A&O corporate dept cocks a snook at its banking critics

Last year's explosive meeting between Allen & Overy's (A&O) corporate and banking partners, as first revealed by The Lawyer, highlighted the tensions between them.

At a particularly stormy meeting last May, A&O's banking partners issued an ultimatum to their corporate colleagues to get their house in order after the corporate group recorded a net loss of some £10m in the last financial year after partner profit allocation (The Lawyer, 25 October 2004).

Yet the corporate partners are bullish at the moment. Since last year's meeting, A&O has landed a handful of high-profile public bids, such as the mandate to advise US tycoon Malcolm Glazer on his much-publicised potential bid for Manchester United.

The team also strengthened its relationship with longstanding Linklaters client BT after partner Paul Burns bagged his first corporate deal for the FTSE 100 company. Meanwhile, Alistair Asher advised HBOS on its failed bid for Abbey.

Corporate head Richard Cranfield insists that any underperformance by his team is merely a perception issue. Unfortunately for A&O's corporate team, this perception is also held by half the City as well as A&O's banking department. Neither has it helped that the firm has recalled its entire Canary Wharf-based corporate team after disaffection among the team's lawyers and a failure to target effectively the investment banks resident in the estate.

Cranfield argues that the move to Canary Wharf was not driven entirely by a desire to strengthen relationships with investment banks, but because the firm wanted to have a full-service office there. He claims: "We found it difficult for [corporate] people to work across groups when they were located in two offices. So it became a tradeoff between being in one location and the opportunities of being in Canary Wharf."

That said, the firm claims that, during the first six months of the current financial year (1 May-31 October 2004), there was less than 10 per cent difference in profit per equity partner for the firm's London corporate, banking and international capital markets groups and corporate was the best performer.

But the statistics also show that the gap between corporate and finance revenues has increased from £34.2m in 2002 to £64.8m in the last financial year (see table). Corporate partner Mark Wippell argues: "If [the gap] had decreased that would indicate our debt practice was losing market share. The relevant comparison is: how is our corporate practice doing against other corporate practices?"

But although the department has shrunk over the past four years, Cranfield - perhaps flushed with relative success after some lean times - is adamant that he will not be wielding the axe on his corporate colleagues.

Instead, he predicts that the firm will be making partner promotions in the corporate department in 2006 and 2007. This is some turnaround. As first reported by The Lawyer (2 August 2004), A&O dashed the hopes of aspiring corporate associates vying to make partner after announcing that there would be no promotions in their department in 2005.

But there is more to A&O's story than the spin allows. Under Cranfield's leadership, A&O claims that the firm's FTSE 100 client list has improved, saying the firm is the main corporate adviser to around 15 FTSE 100 companies. Our research suggests far fewer, but the firm is certainly the main adviser to Alliance & Leicester, Rexam, Royal & SunAlliance, the Sage Group, Smiths Group and WPP. The firm also has places on the panels of around 26 FTSE 100 companies, but Cranfield and Wippell will not be drawn on how much work that yields.

Meanwhile, corporate's relationship with the investment banks is patchy to say the least. Wippell asserts that the firm is on every bank's list for both corporate and finance work; but he plays down the importance of maintaining strong relationships with the banks, arguing that while investment banks have historically been a good source for referrals, companies are increasingly instructing lawyers directly.

But therein lies the problem. Getting FTSE clients on the roster does not necessarily ensure deal flow. As everyone knows, the private equity houses are the must-have clients. They have powered the M&A tables for the last couple of years and, despite the vagaries of auctions, private equity houses mean highly profitable repeat work.

So where is A&O in private equity? It came fifth in Mergermarket's latest rolling 12 months' announced buyouts based on number of deals, ranking below Ashurst, Clifford Chance, DLA Piper Rudnick Gray Cary and Linklaters.

Statistics aside, private equity at the firm has been fairly muted. It advised the now defunct Morgan Grenfell Private Equity and has a longstanding relationship with Investcorp, which completes only a couple of deals a year. Worryingly, the corporate rainmakers at the firm such as Alan Paul and Susan Howard are now more associated with public deals.

Tony Keal has a lock on KKR's financing work, but there is no sign that A&O will break into the corporate end of UK work, which is effectively colonised by Clifford Chance's Daniel Kossoff.

So, there is little joy in UK private equity, although there is a promising streak of principal finance outfits with an infrastructure bent, Nikko Principal Investments being one and Macquarie another. It is an area that plays well with A&O's fabulous projects and infrastructure practice.

Alison Beardsley has been doing some sterling work in building that up. This is by far the most promising development in the practice. But there is little evidence that A&O is building a muscular cross-border corporate capability in Europe. The magic circle business model relies entirely on integration and the ability to provide a matching service in key jurisdictions. This is something that Clifford Chance, Freshfields Bruck-haus Deringer and Linklaters have all been able to do, mainly through picking up established practices. The only place where A&O really has a top corporate practice is Benelux, where it eschewed organic growth for merger with half of Loeff Claeys Verbeke. And in the Netherlands, A&O is one of the top dogs for corporate work, as evidenced by its role on the VNU buyout last year. In Germany and France, though, the firm still lags behind its magic circle rivals. In Germany it appears to be heavily reliant on star partner Neil Weiand.

So A&O corporate partners should be satisfied, but not ecstatic. They have won enough mandates to keep their hawkish banking colleagues at bay; but given their evasiveness on the subject, it is hard to see how they can convince anyone outside the department that progress has been made, especially on building a truly European offering.

husnara.begum@thelawyer.comA&O's corporate and banking financials 2001-04 (£m) 2003-2004 2003-2004 2003-2002 2003-2002 2002-2001 2002-2001

Finance Corporate Finance Corporate Finance Corporate

Global turnover 306.0 241.2 290.0 213.0 231.2 197.0

Percentage of global turnover 47.0 37.0 44.8 33.0 39.8 33.9

Difference between corporate

and finance billings Source: The Lawyer Source: The Lawyer
but does anyone believe it? By Husnara Begum