With a record number of mega deals in 2007 and increased regulation, last year was a busy year for the law firms representing SA's top companies.

Total merger and acquisition (M&A) deal flow reached historic levels last year according to Ernst & Young's (E&Y) M&A survey. It shows that 925 transactions were completed last year, worth R513bn. Three mega law firms have also been created after a flurry of mergers in the industry.

Webber Wentzel Bowens merged with Mallinicks and dropped the "Bowens" from its name. It now has 130 partners and 285 professionals.

Edward Nathan Sonnenbergs (ENS) also merged with Mahlangu Nkomo Mabandla Ratshimbilani and MJ King. The firm now has 644 staff, including 337 practitioners. Bowman Gilfillan also has more than 300 legal professionals.

Meanwhile, Routledge Modise tied up with UK-based firm Eversheds, and Cliffe Dekker entered into an alliance with the second-biggest law firm in the world, DLA Piper Rudnick Gray Cary.

One of the few firms not caught up in merger fever was Werksmans. "Strategically, it's not the route for us to go," says chairman Des Williams. "We already have a good international network and having an exclusive tie-up with one firm wouldn't have been a smart move for us."

He says bigger is not always better. Werksmans has 104 lawyers - 45 of whom are women and 32 from previously disadvantaged backgrounds.

"We have the ability to react more quickly," he says. "You do need some critical mass, but you can still assure clients that you have the teams. There's no point in getting bigger just for the sake of getting bigger."

Director of Routledge Modise in association with Eversheds, Maryann Middleton says larger firms are getting larger, while smaller firms are specialising. "Large companies may still use the bigger firms for general work, but they still brief smaller, niche firms on specialised areas such as environmental and tax law."

But as deals get more complicated and inbound investment into SA increases, the big firms have needed both scale and specialist expertise to handle the work. "If you don't beef up, international companies will simply use international firms for the entire deal," says Webber Wentzel partner Christo Els.

He says SA firms are coming into their own when it comes to advising international clients, but large international firms still tend to use UK- or US-based legal firms for the main transaction, and then only consider SA firms as backup on the SA aspects of the transaction.

Webber Wentzel, for example, was joint counsel with international firm Linklaters for the Industrial & Commercial Bank of China (ICBC) in its R37bn acquisition of 20% of Standard Bank. It acted as lead SA attorney for the deal, which was the largest foreign direct investment outside of China by a Chinese company, and the largest foreign investment into SA to date.

Els says Webber Wentzel had 36 dedicated lawyers working on the deal. "You simply can't dedicate that kind of resources unless you have bulked up and have the scale," he says.

With Webber Wentzel, ENS and Bowman Gilfillan now all having more than 300 lawyers, it's the age of the mega-firms in SA. But with fewer players, could conflicts of interest arise as the pool of lawyers shrinks?

"Most mergers have been done to benefit from geographic diversity," says Els. "There isn't much overlap." For example, Mallinicks has a predominantly Cape Town-based clientele, while Webber Wentzel is focused on Gauteng. "Through the Mallinicks merger we were able to bring 60 experienced lawyers into our fold overnight, which in a scarce-skills environment would have been difficult to build up over time," says Els.

Increasing regulation across all sectors of the economy has been driving business across the firms in the past year.

Companies and legal advisers had to digest a range of new laws, including the long-awaited Corporate Laws Amendment Act, which came into effect at the end of 2007. Growth in sectors such as resources and information technology has not only driven deal flow, but also the need for industry specialists.

With the competition tribunal issuing increasingly large fines, the demand for legal advice around competition issues has risen dramatically. Some of the biggest fines have been handed out over the past two years: R99m for Tiger Brands for price fixing; R146m for The Reclamation Group (Reclam); and R54m for Tiger Brands pharmaceutical subsidiary Adcock Ingram for collusive tendering. ArcelorMittal is contesting its R692m fine for excessive pricing in the competition appeals court.

The corporate leniency policy has also reaped rewards, with some competition offenders providing evidence against others in exchange for immunity from prosecution.

Mondo Ntlha of Cliffe Dekker says companies weren't previously worried about compliance and education. "But the increased fines and recent price-fixing scandals are moving companies in the right direction," she says.

And following investigations by the competition commission into price fixing in the bread, milling and milk industries, companies are bracing themselves for sector-wide inquiries.

"Engaging in sector inquiries places considerable strain on the resources - particularly management time - of the firms at the centre of the inquiry, as well as on the authorities themselves," says Deneys Reitz associate Lindiwe Vundla.

The commission is particularly interested in industries where anticompetitive behaviour has an effect on the poor. The department of trade & industry is seeking to amend the competition act this year to broaden the commission's investigative powers. Vundla says companies will need to beef up their compliance structures and procedures. "Complying with competition regulation has become a major risk-management consideration."

Meanwhile, labour and employment law is still a busy practice area, "but we're not seeing the same level of growth as we did in the late 1990s", says Middleton. She says as employees became sensitised to their rights, there was a spurt in employment-related cases, but that has tapered off. "There hasn't been a downturn, but there isn't the same growth."

Litigation departments at most of the big firms continue to make an important contribution to the bottom line. That's unlikely to be affected by deteriorating economic conditions. "There is a long lead time from the start of a case to when it actually reaches the high court," says Middleton.

But firms are likely to see a rise in liquidation work as the effects of higher interest rates and inflationary pressures begin to bite businesses.

Though M&A deals generated plenty of work for legal firms last year, the pace of deal-making is expected to slow as a result of weaker economic conditions.

Ranked first in the E&Y survey, Webber Wentzel advised on 31 transactions worth R122bn; Bowman Gilfillan advised on 37 deals worth R110,8bn; Werksmans advised on 82 deals worth R77,6bn; ENS advised on 36 deals worth R60,5bn; and Deneys Reitz advised on 19 deals worth R46bn (see Table).

The biggest deals included the ICBC deal with Standard Bank, as well as the unbundling and ultimate dual listing of Mondi and Mondi Limited on the London Stock Exchange (LSE) and the Johannesburg Stock Exchange (JSE). Webber Wentzel acted as lead SA attorney for Anglo American in that deal.

Other large deals included Bain Capital's R25bn acquisition of Edgars, in the largest public-to-private equity deal to date in SA. Webber Wentzel acted for Bain Capital and also advised FirstRand and RMB Holdings in the unbundling of Discovery Holdings.

But more difficult economic conditions are likely to affect M&A activity in the next year. "My gut feeling is that private equity for the first quarter of 2008 has been significantly slower than last year," says Webber Wentzel's Els.

He says consolidation in sectors such as construction and telecommunications will lead to continued deal flow this year. "Trade transactions won't be affected by the credit crunch because they're not reliant on cash and are usually share-for-share structures," says Els.

Bowman Gilfillan chairman Jonathan Schlosberg, says there are definitely question marks about the effect of slower economic growth, but that SA is cushioned because of huge committed infrastructural spend.

Bowman Gilfillan represented Standard Bank in the ICBC transaction, as well as Tongaat Hulett in its restructuring. The firm also advised Goldman Sachs in the disposal by Anglo American of a 20% shareholding in AngloGold Ashanti and Barloworld on its R18bn restructuring. It also advised Standard Bank in the R8bn acquisition of IBTC Chartered Bank in Nigeria.

Piet Faber - The competition for top graduates is intense

ENS CE Piet Faber says black economic empowerment transactions continue to drive M&A activity in SA. The firm advised Sasol on its BEE transaction in which a broad-based BEE consortium collectively acquired about 10% of the issued share capital of Sasol for R25,9bn, making it the single largest broad-based BEE ownership transaction in SA so far. It also acted on behalf of Afripalm Resources on the establishment of a R10,25bn platinum company with Mvelaphanda, Anglo Platinum, and others.

ENS advised the RBS consortium on the financial and competition law aspects pertaining to the SA leg of the proposed acquisition of 100% of the global business of ABN Amro, for a total acquisition consideration of US$99,3bn.

Soon, companies seeking new deals will have to comply with rigorous provisions when the Companies Bill becomes law. Mergers and acquisitions director at Werksmans Gareth Driver says the bill "Americanises" SA company law. With SA's legal system based on British common law, the American shift is a big departure, says Driver. Corporate lawyers will need training and education. "There should be provision made for everyone to get up to speed," he says.

Skills remain a major concern for industry players - and transformation still tops the list of challenges most law firms say they face. "We're starting to see improvement in transformation at a junior level," says Williams. "Our intake is now 70% black."

But the difficulty is hanging on to good black staff as they progress up the ladder. The industry has pulled together to work towards finalisation of the legal services charter, which aims to transform the profession, but big firms face different challenges from one-man and two-man operations.

One of the biggest sticking points has been the issue of ownership. Since most firms operate using a partnership structure, they are unable to sell equity in their businesses as other companies do.

In small firms, compliance of the ownership/equity portion of the scorecard falls away, while for medium businesses of more than five but less than 10 partners or directors, compliance is optional. But firms with more than 10 partners are classified as "big" and should currently be 20%-owned by historically disadvantaged people. In five years that increases to 30%, in 10 years' time 40%.

Over the past few years, firms have beefed up their complement of black staff and achieving those targets now seems well within reach.

After its merger with Mahlangu Nkomo Mabandla Ratshimbilani, 112 or nearly half of ENS's professionals are black. More than 160 are women. "SA has to compete with overseas firms that recruit directly from our universities.

"But if you're able to offer interesting work and the big deals, you can still attract the top graduates," says Faber.

At Webber Wentzel, almost half the professional staff are women and more than 100 are black.

Ownership structures differ from firm to firm. "The critical thing is to satisfy the substance of transformation targets, not just the numbers," says Schlosberg.

Some firms have weighted votes (meaning partners or directors get 60% of the votes, but only 30% of the profits), while others, such as Bowman, have given all partners equal voting rights.

The charter will also require professional partners and directors to provide 24 hours a year of pro bono work. This is less than in countries such as the US, where practitioners are required to provide 36 hours of pro bono work each year. Even smaller firms such as attorneys Leppan Beech have launched community programmes to provide legal representation to underprivileged communities.

"We wanted to be able to share our skills and experience to help the communities in which we work," says Leppan Beech director Tinyiko Kubayi. "This means representing low-income clients directly or indirectly by assisting the charitable organisations that work in these communities."

He says as part of Leppan Beech's social responsibility programme, the firm will invite nonprofit organisations involved in the advancement of social justice to team up with the firm when their work requires legal intervention.

"Each one of our attorneys - across the range of departments - is required to dedicate a certain number of billable hours to pro bono work," says Kubayi. "And we'll encourage them to take part in projects that they are passionate about."

Big firms such as ENS have set up dedicated pro bono offices in underserviced areas such as Mitchells Plain in the Western Cape. "There are many communities in SA which are plagued by illiteracy and poverty," says ENS director and chair of the Law Society of SA's pro bono committee, Taswell Papier. "Attorneys can make a huge contribution to increasing access to justice by contributing their skills and experience outside of their firms."

But for the most part, firms undertake pro bono work on an ad hoc basis.