Davis Polk analysis: Friends and relationships
11 February 2013
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29 September 2014
New boss Tom Reid is taking Davis Polk down a path that calls longstanding links into question, including those with Slaughter and May
It was just over a year ago that Davis Polk & Wardwell, one of the US’ most conservative firms, proved that it had at last woken up and smelled the coffee.
The bluest of blue-blood firms has had a presence in the UK for years. Until last year it was the exclusive preserve of US-qualified lawyers.
Finally, however, with the hire of Freshfields Bruckhaus Deringer capital markets partner Simon Witty, Davis Polk has launched an English law capability in London.
The hire was widely received by the market as a good move both for the firm and for a lawyer who, though nearing retirement age at his UK firm, remained highly regarded.
But the market also saw it in another, less positive light. Coming several years after similar moves made by key rivals Sullivan & Cromwell (S&C) and Simpson Thacher & Bartlett, Davis Polk’s strategic U-turn represents confirmation of the long-suspected claim that this most conservative of US firms has lost ground on its peers and is now playing catch-up.
“My guess intuitively,” says a senior partner at a peer group firm, “is that they will have looked across at what Simpson and S&C have been doing and said to themselves, ‘if they’re doing A we need to be doing A too’.”
A partner at another US firm puts it more bluntly: “They were way too sleepy, even by Wall Street standards, and they were starting to fall behind on a relative basis to their peers.”
But the hire of Witty, effectively just another lateral in an increasingly fluid market, signalled more than simply a change of direction for the US firm. It was also a snub to Davis Polk’s long-time fellow blue-blood best friend, Slaughter and May.
And even more fundamentally, the hire of Witty suggested that behind the doors of Davis Polk’s Lexington Avenue head office in New York, divisions over its strategic direction - or lack of one - had led to a power struggle that culminated with one of America’s most iconic firms being led by a Scottish lawyer, Tom Reid. And a Scot on a mission at that.
A tale of three cities
This is primarily a story of New York, London and Hong Kong. For Davis Polk & Wardwell, one of the world’s leading underwriter-sfocused law firms, strength in those key financial centres is paramount. And increasingly - eventually - the firm has cottoned on to the fact that a strong local law capability is not a bad thing to have.
“How bad must things have been to do a strategic U-turn?” asks one London magic circle firm partner. “I’d say quite bad, but not disastrous. The real issue is that Davis Polk is neither fish nor foul. It’s not a good niche practice like Wachtell [Lipton Rosen & Katz] or Cravath [Swaine & Moore] but it’s not doing as well as the more international practices like Simpson or Sullivan & Cromwell either. It has been falling behind SullCrom for sure.”
The finance countdown
The clearest measure of how far Davis Polk has fallen behind its key rivals is its financial performance. Last year the firm’s average profit per equity partner (PEP) came in at around $2.3m (£1.5m). Compare that with Simpson’s ($2.6m) and S&C’s ($3.2m). There is, in fact, no comparison.
As long ago as 2008 The Lawyer’s first Transatlantic Elite report identified Davis Polk’s peer group-lagging strategic inertia. While describing it as still a “top six Wall Street firm”, the report argued that its growth in recent years had, “lagged significantly behind that of its peers, most of which have bitten the bullet of international investment”.
Best known as a capital markets firm (see deals tables), Davis Polk needed to broaden its overseas services offering. Which meant that in its case, filling the investment gap was less about opening additional overseas offices and more a case of hiring in local law specialists in key outposts such as Hong Kong.
In short, the firm risked losing out on deals in the Asian IPO market and realised it needed significant local law capital markets talent in Hong Kong.
Cue a string of stellar hires, and in August 2010 the firm launched its domestic law practice in Hong Kong with partners Bonnie Chan, formerly the senior vice-president of the listing division of the Hong Kong Stock Exchange, and Antony Dapiran, formerly managing partner of Freshfields Bruckhaus Deringer’s Beijing office.
“It was first-mover with some high-quality people,” says one legal market consultant familiar with the Hong Kong market. “In that market it was ahead of Simpson and S&C, and what it did was followed by Cleary [Gottlieb Steen & Hamilton], Shearman [& Sterling] and others.”
By 2011 the gap in Hong Kong had been at least partially filled. Not so London.
Enter Tom Reid. In April 2011 Davis Polk stunned the US legal market when it announced that Reid had been elected managing partner and was to take over from incumbent John Ettinger, taking a leading place on the firm’s three-person management committee alongside head of corporate John Bick and Bick’s litigation group opposite number Carey Dunne.
“Reid was the sole candidate for managing partner,” says a source. “His platform, no question, was that he would be the biggest change agent he could be. He’s not a politician, doesn’t go softly-softly. He’ll tell you you’re shit. He absolutely won’t have been voted in to carry on the status quo.”
From day one Tom Reid’s surprise mid-year appointment heralded change at Davis Polk.
“Tom was not an obvious choice, unless there was an implication that goes along with it,” says the managing partner of a rival US firm. “Change out of the blue generally is a sign that something’s up.”
Change following Reid’s installation as head of the firm did not take long. His appointment triggered a strategic review, a sharper focus on partner contribution and an added impetus to do something about the new managing partner’s former stomping ground of the UK.
Once that had been done it begged the question - why not in London? Here the main issue was Davis Polk’s best friend strategy with Slaughter and May. It was a good relationship, so this was a big thing. Eventually, under the leadership of Tom Reid, they decided to go for it.
If the hire of Simon Witty last year, and the subsequent hires of fellow Freshfields alumnus tax partner Jonathan Cooklin and Herbert Smith Freehills’ corporate partner Will Pearce was designed to make the London market sit up and take notice, it achieved its goal.
“It was a very interesting move,” says one London recruitment consultant. “It’s interesting because they held off for so long. And also because the hires they’ve made are really good ones, not just big names. US firms tend to try to hire big names, but these are hires who can make a difference to the business. And they’re high quality.”
Witty, a specialist in public and private securities offerings and M&A, had been a partner in Freshfields’ London corporate department for 15 years. His move to Davis Polk was partly about him anticipating a winding-down of his role at Freshfields as he reached the firm’s retirement age of 55 and partly about his desire to be at the one firm that had got his attention.
Added to that is the fact that Witty knew Davis Polk of old, having worked on deals together, and is also said to have seen it as the one US firm that attracted him because of its quality and its approach to partnership culture.
“They don’t just pontificate about collegiality or having a homogenous platform,” says a source. “They mean it.”
As the man to kickstart Davis Polk’s English law practice Witty, widely cited as one of London’s leading equity capital markets lawyers who has acted on a string of fundraisings including those of Yell, eircom, Premier Foods, Virgin Mobile, Inmarsat, Britvic, QinetiQ and Experian, is eminently credible. But he is considered less so on pure M&A, an area where Davis Polk is seen as comparatively sluggish when stacked up against its rivals such as Simpson and S&C.
“Davis Polk is not really part of the M&A crowd - not a top-six player,” argues one New York corporate partner at a rival firm. “That group is Wachtell, Skadden [Arps Slate Meagher & Flom], Sullivan, Simpson and Cravath, with the only question mark being who gets the sixth slot. Davis Polk’s game is capital markets.”
Similar comments are readily levelled at Witty, Davis Polk’s landmark London ‘corporate’ hire.
“In English terms he’s a capital markets lawyer, not M&A, although you often get US-qualified lawyers handling capital markets - debt and equity - and M&A, as well as high-yield,” says a partner at a rival firm. “In UK firms lawyers tend to get pigeonholed at an early stage. To be fair, Freshfields went out of its way to develop a capital markets practice led by Will Lawes, who’s an M&A guy. That’s where Witty gained his experience in the past decade. My guess is that [Davis Polk] doesn’t have a real desire to fill an M&A gap in London - this is about completing the capital markets practice.”
These words may come as some comfort to Davis Polk’s longstanding best friend, Slaughters, which now faces the threat of being NFI when the latest hefty US acquirer of a UK asset comes calling.
In this context it is worth noting that Davis Polk’s London strategic about-turn did not raise eyebrows only in the City. It was also very much noticed across the pond in the firm’s Manhattan backyard.
“It looks like its reliance on the best friend strategy was starting to get a little long in the tooth,” quips a senior M&A partner at a rival New York elite firm.
Back in the UK, another partner at a top US firm puts himself in Slaughters’ shoes.
“I see it as yet another of [Slaughters’] US relationship firms beginning to tread on its toes,” says the partner. “It’s another competitor incrementally creeping into its marketplace.”
With Slaughters also losing its Australian best friend Allens (formerly Allens Arthur Robinson) to Linklaters last year, the firm is likely to be feeling a little unloved right now.
But few things are as black and white as they seem at first glance, and the signs are that it is not yet curtains for the Davis Polk/Slaughters relationship.
One source close to Slaughters puts it like this: “So Davis Polk is targeting the English law aspects of equity capital markets and
M&A. Okay, but for the £5bn takeover my guess is it will still turn to Slaughters for help. And on capital markets it’s true it needed more coverage - it’s a huge part of its brand proposition, its preeminent practice for clients such as Morgan Stanley. And if you can get a Simon Witty…”
Another source close to the firm admits it will have been affected, but doesn’t hold to the school of thought that because Davis Polk is now competing on English law the two firms can’t work together.
“Things simply aren’t an homogenous splodge,” says the lawyer. “Do you really think that when Davis Polk’s most valued client is lining up its biggest UK deal it will send it to a tiny team in London? It’ll want Slaughters.”
Even Slaughters insiders admit that Davis Polk’s moves to grow its own English law capability has had an impact, but the two firms do continue to work together, sharing clients such as Taylor Wimpey (on which the pair teamed up for TMM’s $955m acquisition of the house builder’s Canadian assets deal) and Resolution.
“It’s a testament to the maturity of the relationship,” says one Slaughters partner, adding with candour: “It also makes us sad.”
What nobody at Slaughters - realists all - would deny is that the referral relationship nexus has been changing. Clients have been getting increasingly global and firms that lack the required coverage have been losing opportunities.
“My guess is that Davis Polk tallied it all up, thought ‘we’ve got a great brand, the money to spend on investment and good global clients’ and made the equation,” says one legal market consultant.
Still, when one door closes another opens. Another of Slaughters’ close friends, Paul Weiss Rifkind Wharton & Garrison, is understood to be “doing more” with Slaughters, one recent example being the US firm’s co-head of securities and capital markets Mark Bergman advising Cable & Wireless on a $400m high-yield bond alongside the UK firm last year.
Back at Davis Polk, however, the changes heralded by the arrival of Reid appear to be more structural. Numerous sources confirm that
the sharper focus on performance coupled with younger partners pushing for change has led to an internal restructure, with several partners being asked to leave the firm. That would have been unthinkable under the previous, more patrician regime.
“The Ettinger years were a bit of a wilderness,” claims one source. “I know and like John [Ettinger] a lot - he’s a very good guy, but he carried on doing client work while running the firm. And it was often difficult to get him to engage. Reid is quite direct so it’s likely there was, or is, some anxiety about the change. John was quite patrician in style, so you have two radically different personalities.”
Another source insists: “There’s definitely been change at Davis Polk. Tom Reid? I’m a fan. He’s an energetic being. And he clearly came in with the ambition to shake things up. He wanted to move the rev counter needle and has done that with the lateral hires. He’s been revving things up without breaking too much crockery.”
Don’t expect to see a Linklaters or DLA Piper-style restructuring at Davis Polk, but the firm’s current defensive point of view is likely to lead to more changes internally.
“As far as I know it hasn’t lost any - or many - partners,” says a rival partner. “Through the grapevine I’ve heard that some of the younger partners have, or had been, getting frustrated and there’s a sense that the firm’s standing in New York has been going backwards. But it’s not clear how, or whether, it is holding senior partners more accountable.”
What is certain is that in London the firm under Reid has shaken things up.
“Until now Davis Polk been resolutely not English law and resolutely not expansionist,” adds the partner. “The strategy appeared to be to do nothing unless it absolutely had to. The equation that faces every law firm includes the question ‘what’s our risk?’ The risk with Davis Polk was that the world was passing it by.”
Now Davis Polk - in London at least - is seen as being a bit like Skadden was 10 years ago: a powerhouse in the US, sleepy in London.
“Skadden has come a long way, but it’s taken a while,” says the partner. “Davis Polk has the right brand. Whenever magic circle firms are talked about in the context of a merger, Davis Polk has always been one of the firms that’s mentioned. It ticks that box. It has the prestige. So if a magic circle partner is sitting there vaguely unhappy and thinking about making a move they could go to Davis Polk without it seeming a move downmarket or being a big risk.”
In London Davis Polk has been the odd one out in its peer group for a long time. Equally, it will take time to do what’s necessary.
“The market will expect it to do something significant, which means more hires and much more investment,” says a City partner. “It doesn’t expect the partners that it’s hired to simply sit there and live off the brand in a nice safe house for five years until they retire, although that’s always a possibility.”
There’s an old saying that if a firm appoints a Scottish or Dutch managing partner, it wants to focus on the money. With Reid at the firm’s helm, it is unlikely that simply sitting there and living off the brand is now an option at Davis Polk.
Davis Polk did not comment.
Reid between the lines
Davis Polk managing partner Tom Reid’s role in the attempt to re-energise Davis Polk is central.
“Reid’s not just a Brit, he’s a Scot,” says one legal market consultant familiar with the Davis Polk head. “He grew up in Kirkcaldy in Fife and has come a long way. Phenomenal. He has a first-class honours degree in law at Edinburgh, an outstanding achievement. He has the capabilities upstairs and clearly has the ambition to go with it. And I’d say he hasn’t received the recognition his achievements deserve.”
The ambitious Reid, 48 this year, left Scotland for New York soon after graduating. He joined Davis Polk as an associate in 1987 and was elected partner in 1995, working in its New York and London offices.
In 2000 Reid left the firm to join Morgan Stanley as a managing director in its investment banking division in London. He rejoined the firm in 2003 and featured on its management committee as head of the corporate department.
Numerous sources confirm that Reid will have been an integral part of the decision-making process leading up to Davis Polk’s strategic U-turn.
“Tom Reid was the only candidate for senior partner,” claims one partner familiar with Reid. “His platform, no question, was that he would be the biggest change agent he could be. He’s not a politician, doesn’t go softly-softly. He’ll tell you you’re shit. He absolutely won’t have been voted in to carry on the status quo. Tom Reid’s strategy is to copy Sullivan & Cromwell. He hasn’t made a bad start either with Witty.”
As another puts it, “Tom Reid is a fabulous lawyer, I have lots of respect for him but he’s trying to make big changes at Davis Polk. There are a lot of partners that aren’t contributing all that much. From what I hear he’s started holding partners much more accountable and there’s a significant increase in focus on performance.”
Virtually universal praise for Reid the lawyer and manager then, but the consensus in the market is that he and Davis Polk have a real challenge on their hands closing the gap between it and the likes of Sullivan and Simpson Thacher.
M&A: the Davis Polk/Slaughters link
Since 2008 Davis Polk and Slaughters have appeared as co-counsel on 19 M&A deals worldwide, worth in excess of $35bn, according to data provided by Thomson Reuters.
Highlights include the August 2011 $12.45bn acquisition of Libertyville-based communication products manufacturer Motorola Mobility by Google, the $3.25bn acquisition by Apache of BP’s Western Canadian upstream gas assets in July 2010 and the acquisition by Emerson Electric subsidiary Rutherfurd Acquisitions of Chloride Group for $1.49bn, also in 2010.
The two firms have also featured on opposite sides of the table, notably on the $12.2bn acquisition of Dublin-based electrical and lighting equipment manufacturer Cooper Industries by Eaton Corp, with Slaughters partner John Boyce providing competition advice in a team that also featured Wachtell partner Dan Neff opposite Davis Polk and half a dozen other firms.
Slaughters and Wachtell also teamed up for the $10.1bn merger of Intercontinental Exchange and NYSE Euronext.