Irreplaceable M&A know-how could disappear in the massive shake-out by banks and finance houses in response to the global credit crisis. Andrew MacLeod reports

As tens of thousands of City jobs fall under the shadow of the axe, there are worries that in the rush to trim unwanted fat, some organisations may be tempted to cut too deeply, severing the very sinews of business.

The global meltdown of the financial sector has threatened jobs at all levels to such an extent that Andrew Taggart, a partner with law firm Herbert Smith, believes no one can be considered safe.

“If high-risk deals aren’t being done any more, then some skills will be surplus to requirements,” he says.

“What I would say to banks in an M&A market is that they shouldn’t react in a knee-jerk way by sacking all their M&A specialists just because there’s a downturn.

“Historical analysis suggests that at some point the tide will turn.”

The circumstances surrounding the current crisis could be particularly bad news for those high earners who in times past might have considered themselves fireproof.

Headline-grabbing cases, such as the failure of Lehman Brothers, are only one side of the coin, says Taggart. Under the circumstances of its collapse there was no money to pay wages for many of the staff, and the lay-offs occurred almost immediately.

But where solvent companies are considering redundancies a more advanced planning process is required, involving a strategic approach.

“Traditionally a firm might keep its top people and lose those at the bottom,” Taggart points out, “whereas now organisations may be looking at losing some of the very high earners and instead retaining the people coming through.

“They are often able to do a similar job, but are prepared to work for less in return for the promotion.

“Where there is relatively low turnover of staff some businesses may have employees who are capable of doing the job of someone who is a rung or two above them.”

Those institutions aiming to save money by shedding from the top, however, face running into major problems on a couple of fronts.

The way business is organised generally means that the terms “senior” and “older” are pretty much interchangeable when applied to employees, which could set firms on a collision course with the law if employees selected for the axe can prove that their age played any part whatsoever in the selection process for redundancy.

It could also be argued that many older, better-paid employees owe their positions to the experience they have amassed during their careers, and are more likely than their younger colleagues to have memories of the wholesale redundancies that devastated manufacturing in the early 1990s.

Serious lessons were learned from that particular bloodbath – among them that many firms discovered too late that they had axed the very workers they needed to ride the recovery that inevitably followed the slump.

“The economy may be bust at the moment, but it is likely that at some point it will turn up again, and the banks and finance sector must be ready,” Taggart states.

Over at the CBI, communications director Rachel Barbour makes the point that the woes affecting the large finance houses have left the private equity houses – drivers of so much M&A activity – virtually unscathed.

“The PE model is lean and flexible. They still have plenty of cash to invest, and even the big name firms rarely have more than 40 people working in them. They don’t have the huge infrastructure that a big bank or stockbroker would have.”

Barbour also points out that fundraising has not declined, according to recent figures from the Centre for Management Buyout Research.

She adds that a reduction in the number of deals being done does not necessarily mean a reduction in overall investment. PE houses are spending money on their existing portfolios, fine tuning the businesses they already own.

A report produced for the CBI by leading accountants and business advisers PricewaterhouseCoopers reveals the deep sense of gloom descending on the financial services sector.

It speaks of falling profits, accelerating job losses and shrinking volumes, and quotes John Cridland, CBI director general, as saying: “Firms have become more fearful about the extent and length of the credit crunch, and they are now looking to cut more jobs and scale back their investment.”

Will M&A specialists be among them? Who knows. PwC’s banking advisory leader, Andrew Gray, has few crumbs of comfort to offer, reporting that the sector is at its most depressed since 1998 and that building societies are faring little better.

“Sentiment remains negative,” he says, and looking ahead he forecasts that the mutuals will be facing a “marked downturn” in business activity.

REDUNDANCY EMPLOYMENT LAW

Chris Piggott, employment law specialist at Clarke Willmott, warns firms to tread carefully on redundancies. The failure to hold timely and meaningful collective consultations, or to provide enough information, could expose a business to punitive penalties of up to 90 days gross pay per employee.

The punishments become tougher when decisions based on sex and age discrimination influence where the axe will fall. Out goes the concept of “last in, first out” that was once the popular formula for selecting candidates for redundancy, as it usually involves discrimination on grounds of age and sex. Women who hold down careers as well as raising families tend to have fewer years of service than men.

It could also discriminate against younger employees who have fewer years service than older colleagues, even though they may be more accomplished. Piggott advises firms to provide a defence against any future tribunal claim by ensuring the selection process is seen to be fair, and based on an impartial system which rates the performance and skills of individual employees.

New Tier 2 rules on immigration

The new immigration requirements mean that businesses intending to employ workers from outside the European Economic Area or teach foreign students must register with the UK Border Agency (UKBA).

Employers who didn’t register by 1 October 2008 will not be able to apply for work permits or extensions – Certificates of Sponsorship.

There are TUPE (transfer of undertakings) ramifications, as the new owner of a business must have a Sponsorship Licence on transfer if the transferring employees are already employed on either old work permits or have been issued with Certificates of Sponsorship under Tier 2.

The new owners must apply to be registered within 28 days if existing employees are already on work permits, failing which the new employer will be employing those workers illegally and may face a civil penalty of up to a £10,000 fine or even imprisonment if convicted of a criminal offence.

A TUPE transferee must carry out specified document checks within 28 days to ensure any inherited employees are legally working in the UK, before informing UKBA.

For more information contact Miranda Leate at Birkett Long LLP on 01206 217356 or email miranda.leate@birkettlong.co.uk