Focus: SNR Denton: We shall overcome
29 May 2011 | Updated: 31 May 2011 9:38 am | By James Swift
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Shocking financials have blighted SNR Denton’s first year as a combined entity. Chief executive Matthew Jones explains his plan for turning the firm’s fortunes around
SNR Denton’s UK LLP financial report this year is going to make for grim reading, there is no way to sugarcoat that. To be fair, the firm’s UK LLP CEO Matthew Jones does not even try.
“It’s been a difficult year,” admits Jones. “We’ve spent a lot of time and effort on completing the combination [between legacy firm Denton Wilde Sapte and Sonnenschein Nath & Rosenthal (SNR), which merged under a Swiss Verein structure on 30 September 2010], and our clients have faced a very tough year too. We recognise that our performance needs to be better.”
Jones was appointed CEO of SNR Denton’s UK LLP in March; and for many in the market it came out of nowhere. By some accounts he was not even that well-known within his own firm until recently.
On meeting Jones, however, you can imagine how that might be the case. He comes across as mild but upfront, lacking the streak of either intensity or belligerence usually found in firm leaders.
A low profile, however, is probably no longer an option for the man charged with whipping the UK half of SNR Denton in to shape and bringing out the potential that the firm is hoping lurks just behind the veneer of what is sometimes described as a mid-market - or worse, middling - firm.
Writing on the wall
SNR Denton’s UK results for the 2010-11 financial year have not yet been released, but already the market is rife with talk about the firm’s performance. The first-half results, released at the end of 2010, certainly make a drop seem like a foregone conclusion.
During that period revenue fell by 9 per cent on the same period in 2009-10, when the firm brought in £87.7m, to £79.8m. What this means for the average profit per equity partner (PEP) figure is not clear. Legacy Denton’s PEP figure was £360,000 in 2009-10; a drop of 9 per cent would see it fall to £328,000, roughly on a par with Nabarro’s or Brodies’ 2009-10 PEP showings. Word is that it could fall even further.
Contrasting these figures with SNR’s in 2009-10, when turnover dropped to $456.6m (£279.7m) but PEP increased by 15 per cent to $827,000, has led to speculation that the UK half of SNR Denton is under pressure from its US compatriots to shape up, and fast.
It is a rumour that Jones is keen to nix.
“There’s absolutely no pressure being put on us from the US,” insists Jones. “Even without the combination with the US we would have wanted to improve our performance. We now have the US side of the business alongside us and that’s been extremely positive. Pressure’s the last word I’d use.”
It is not all bad news and talk of pressure, though. Alongside the reports of an unimpressive financial performance an air of optimism nevertheless pervades the firm. Former lawyers, usually a rich source of vitriol, speak about the firm in a measured way, praising the London office as a great place to work and saying how the Dentons-SNR combination makes good business sense.
“I think generally people are very positive about the combination with Sonnenschein,” says one former Dentons lawyer. “It’s an interesting juxtaposition - on the day-to-day side things aren’t looking great, but on the other hand people can see opportunities coming.”
“It was a nice place to work,” recalls another. “This year’s been a bit of a horror story I think, but the market’s stagnant so it needs to be put in context.
“The firm’s certainly had problems, but I think the merger, in the long term, is a very good thing.”
All this, of course, is anecdotal and by no means a reliable bellwether for the state of a practice, but neither are there any signs of gloom at the firm’s London offices when I visit Jones. The foyer is buzzing and I count around 14 people at any one time, coming and going, chatting, admiring the view.
Senior partner Martin Kitchen greets two guests cheerily. “I recognise you from somewhere,” he says to one. “Some wine bar maybe?”
It fits with the atmosphere former lawyers had described - one of a firm that is well-established and comfortable in its own skin.
“They’re a pretty collegiate bunch,” reveals a source close to the firm. “The partners who are there really want to be there. And for the most part these people are in a frame of mind where, so long as they’re making a reasonable amount of money, that’s fine.
“The firm shouldn’t be compared with Ashurst or Travers Smith because it’s not that kind of firm. I’d say it’s a pretty solid mid-market firm, but the merger’s a good move and puts them on a totally different footing.”
The gospel according to Matthew
Those with a fondness for pop psychology might even say that the rise of Jones is a reflection of the firm’s perceived image.
“I didn’t know Matthew at all, he’s kind of come from nowhere,” says another former SNR Denton lawyer. “I don’t think he was on the management committee before. You’d have done well to have predicted that appointment, since you had people like [finance partner] Michael Black, who were much more visible.”
“There’s no doubt Matthew’s a fantastic lawyer,” says another former lawyer at the firm, “but in certain firms you have a culture where the alpha males tend to go to the top, whereas Matthew always seemed quite quiet.”
Jones led the banking practice at legacy firm Dentons for three years, beginning in 2007, and was made co-head of energy, infrastructure and project finance at the merged firm before being elevated to CEO as part of a management reshuffle.
In the UK Jones replaced Howard Morris, who has become global integration partner. Martin Kitchen, described by one senior City source as “a very sensible guy and very capable”, was made senior partner, while Brandon Ransley, who had proved himself as head of the firm’s Milton Keynes office, remained UK managing partner and now has responsibility for the executive management of the UK business.
Jones also has a global role, sitting on the group board, which hovers above the UK and US LLPs. He was appointed, not elected, to his position as CEO in a move away from contested elections, which is part of the firm’s plan to merge constitutional practices with the US. It is a process that Jones expects to take up to three years to complete.
“I measure the process of integration in years, not months,” explains Jones. “It’s not easy to combine two firms when you’re separated by the Atlantic Ocean.”
Gee up Jones
Jones has less patience, however, when it comes to attacking the firm’s most glaring weak point - its profitability. He seems acutely aware of the firm’s perceived foibles and what needs to be done to eliminate them. One of his first acts on becoming CEO was to launch a three-month review of practices and sectors.
“Along with improving client services, the most important item on my desk is to improve profitability,” he stresses. “The review will not be a lingering, drawn-out process, it will be a concise review of key business areas - to kick the tyres, so to speak.”
A comprehensive review has been a long time coming, according to those familiar with the firm: while the terrible UK market and the distracting navel-gazing that
usually follows a merger are sure contributors to this year’s performance, there is a perception that the firm’s issues run deeper and that it has failed to deliver on the high expectations - particularly in banking - attached to the legacy Wilde Sapte, which merged with Denton Hall in 2000.
“In some ways the firm’s been a story of what could have been,” says a source close to the firm. “You look at the alumni and there’s some fantastic people who’ve been at the firm, people who are now heading up positions in magic circle firms, but that’s been over the past 10 years.”
Indeed, the list of former Wilde Sapte talent now at magic circle firms is extensive. Banking and restructuring partner David Ereira, a partner at Wilde Sapte until 1990, is now at Linklaters, as are star partners Robert Elliot (who has just become senior partner at the magic circle firm), Nick Syson, Bruce Bell and Phil Spittal. Clifford Chance banking partner James Johnson was also a partner at Wilde Sapte until 2000.
Of course, the partners named all left way back in the mists of time, but the worry that profitability issues affect the firm’s ability to retain and recruit top talent is still there. The firm’s merger with SNR was evidence that those at the top knew something had to be done.
“It all comes down to profitability,” states another source close to the firm. “The firm has a lot of large-cap companies on its roster, some great clients such as Vodafone and Sainsbury’s, and a lot of bank work acting for insolvency practitioners.
“The trouble with this work is that it comes from incredibly sophisticated purchasers of legal services and it’s a very competitive market. The hourly rates we were offering were pretty low. Of course, you’ve got the Milton Keynes office to manage commoditised work, but it rarely works like that in practice.
“Again, it’s a very well-established firm, but it doesn’t really have the private equity or early-stage growth companies that do more transactions and have less commoditised relationships with law firms.
“I think you can get better margins on mid-tier work. If you look at Ashurst and Taylor Wessing, they’ve got a good pipeline of those sorts of companies.”
Jones, describing how he sees the future of the practice, reiterates the importance of the finance practice, declaring it to be part of the firm’s DNA. And indeed it is. Wilde Sapte, before its merger with Denton Hall in 2000, boasted a market-leading banking practice in the UK on top of its game in asset finance, insolvency, restructuring and leveraged finance.
But the practice was diluted by the combination - Denton Hall had no banking expertise to speak of and an interest in a range of other activities, such as media and energy and infrastructure.
Now many believe that it is the projects practice, as well as Dentons’ footprint in the Middle East and Africa, that is the firm’s greatest strength and was the jewel in the crown for SNR.
These are areas that Jones is keen to develop, with a background in projects and a remit spanning Europe, the Middle East and Africa (Emea), with the latter excluded from the LLP, as well as Asia.
“Our existing markets are by no means moribund, but we need to exploit new ones,” says Jones. “We’re looking at the Emea business - how we can strengthen it and where we can follow our clients. We clearly have a business with a great pool of talent and a great reputation, but there’s a feeling that there’s more gas in the tank.”
The firm’s tie-up with the six-partner Hong Kong office of Squire Sanders Hammonds legacy firm Hammonds in January is a good example.
Breaking new ground
“We gave ourselves a three-year timeframe for adding an office in Hong Kong and we ended up doing it within 100 days of the merger,” says Jones brightly. “There are more international business opportunities than ever before. New markets are opening up to us as a result of enhancements on the US side - we’ve added to the Far East practice with our new Hong Kong office and expanded our Africa locations to 21.
“Our sector lines, for instance real estate and TMT, have quickly integrated on a global scale. Part of our [UK management’s] role is to capitalise on that against a very different and very tough UK market.”
A shrewd move by the firm has been to move the Africa committee co-chairman Paul Bugingo to the Middle East with a remit to develop the firm’s Africa practice on a different axis.
“Before the Africa practice tended to have a London focus, so we wanted to broaden that considerably,” relates Jones. “And to broaden the practice in the Gulf too.”
New markets, too, are clearly on the agenda. Jones never alludes to specific jurisdictions, but a question regarding recent hot spots Houston, Canada and Australia provokes an intriguing response.
“We’re ambitious,” replies Jones, “and we want to build a truly global, client-driven firm. You can look at a map and see where we’re not, and from that you can easily discern which countries or regions we’re interested in.
“We certainly have a growth agenda and we’ve had a number of firms approach us in different centres.”
Yankees growing dandy
Jones also hopes to get a boost from SNR’s known strengths in sectors that his firm has not previously been involved in.
“Insurance is a highly rated practice in the States, so you’d expect to see the firm go from strength to strength there,” Jones says. “The US side also has a great reputation in healthcare and life sciences, so you’d expect to see that wash across the practice here too.”
But if that is to happen it will take time, much like the full harmonisation of the merged firm’s internal workings. The merger with SNR is a Swiss Verein, so profit pools are kept separate but the firm is expected to align practices with the US and visa-versa.
Again, remuneration is a factor. According to one source familiar with the inner workings of the firm, a proposal was put forward two years ago to change the remuneration structure (mostly lockstep but with a discretionary, performance-based element, as well as a separate, completely discretionary pot) to a more merit-based model.
That proposal was rejected by the partnership and the subject fell by the wayside as Dentons became more focused on its business. With the merger, however, a move towards the US-style, eat-what-you-kill model is seen as inevitable.
“We’re aiming to have similar structures wherever possible and always to follow best practice. Sometimes that will mean the UK LLP adopting US LLP practices; sometimes it will be the other way around; and sometimes we’ll find best practice elsewhere,” says Jones.
Of course, the issue of remuneration is academic if the firm is not bringing in more work.
Concrete evidence that the merger has borne fruit is hard to come by. But the merger is less than a year old and it is still too soon to talk about winning new clients or about long-established clients on either side of the Atlantic giving up old allegiances with other firms.
The key test at this stage is whether existing clients are considering SNR Denton for deals that they would not have done prior to the merger.
“Obviously we can’t give details,” intones Jones, “but a typical example would be a panel that we’ve got onto because of the combination that’s generated a significant piece of litigation for us.
“We have hundreds of clients and matters on which our lawyers are working together across regions and generating significant volumes of new work that, but for the combination, wouldn’t have come to our firm.”
Sources close to the firm also suggest that the merger has altered clients’ perceptions.
“Certainly there are things that the firm’s won that it wouldn’t have won if it weren’t for the merger,” confirms a former partner at the firm. “I’m sure there have been situations where two plus two’s equalled five for the firm.”
Naturally the SNR Denton merger has its sceptics, but there remains an upbeat aura surrounding the tie-up.
“Has the firm maximised on its position, going back to the Wilde Sapte days? Probably not,” says one source. “But they’ve done something about it now and I don’t see how
it could do anything but good for them.”