit crunch” as banks limited the availability of credit to consumers and small businesses in a desperate effort to avoid exposure to additional risk. The drying up of credit, lead to the first major bank failure in the UK in over a century, when Northern Rock collapsed in September 2008, as it had relied on wholesale short-‐term borrowing rather than deposits for its funding.

The resulting adverse business conditions and uncertainty sparked off a mild bank panic, as depositors begun to withdraw funds from banks which were known to have traded in mortgage-‐backed securities, which were now rapidly downgraded by credit rating agencies such as Standard & Poor's ,thus contributing to the shortage of liquidity in the system. A series of bank failures followed starting on September 15, 2008, when, Lehman Brothers the then fourth-‐largest investment bank by assets size in the world, with over $600 billion in assets and over 26,000 employees, filed for bankruptcy, after suffering substantial losses in the subprime market. The collapse of Lehman Brothers, which was the largest bankruptcy in US history, sparked fears of a so-‐ called "systemic risk", where the collapse of one large institution, creates the risk for the entire financial system to follow, through the adverse impact it has on the other institutions operating in an integrated market. These fears were partially realised when on September 16, one of the largest insurance companies in the world -‐ AIG, with assets over $1 trillion, suffered an extreme liquidity crisis when it was downgraded, and the Federal Reserve was forced to bail it out by providing a whopping £85 billion loan just to keep it afloat.

Soon afterwards, on September 25, 2008, the Washington Mutual, the then sixth-‐largest bank in the US, was put into receivership by the Federal Deposit Insurance Corporation, after it faced a run on its deposits. By the time when

the Emergency Economic Stabilization Act was finally passed by the US Congress on 3 October 2008, which provided for a $700 billion dollar recapitalisation of US banks, the US stock market crash had accelerated with the worst weekly decline in US history, dropping 40% per cent from its peak just before the crash. The crisis then spread to Europe where it was followed by a series of bank and company failures, and by a substantial decline of housing and asset prices across the Continent. The resulting decline in bank lending and the collapse of the US housing market led to the US unemployment rate rising to above 7% by the end of 2008, and to the nearly 9% which it is today. The crisis lead to a slowing down of productivity and economic growth worldwide and to massive government bailouts of financial institutions, which have since then, raised the deficits of a number 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-Ââ&#x20AC;?dip recession remains to be seen, but one thing is certain: That the mismanagement of financial institutions and financial innovation in the subprime residential mortgage market provided the fuel, which the bursting of the housing price bubble ignited in 2007, to set in motion the chain of events 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.

Greece and The Eurozone Debt Crisis: In A Nut Shell

By Najiba Sultana It is fair to say that Greece’s economic upheaval started far earlier than 2011, and one significant cause is the economic reforms which the Greek government undertook in order to abandon the drachma for the euro currency in 2002. Deciding to opt for the Euro gave Greece the ability to borrow money easily and this, along with the Greek Government’s reckless pursuit of economic greed, led to Greece’s economic downfall by paving the path for the country to carry on its somewhat juvenile and irresponsible financial behaviour which has huge repercussions internationally. So here we are, a culmination of events leading to a country drowning in a sea of economic debt, and a situation without effective remedy could see other countries potentially being swept by its forceful currents leading to an economic disaster that will be felt far beyond the European territory.

How did Greece get into such a mess? Greece has lived beyond its means and spent much of the last two centuries defaulting on its debts. 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 far worse. When the new euro was introduced in 1999, it was no surprise that the European Union initially refused to allow Greece to be part of it. Greece’s debts were far too high and inflation seemed volatile and unpredictable. However, somewhat suspiciously within a year Greece had managed to hit the rather stringent euro criteria. Having joined the euro, it suddenly enjoyed substantially lower interest rates paying rates ranging between 2 to 3 per cent, in comparison to the previous 10 percent or more during the 1990s.

Subsequently the Greek government became increasingly optimistic, recklessly living beyond its means. It borrowed heavily, public spending rocketed and public sector wages increased by almost two folds in the last ten years. Furthermore, the tax evasion endemic among Greece's wealthy middle classes meant that the Government's tax revenues were not coming in fast enough to fund its outgoings. Subsequently Greece is now in 340bn euro worth of debt, which works out to be 31,000 euro per person in population of 11 million. There is a gaping void in the Greek national budget, the extent of which is huge and other countries that are not performing very well financially need to be cautious in order to avoid being sucked into it. Currently, all the Euro counties are trying to fill this deficit that exists in the Greek state budget and the reason being is that if one euro country declares bankruptcy it would have serious repercussions for other euro countries due to the strong network of economic relations.

What’s being done? The first step was to provide Greece with a bailout package worth over 110bn euros which had been put together by the Euro countries in 2010. However, this proved to be insufficient and a second measure needed to be introduced. A so called ‘parachute’ amounting to about seven times the size of the bailout rescue package was subsequently created, which is targeted at Greece as well as other countries which may show signs of financial weakness. The money given through this ‘parachute’ scheme is much like the money used to create the bailout package; it is on a loan basis that is needed to be paid back. It was proposed that a state could only use this money providing it acts more responsible financially in the future. The parachute is very much a short term measure, which will cease to exist in 2013. After that, the European Stabilisation Mechanism (ESM) is to take effect. This is made up of a huge pot of money – European countries will contribute 80bn euros and have promised to further fill the 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 was introduced as a necessity because private banks are very reluctant to give any more money to Greece. Although this measure runs against the basic principles of the ECB it is nonetheless quintessential in rescuing Greece.

Lastly, the Greek government has devised a savings package. However, this measure has caused much anger from the public as they now have to pay the price for the poor management of its politicians. In addition, the Greek government will also have to start privatising and they will have to sell shares of its state businesses, for example their postal service. One would suspect all these measures would start to bring Greece safely to shore; nevertheless it is clear that the bailout package, parachute rescue package, ESM, credits from the ECB and Greek Government’s austerity measures involving financial cuts will not be adequate. A sixth option was discussed and caused much controversy; the option concerned providing Greece with Euro Bonds as a means of aiding its rescue. While some say that Greece should be saved whatever it takes and if Euro Bonds will provide this – so be it; others however are convinced that such a measure will do little to assist the situation but will in fact make situations far worse. In October 2011, EU leaders held an emergency summit in Brussels aimed at tackling Greece’s debt concerns and the eurozone debt crisis in general. In the midst of trying to resolve matters during the summit, it was evident that there were major fears that Italy and Spain would follow the Greek debt crisis. However, the summit proved to be an important stepping stone, not only for agreements to be reached but also exploring other potential relief strategies. During the summit, EU officials agreed that European banks must raise 106bn euros in new capital to guard them against possible losses to indebted countries; the European Financial Stability Facility (EFSF), the single currency's 440bn-‐euro bailout fund -‐ is to be given more firepower (although there was little discussion as to how this will be achieved) and lenders to Greece will be asked to agree to much deeper losses than the 21% write-‐offs. Though much of the focus has been on Greece’s economic crisis, it is part and parcel of the wider issue, that being the financial crisis that is looming in the eurozone as a whole. Eurozone leaders during the Brussels summit also discussed issues concerning ways 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 of preventing the accumulation of surplus debt and act as an arm against another financial crisis.

How did the European crisis came about? Although it seems like the German proposed 3% borrowing limit during the October summit is one that ought to be enforced, and a stringent measure that would be an effective starting point for all euro countries to comply with, this 3% limit was one that was agreed upon in 1997 when the euro was being set up and was referred to as the “stability and growth pact”.

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 France followed. However, where Italy, Germany, France and later Spain broke this limit, Greece was in an entirely different terrain of its own. It never stuck to the 3% target and manipulated its borrowing statistics in order to not disclose its real financial situation, which subsequently came into light only two years ago. Given that Germany, France and Italy should be in trouble due to its reckless borrowing, Germany is in fact ‘safe’ in the sense that markets have been willing to lend to it at low interest rates since the crisis began. Spain, although statistically the one country out of the big euro players that kept to the 3% limit is almost in as much risk at Italy. In essence, there was an overwhelming accumulation of debts in Spain and Italy prior to 2008, and it was the private sector including companies and mortgage borrowers who were taking out loans. When southern European countries joined the euro, interest rates were incredibly low and that encouraged a boom fuelled by debt. However, while countries like Spain, Italy and France had an increased amount of imports coming in, Germany was selling far more than the rest of the world than it was buying imports and therefore earning surplus cash on its exports. However, much of this money went into providing loans to southern Europe. Debt wasn’t the only problem in Italy and Spain, during the more ‘prosperous’ years, wages rose exponentially in the south and in France. Yet the Germans remained steadfast with their wages avoiding any increase. Consequently, Italian and Spanish workers are at a huge disadvantage regarding competitive price and this in effect is the reason why southern Europeans are unable to export to the extent of Germany. In essence, with the exception of Greece, government borrowing which increased post the 2008 global 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 a crisis occurring again. The fact that no one wants to spend since companies and mortgage borrowers are busy repaying their debts, recession has consequently hit Spain and Italy. Furthermore, exports are uncompetitive and now governments are in the midst of cutting spending in aid of salvaging their economy. However, Government spending cuts will only worsen the recession and will sure aid countries to hit an economic nadir. It will essentially mean greater unemployment, lack of wages make it harder for individuals to repay their debts and they are likely to cut spending even more so and it is unlikely low wages will increase export if European export markets are in recession also.

Alternatively, if spending cuts are made, there is a risk of financial collapse all together. Markets are likely to lose confidence in an economy that looks uncompetitive within the euro and a fear that their economy is simply too weak to support the ever growing debt load. In the meantime it could very well be that other European governments may not have enough money to bail out countries drowning in a sea of loose change and the European Central Bank says it goes against its purpose and it would seem Europe is in a bit of a pickle. Greece and the financial crisis within the Eurozone pretty much headlined news globally throughout 2011 and very much took the limelight away from other major events that happened throughout the year, such as the tsunami in Japan and the Arab Spring. We are in 2012 and it remains a hot topic and forecasters are still trying to predict the economic climate for the year ahead, but with matters yet to be resolved, it remains to be seen what the year ahead will follow.

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

By Yoana Georgieva Quite possibly when you hear the word ‘investment bank’ you instantly visualize one of those high-class buildings in a concrete jungle full of unscrupulous yuppies with an affluent style who grin like Cheshire cats just to close a winning deal with yet another gullible client. The aim of this article, however, is not to approve of or disprove this common conception- it is rather to explore the exciting story behind the curtain of the complex creature called an ‘investment bank’.

The 18th and 19th centuries saw the rapid expansion of the financial engines that guide market tendencies under the umbrella of European merchant banks. For a considerable time, the two big players on the global scene were the Netherlands, and later Great Britain. They dominated the waves of commerce in terra nova places like India and Hong Kong and this was, to say the least, quite unusual at that time. In the context of the United States, the name Jay Cooke springs to mind-‐ he launched the first mass-‐market securities selling operation (ultimately amounting to $830 million worth of government bonds). This occurred during the American Civil War when it became a practice for syndicate banking houses to sell millions of dollars worth of government bonds to a wide group of individual investors with the single aim to help finance the participants in the gruelling conditions to which they were exposed to during the war.

At the same time the savvy British industrialists satisfied their thirst for capital by attracting a vast source of international investments through British banks such as Westminster’s, Lloyds and Barclays. In the United States, by comparison, in the Post-‐Civil War era, the country’s relentless strive to appear as a world power determined the trajectory of investment banking. The expansion of railroads, mining companies and heavy industry, which in fact later became the driving forces of American economy, presupposed a more ambitious approach than that adopted in already well-‐established European forces. The sea change, however, happened when the merchant banking model crossed the Atlantic and served a good favour to families of which we all have heard of-‐ the Rotschilds, the Barings and the Browns.

The Panic of 1873, now known as the Long Depression, caused Britain’s stagnation and weakened its economic leadership in the world. In the United States, the infusion of cash from speculators to the nation’s largest employer outside of agriculture, namely infrastructure, predicated risky projects with high yields but which offered no immediate returns. To make matters worse, the decision of the German Empire to cease minting silver coins forced the U.S. to enact the Coinage Act of 1873 which moved the country to a ‘de facto’ gold standard. Essentially these developments had their grave implications upon major components of the U.S. banking establishments-‐ Jay Cooke’s bank was declared bankrupt and this set off a chain reaction of bank failures which culminated in the brief closure of the New York stock market. Germany was also hit by the panic and depression-‐ the euphoria over the military victory against France in 1871, combined with influx of capital from the payment of war reparations encouraged over-‐ expansion in railways, factories, docks-‐ in short, Germany followed in the footsteps of the U.S. On the British landscape the situation did not appear any more safer-‐ the construction of the Suez Canal forced the goods from the Far East to be carried out around the Cape of Good Hope since the sailing vessels were not adapted to take the strong Mediterranean winds. Thus, bankruptcies, escalating unemployment and major trade slumps were inescapable.

In the first decade of the 20th century two strands of the private investment banking industry were instrumental to the process of capital formation in the U.S-‐ the German-‐ Jewish immigrant bankers and the ‘Yankee’ houses. The former had ties with German-‐ Jewish merchant bankers while the latter dealt with expatriate Americans, both in London.

Unsurprisingly, since modern banking in Europe and the U.S. was influenced by the Rotschild family and the Warburg family, their contribution was substantial to the establishment of investment banks on Wall Street. Examples of the Jewish banking firms which became mainstays of the industry include Goldman Sachs (founded by German Jewish immigrant Marcus Goldman who later partnered with his son-‐in-‐law, Samuel Sachs), Kuhn, Loeb & Co (known as the principal rival of J.P. Morgan & Co), Lehman Brothers (the traditional family-‐only partnership), Salomon Brothers (what later became part of Citigroup) and Bache & Co (introduced the first employee profit-‐sharing plan in Wall Street history). The ‘Yankee houses’ nomenclature denoted the truly American origin of the banks and Drexel, Morgan & Co., later known as J.P. Morgan & Co. was a prominent representative which became the most influential investment bank in American history. Following from that at the turn of 20th century the Pujo Committee investigated the ‘money-‐ trust’-‐ the monopoly of the dominant figure of J.P. Morgan and New York’s other most powerful bankers. A scathing report was presented and many parts of the public became disappointed when they found out that a community of influential financial leaders had gained control of major manufacturing, transportation, mining and telecommunications corporations. Through the resources of seven banks and trust companies the empire of J.P. Morgan controlled an estimated $2.1 billion while suspicions of manipulative control over the New York Stock Exchange and breaches of interstate trade laws emerged.

In the same vein, the stock market crash of 1929 and ensuing Great Depression caused the U.S government to reach the conclusion that financial markets needed more close regulation in order to protect the financial interest of average Americans, who in fact became more conscious and subsequently disgruntled by the social inequalities. At the turn of 20th century William Jennings Bryan asserted famously that ‘you shall not crucify mankind upon a cross of gold’. He referred to the financial supporter of presidents and political elite, namely J.P. Morgan and as Secretary of State under Woodrow Wilson, he implacably opposed the strength which he had to ‘make or break a politician’s career’. In the thirties politicians fueled the public’s animosity against bankers and financiers who were deemed to be the original sin for the 15 million unemployed, the fall in the gross national product, and the disappearance of all forms of investment. The great depression and the outrage led to the Banking Act of 1933, also known as the Glass-‐Steagall Act, which, amongst other objectives, separated commercial and investment banking. It was enacted in order to rectify persistent problems in the banking system, as well as to combat the immediate banking crisis. The Morgans were split into three separate entities: JP Morgan continued to operate as a commercial bank, Morgan Stanley was an investment bank, and Morgan Grenfell established itself as a British merchant bank.

The major Wall Street investment banks were active dealmakers, advising corporations on mergers and acquisitions as well as securities. The transition from dealmaking to trading became apparent in the 1980s when the emphasis shifted to using mathematical-‐models to develop and successfully execute trading strategies.

In the late 20th c, the metaphoric bulwark of the Glass-‐ Steagall Act was destroyed by its repeal owing to the Gramm-‐ Leach-‐ Billey Act 1999 which allowed a pick-‐and-‐mix approach between investment banks, commercial banks and insurance companies. The previous relatively established framework on Wall Street was effectively discharged and this Government step has been thought to be one which contributed substantially to the severity of the Global Financial Crisis. I do remember the times when my grandfather would tell me stories while I was curled up near him listening in astonishment to every word he spoke. These moments have, indeed, thought me that history illuminates us, gives us broader perspectives and prepares us for what the future holds for each of us individually, and yet as a community. If the presented brief historical facts have achieved at least one of these objectives, then it is safe to say that we have come a step closer to understanding the deep-‐rooted importance of investment banks and the major role which they play in our day-‐ to-‐day activities.

Ever Thought about working with Mergers: What exactly are M&As ? By Gianfranco Lombardo Each month, Corporately Aware will be providing you with an insight into the different areas of finance both applicable to the roles of lawyers and bankers. This article and future articles will hopefully provide you with an informative understanding of the often complex but highly intriguing areas, 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 glamorised area of the corporate world, which is subject to a high media focus and sleepless nights for those involved. 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? What’s the rationale behind a Merger or Acquisition?

Why might a company decide to merge with another one?

The main reason behind many M&A’s is that simply two companies put together are worth more than two separate companies. Companies will often engage in such practices where the one company might view a smaller company, as key to growth and therefore acquire such a company in order to increase efficiency, market share and competitiveness. This is done as alternative to starting a new business from scratch.

The rationales behind such mergers are found within the idea of “Synergy”. Synergy can be explained as a notion that the value and performance of two companies will be greater than the companies being separate, thus meaning that prior to the two companies merging, there would be a lot of overlap of the same costs, meaning the two companies combined would be more efficient, get the idea?

What is a Merger? A merger happens when two companies, often of a similar size merge together to form one separate entity by mutual agreement. As a result of the merger both companies' stocks are removed and a new stock is attached to the newly formed company.

What benefits may result from a Merger? A successful merger may result in increased economies of scales, improvement of acquiring capital, decrease of competition, increased brand awareness and the acquisition of new technology to improve efficiency and productivity. However , the most central reason behind a merger is that of an increased market share, resulting in companies being able to reach out to new customers and ultimately maximise their profits.

What are the different types of Mergers? Subject to competition laws and antirust issues there are a variety of different mergers available *Vertical merger* This is a merger between two companies, typically a supplier or distributor who then merges with that company. *Horizontal merger* Two companies that are in direct competition between each other and have similar products and markets. *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. What is an acquisition? This occurs where one company purchases another to form a new company. The acquired company ceases to exist and so does its shares. The buying company keeps its stock. Acquisitions: hostile or friendly? An acquisition can be hostile whether privately or publically. Here the “hostile” purchasing company does not have the agreement of the target company, which results in the purchasing company actively trying to purchase shares either by offering higher share prices or buying shares if they are public on a stock exchange. A friend takeover, however, consists of an acquisition where the target company’s management has agreed to be acquired, much less “hostile”, so to speak. What happens if a company wants to avoid a takeover, what options could it take? One option would be to take a so-‐called “poison pill”. This would be the issuing of additional shares to shareholders but at a cheaper price, making the acquiring company, view the takeover as less attractive because of the dilution of the target company’s stock.

Another option would be to find a “White Knight”. Here the target company finds another acquirer and the deal is done in a friendly manner. How are they financed? The acquirer can use cash or stock, or even a combination of the two. If the acquirer uses cash, the acquirer can take cash off its balance sheet, i.e. using its own revenues to fund the purchase of the target company. The cash could also be financed from a bank loan, i.e. by using an investment bank to fund the acquisition or lastly be raised from capital markets, where the company could issue bonds to raise cash to acquire the target company. If the transaction were by stock, an acquirer would issue shares of its own company, new shares to pay for shares of the target company in some form of an agreed ratio between the companies.

Examples of M&A’s Exxon Mobil In 1999, two previous giants (Exxon and Mobil) of the Oil industry merged in what was estimated to be a deal within the $82 billion mark. Under pressure from anti-‐trust and competition issues, the Federal Trade Commission and the Department of Justice scrutinized the merger at large lengths, forcing the separate entities to sell off around 2,431 gas stations, which made it one of the largest divestiture proceedings and commission review’s seen to date. However despite constant regulatory scrutiny, the new entity has enjoyed increasing dominance and success. With record making profits in light of ever increasing oil prices, as of 2011 it was listed as having the highest market value and revenue in two financial quarters.

Pixar and Walt Disney In 2006, two greats of the film industry merged for an estimated $7.4 billion. With the contract between the two companies set to run out, the merger made perfect sense. Combining the creativity of Pixar under Steve Jobs and the brand power of Disney, each company were both in a win-‐win situation. Releases such as “UP”,“WALL-‐ E” and “Bolt” and subsequent releases of series films such as Toy Story and Cars have further justified the success of the merger.

Vodafone In 2000 and at an estimated £112 billion, Vodafone purchased Mannesmann in what is currently the largest M&A to date. Interestingly the deal surrounded a hostile takeover on Mannesmann by Vodafone, with Mannesmann rejecting several advances by Vodafone. In the end the Mannesmann board agreed to Vodafone’s acquisition. As a result of the acquisition, Vodafone is one of the largest telecommunications provider’s in the world, with yearly increases in profits and market dominance.

Dividend– that part of profit paid to ordinary shareholders, usually on regularly basis. Derivative – a financial asset, the performance of which is based on the behavior of the value of an underlying asset.

A - Z in Finance By Velyana Borisova These are some of the basic terms that everyone who wants to pursue a career in the corporate sector should know. Every issue will add on more words to this list so our members can gain a good understanding of financial terminology. Alternative Investment Market (AIM)-‐ The lightly regulated share market operated by the London Stock Exchange, focused particularly on smaller, less well – established companies. Articles of association – The internal rules governing a company. Can be unique to a company. Balance sheet – provides a picture of what a company owned, what it owes and what is owed to it on a particular day in the past. It summarizes assets, liabilities and net worth (capital). Base rate – the reference rate of interest that forms the basis for interest rates on bank loans, overdrafts and deposit rates. Cartel – a group of otherwise competing firms entering into an agreement to set mutually acceptable prices, output levels and market shares for their products. Cash cow – a company with low growth and stable market conditions with low investments needs. The company’s competitive strength enables it to produce surplus cash.

EBIT – a company’s earnings before interest and taxes are deduced. Euribor – short –term interest rates in the interbank market (very stable and safe banks lending to each other) in the currency of euros. Fallen angel – debt that used to rate as investment grade but that is now regarded as junk, mezzanine finance or high-‐yield finance. Flotation – the issue of shares in a company for the first time on a stock exchange. GDP (nominal, real) – gross domestic product, the sum of all output of goods and services produced by a nation. Nominal means including inflation, and real means with inflation removed. Going long – buying a financial security (e.g. a share) in the hope that its price will rise. Hedge fund – a collective investment vehicle that operates relatively free from regulation allowing it to take steps in managing a portfolio that other funds managers are unable to take e.g. borrowing to invest, shorting the market. Horizontal merger – the two companies merging are engaged in similar lines of activity. Inflation – the process of prices rising resulting in the fall of the purchasing power of one currency unit. Initial margin – an amount that a derivative contractor has to provide to the clearing house when first entering upon a derivative contract. Joint venture – a business operation is jointly owned by two or more parent firms. It also applies to strategic alliance between companies where they collaborate on, for example, research.

Junk bonds-‐ low-‐quality, low credit-‐rated company bonds. Risky and with a high yield. Limited liability – the owners of shares in a business have a limit on their loss, set as the amount they have committed to invest in shares. Liquidity – the degree to which an asset can be sold quickly and easily without loss in value. Merger – the combining of two business entities under common ownership. Mezzanine finance – unsecured debt or preference shares offering a high return with a high risk.

Security – a financial asset e.g. a share or bond. Short selling – the selling of financial securities (e.g. shares) not yet owned, in the anticipation of being able to buy at a later date at a lower price. Tax haven – a country or place with low rates of tax. Tender offer – a public offer to purchase securities.

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

Universal banks – financial institutions involved in many different aspects of finance, including retail banking and wholesale banking.

Niche company-‐ a fast-‐growing small to medium-‐sized firm operating in a specialist business with high potential.

Volatility – the speed and magnitude of price movements over time, measured by standard deviation or variance.

Oligopoly – a small number of producers in an industry.

Warrant – a financial instrument that gives the holder the right to subscribe for a specified number of shares or bonds at a fixed price at some time in the future.

Option – a contract giving one party the right, but not the obligation, to buy or sell a financial instrument, commodity or some other underlying asset at a given price, at or before a specified date.

White knight – a friendly company that makes a bid for a company that is the subject of a hostile takeover bid.

PacMan defence – in a hostile merger situation the target makes a counterbid for the bidder.

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

Plain vanilla – a bond that lacks any special features such as a call or put provision.

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

Quota – quantitative limits placed on the importation of specific goods. Random walk theory – the movements in prices are independent of one another; one day’s price change cannot be predicted by looking at the previous day’s price change.

Redemption – the repayment of the principle amount, or the per value, of a security at the maturity date resulting in the retirement and cancellation of the bond.

INTERNAL How Members will Benefit from Attending Our Events ? By Aryona Rexha We have a range of different events in store for our society members, which will help with that all important term ‘commercial awareness’, which we are all seeking to demonstrate. Our upcoming events will include talks from guest speakers, where you will able to gain a first class insight into their experiences of working in the corporate world as well as those all important tips to help further your knowledge of the sector and further your chances. Our workshops and talks will give you a chance to network and make a great first impression, and you never know maybe even a business card. Those of you in your first, second or third year who attend

our events will have the upper hand when applying to law firms, banking corporations etc as you will be able to demonstrate a genuine interest in that particular law firm or banking corporation because you attended one of our events and were able to speak with a representative who is an employee there. There is nothing more boring than a generic answer on an application form, and this is where we will be able to help you stand out from the crowd. With our interactive workshops and challenges you will also be able to sharpen those necessary skills and actually demonstrate how you did this in your job applications.

Upcoming Events.... Guest Speakers February Insight into M&As Derek Cilliers (ex M&A Integration & Separation Director of Deloitte) March Commercial Awarness Workshop by Mayer Brown Commercial Awareness Talk by Accenture

This Issue's Team

The Ultimate Business Game -‐ September 2012 -‐ Are you up for a challenge? Do you have what it takes to be the next Lord Allan Sugar or Richard Branson? If you are, then Corporately Aware is the right place for you. We are pleased to invite you to participate in our first annual Business Challenge Competition, which is to take place during the 2012-‐2013 academic year. It will challenge students to tackle a business task which will constitute three separate stages. It is a work-‐related experience and a great opportunity to develop enterprise skills that will give you the competitive edge in today’s job market. The aim of the Challenge is to: * Create high performance teams within business environment * Enhance leadership skills * Develop problem solving and communication skills You can register your interest in participating in the Business Challenge at corporately.aware@gmail.com

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

Bibliography: Anonymous, “The Greatest Depression Has Only Begun”, 02/06 2011, Global Research, http:// www.globalresearch.ca/index.php?context=va&aid=25089, (Date accessed: 05/02/2012) Anonymous, “ Grange St. Paul’s Hotel”, KHL Group, http://www.khl.com/events/iapa/venue/, (Date accessed: 05/02/2012) Anonymous, “Can Tiny Tweets Predict Financial Markets?” , 01/11/2010, Discovery News, http://news.discovery.com/tech/zooms/twitter-‐stock-‐market-‐finance.html, (Date accessed: 05/02/2012) Anonymous, “Global Business Deal Handshake”, Rambler photo, http://foto.rambler.ru/users/ iezekili/albums/47536841/photo/4b54f281-‐2b82-‐0e4d-‐6583-‐e16c4c59a63f/, (Date accessed: 05/02/2012) Uria Menendez logo, http://www.uria.com/en/index.html , (Date accessed: 05/02/2012) Skadden logo, http://www.skadden.com/ , (Date accessed: 05/02/2012) Clifford Chance LLP logo, http://www.cliffordchance.com/home.html , (Date accessed: 05/02/2012) Linklaters logo, http://www.linklaters.com/pages/index.aspx , (Date accessed: 05/02/2012) Clyde&Co logo, http://www.clydeco.com/ , (Date accessed: 05/02/2012) Barlow Lyde & Gilbert, http://en.wikipedia.org/wiki/File:Barlow_Lyde_%26_Gilbert.JPG , (Date accessed: 05/02/2012) Akin Gump Strauss Hauer & Feld LLP logo, http://www.akingump.com/ , (Date accessed: 05/02/2012) Anonymous, “Legal Services Act 2007”, SOS Innovate and Evolve, http://www.soslegal.co.uk/ services-‐acquisitions.asp, (Date accessed: 05/02/2012) George Peters, “ Financial Crisis”, 25/09/2008, iStockphoto, http://www.istockphoto.com/ stock-‐illustration-‐7325502-‐financial-‐crisis.php, (Date accessed: 05/02/2012) Anonymous, “ The Greatest American Squeeze”, 22/04/2010, So you think you can invest, http://www.soyouthinkyoucaninvest.com/2010/04/great-‐american-‐squeeze.html , (Date accessed: 05/02/2012) Anonymous, “Floating exchange rate”, 21/07/2010, Currency and Banking Markets, http:// internationalcbm.com.au/2010/07/21/floating-‐exchange-‐rate/, (Date accessed: 05/02/2012) Anonymous, “Harold Lloyd doing his homage to Back to the Future”, 23/01/2012, Libcom, http://libcom.org/blog/credit-‐crunched-‐working-‐financial-‐services-‐during-‐2008-‐2009-‐ crash-‐23012012, (Date accessed: 05/02/2012)

Anonymous, “UNDERSTANDING THE GREEK CRISIS”, 15/08/2011, Il Lobbista, http:// illobbista.wordpress.com/2011/08/25/understanding-‐the-‐greek-‐crisis/, (Date accessed: 05/02/2012) John Darkow, “PIGS Crisis Points to a Micro-‐economic Malady, Too”, 11/05/2010, http:// www.dailycasserole.com/tag/greek-‐debt-‐crisis/, (Date accessed: 05/02/2012) Anonymous, “ Greece raises 1.625 billion euros in six-‐month treasury bills auction”, 08/03/2011, http://leeuniversal.blogspot.com/2011/03/greece-‐raises-‐1625-‐billion-‐euros-‐in-‐ six.html, (Date accessed: 05/02/2012) Henning Studte, Credit crunch: a fistful of pounds and zlotys, 15/01/2010, CafeBabel.com, http://www.cafebabel.co.uk/article/28807/financial-‐crisis-‐currency-‐pound-‐zloty-‐euro.html, (Date accessed: 05/02/2012) Tom Bachtell, “Ask the author live: John Lanchester on the Euro Crisis” , 03/10/2011, The New Yorker, http://www.newyorker.com/online/blogs/ask/2011/10/2.html, (Date accessed: 05/02/2012) Velmerk, “ Russians Unite in Satirizing the State”, 11/02/2009, The Other Russia, http:// www.theotherrussia.org/2009/02/11/russians-‐unite-‐in-‐satirizing-‐the-‐state-‐gallery/, (Date accessed: 05/02/2012) Ocal, Euro Coin 3D, 08/12/2007, Clker, http://www.clker.com/clipart-‐15606.html, (Date accessed: 05/02/2012) Hyram Pinn, “Bank Regulation Does Not Work”, 30/03/2011, Special FX for Wizard, http:// specialfxforwizards.blogspot.com/2011/03/bank-‐regulation-‐does-‐not-‐work.html, (Date accessed: 05/02/2012) Anonymous, “ The Money Line”, 10/07/2011, My Tax Form Info, http://www.mytaxform.info/ tag/black-‐money/, (Date accessed: 05/02/2012) Anonymous, “ Unanswered Question”, 31/03/2009, http:// jasonchenoweth1.blogspot.com/2010_03_01_archive.html, (Date accessed: 05/02/2012) Lee Murphy, “ The biggest deals of 2011: M&A climate warms up”, 06/02/2012, Chicago Business, http://www.chicagobusiness.com/article/20120204/ISSUE02/302049992/the-‐ biggest-‐deals-‐of-‐2011, (Date accessed: 05/02/2012) Exxon Mobil logo, http://www.exxonmobil.co.uk/UK-‐English/default.aspx Pixar Walt Disney logo, http://www.heyuguys.co.uk/2011/08/14/big-‐screen-‐walt-‐disney-‐ pictures-‐pixar-‐animation-‐panel-‐live-‐blog/ Vodafone logo, http://www.vodafone.co.uk/personal/index.htm Anonymous, “ It’s a wrap: The Globe Arts Holiday Gift Guide”, 09/12/2010, The Globe and Mail, http://www.theglobeandmail.com/news/arts/its-‐a-‐wrap-‐the-‐globe-‐arts-‐holiday-‐gift-‐guide/ article1831417/, (Date accessed: 05/02/2012) Anonymous, http://www.definitionofwellness.com/dictionary/index.html, (Date accessed: 05/02/2012) Anonymous, 08/11/2011, http://joannebrothwell.blogspot.com/2011/11/announcement-‐ coming-‐soon.html, (Date accessed: 05/02/2012)