For financial gain
19 December 1995
This year has seen the end of the independence of three of the great names in UK merchant banking (Kleinwort Benson, SG Warburg and Baring Brothers); rapidly followed by the City's leading broker Smith New Court. The new owners from the US, Holland, Switzerland and Germany were already established City players, albeit primarily in different markets.
Buried deep in the cultural and business changes facing these organisations, and in many other houses addressing global corporate finance, is the question of the role of in-house counsel and/or legal department, outside counsel and the future supply of legal services to banks.
SG Warburg did not have a legal department. Swiss Bank Corporation (SBC) has long had one of the largest and most active departments of any bank in the City, built and headed by Neil Stocks.
Traditionally Warburgs was thought to be closest to Slaughter and May and Freshfields, and SBC to Linklaters & Paines. How significant will Stocks and his team be in the battle for future business? History suggests they will play a decisive role.
The Warburg/SBC scenario is a microcosm of what is happening across the City as traditional relationships come under strain.
The increasing dominance of the US approach to corporate finance, which does not distinguish between debt finance, equity finance and advisory work, has a number of consequences.
Not least of which is the requirement for advisers who can deal with a broad spectrum of legal and financial disciplines.
These skills have always been essential for the in-house lawyer. A growing need for them in external counsel mitigates against the trend towards specialisation which has occurred over the last 10 years within major City law firms. The obvious exception to this is Slaughter and May which has always favoured a generalist approach.
How can law firms train younger lawyers to be multi-disciplinary in outlook, but with a depth of knowledge in particular specialisations? The more senior partners in City law firms grew up in an environment where a corporate lawyer could turn his hand to most things.
This experience, plus the contacts and inter-personal skills they have developed, leaves them well placed to mirror the role which the 'relationship banker' plays with a bank's corporate clients - introducing the specialist products or industry expertise which the bank can provide.
The creation of the securities group at Clifford Chance was seen as an attempt to apply a similar approach in selling legal services to investment banks. Has it been successful?
It is, in part, the requirement for the full range of services to global corporates which is driving the restructuring of the banking and securities industry at this time. Law firms must respond. A number of firms have established worldwide networks of their own offices.
Freshfields and Clifford Chance are the prime UK exponents of this trend, with the former leveraging off a global public equity practice and the latter a substantial commercial banking practice.
Allen & Overy seems to be following suit with a judicious mixture of alliances and own offices. Other firms still follow the "network" of contacts approach. However, clients seem to appreciate the one-stop shop, rather than search for excellence in a multitude of markets.
The use of international branding is another challenge for firms. Technology is also driving change. One reason for the recent Chemical/Chase merger was the increasing cost of investment in technology.
Law firms feel the same pressure, and the availability of sophisticated databases will continue to diminish the role of the lawyer as a supplier of legal knowledge. As a result, the method of delivering legal services and services themselves will have to change.
What other products will lawyers sell? Obvious ones include deal structuring, management and co-ordination, execution and occasionally origination. The more forward-looking firms emphasise their skills in these areas.
Basic financial modelling is also appearing in the lawyer's skill set, and no doubt this will develop. But are these not the skills of the merchant banker before trading took over?
The leading accountancy firms have established corporate finance arms. How long before law firms do the same? And how will this affect their relationship with the banks where these skills have traditionally rested? The changes have barely begun.