An annus mirabilis
25 August 1998
Champagne corks are popping for those firms posting record profits, but Philip Hoult and Robert Lindsay wonder whether a hangover is in the offing.
Law firms will look back on the 1997/1998 financial year as a halcyon period. Amazingly, nearly every firm in The Lawyer Top 50 broke its record for both turnover and profitability. And, as more than one managing partner has commented during the compilation of this survey, if a firm cannot make serious money in this business climate, then maybe it should be looking to do something else.
The big five firms - Clifford Chance, Linklaters, Freshfields, Allen & Overy and Slaughter and May - have continued to pull away from the pack, even when many other firms are posting their best ever results.
Remarkably, each firm in the so-called magic circle boosted total profits by over 25 per cent in the period. Clifford Chance's profitability had suffered in previous years because of its overseas investment. Now it would appear that investment is paying off.
Allen & Overy has had a particularly good year, boosting income and total profits by nearly a third. Profits per partner were down slightly because it has made up many more. A quarter of its income was from overseas offices. But all the top five also undoubtedly benefited from a record year for mergers and acquisitions in the UK.
Look at Slaughters' profits. Partly due to its much smaller overseas costs it has achieved its highest ever figures, and is even pulling away in profits from the other four. The jury is still out as to whether foreign law investment, or the lack of it,will pay off in the long term (see pages 5-6).
The majority of firms below the big five saw both profits and fees grow by between 10 and 20 per cent. But the big five's march away from the rest has a relentless look about it. Also, there have been widely varied performances among the six or seven would-be international firms which are trying desperately to catch up. Most notable is Norton Rose, which has not only ridden on the back of the mergers and acquisitions boom but has also done well out of international project finance.
Cameron McKenna and Simmons & Simmons appear to be struggling. Camerons' income and profits were flat but it has had a merger to bed down. Simmons & Simmons has less room for excuses. Increased turnover did not translate into increased profits and the word is out that the firm has asked several non-performing partners to leave in a restructuring of its equity.
Chief executive Alan Morris said that the firm was continuing to invest significant amounts in IT, new offices, lateral hires and its international finance joint venture with US firm Fried Frank Harris Shriver & Jacobson and that this investment "was beginning to pay off".
In the small but perfectly formed category, Macfarlanes has again proved to be the firm that many larger firms will look at with envy as it produced average profits per partner of £450,000 - almost equal to those of Clifford Chance. Another corporate finance specialist, Gouldens, is still punching above its weight. But it may have peaked - profits did not increase last year.
Olswang's size and proportionately lower fee income means that it does not register in The Lawyer top 50. But in profitability terms there is no doubt that it is well up there in the top 20.
Other smaller firms which have done particularly well include two with international presences - Taylor Joynson Garrett and the traditionally profitable asset finance specialist Watson Farley & Williams.
Of the nationals, merger-hungry Eversheds saw solid growth in the past year. The figures include its merger with Newcastle's Wilkinson Maughan but not the later acquisition of half of Frere Cholmeley Bischoff.
Dibb Lupton Alsop and Addleshaw Booth & Co both took a profits hit. For both, it was their first full year since merger and both had new IT and office costs - in Manchester for Dibbs and in Leeds for Addleshaws. These firms are now being challenged by the Arthur Andersen offshoots, Garretts and Dundas & Wilson, who performed strongly under the accountants' careful management.
Interestingly, the "national" firms without a full national presence have also done well. Osborne Clarke (Bristol and London) and Pinsent Curtis (Birmingham, Leeds and London) performed strongly. But it was Hammond Suddards that turned in by far the best results of the nationals. With fees boosted by a number of high-quality mergers and acquisitions deals from its London and Leeds offices, Hammonds now falls into the top dozen firms in the country for profitability.
If there is a group of law firms that does not appear to have shared in the general euphoria, then those with significant shipping and insurance practices are prime candidates.
Insurance companies are consolidating worldwide as business declines and are slashing their legal panels as a result. Related shipping advice work faces a similar slump.
Firms such as Clyde & Co, Stephenson Harwood and Sinclair Roche & Temperley have seen their turnover and profits rise, but not at the rapid pace of firms of a similar size.
With margins for this type of work still tight, there is likely to be a period of consolidation and mergers as firms fight to keep market share and boost margins.
As for the future, the bull market in UK legal services appears to be continuing with many firms reporting a good first quarter for 1998/1999 driven by the plentiful supply of mergers and acquisitions work. But there are no big deals in the pipeline for the second half of the year.
A number of clouds are appearing over the horizon, including the Asian crisis, the fragility of the Russian economy and a looming recession domestically. Income from Hong Kong - a cash cow for many firms - will have dropped dramatically for several firms in the first quarter of this calender year and is not likely to go up in the near future. Overheads are also rising at a significant rate as firms battle to keep their best fee earners who have been tempted to go to in-house or to US firms.
Even if 1998/1999 proves a good enough year to allow the champagne corks to pop in time for the Millennium, the hangover in 2000 could well be acute.