|
|
|
The UK firms are thinking global, but the savvier US practices are starting to act local. By Catrin Griffiths
|
Sheer force of numbers is key to entering the Global 100 and transatlantic mergers add bulk like nothing else. A case in point is Clifford Chance's 2000 merger with Rogers & Wells, which almost doubled turnover in the space of just two years.
Of the five major transatlantic firms, four - Dechert, Jones Day, Mayer Brown Rowe & Maw and Reed Smith - are now US-based practices. And while some would argue otherwise, each of those mergers can be characterised as de facto takeovers by the US firms. They have been singularly successful at penetrating the UK legal market, with Clifford Chance remaining, in spite of its woes, the only UK firm to make a significant impact on the US legal market through transatlantic merger. All the rest are managed stateside. What's more, in all four cases the UK firm adopted meritocratic remuneration and all but Rowe & Maw have relinquished their names.
For the US firms, transatlantic tie-ins accord instant critical mass in the UK market. But at the largest of these, Mayer Brown, London contributes just 16 per cent to annual turnover. At Jones Day, the figure is just 8 per cent. Perhaps surprisingly, Dechert's London office contributes 17 per cent, or £42.5m, to firmwide turnover, the highest proportion of any of the US firms in the top 15.
Compare that with US firms that have grown organically in London. The statistics show that if gaining critical mass in the UK is a key motivation behind transatlantic tie-ins, it is somewhat misguided. Shearman & Sterling (£53.4m) and Latham & Watkins (£50m) have gained through organic growth in the capital what Mayer Brown (£79m) and Jones Day (£50m) have achieved through merger.
And they have done so while maintaining high profits per equity partner (PEP). Indeed, the Global 100 confirms what the market has long suspected: transatlantic mergers and strong profit figures are rarely happy bedfellows. From a London perspective, the four US-based merged firms have an average PEP of £462,500. This is 42 per cent lower than the average PEP at the top 20 US firms in London.
On a global scale, Clifford Chance, ranked first in the Global 100 on turnover, slides to 40 in PEP, while Mayer Brown slips from 10 in the turnover tables to 52 on profit. Reed Smith, at 40 on turnover, slumps to 80 on profit. Jones Day, seventh in turnover, falls to 74 on profit, with an average PEP of £389,000.
The notable exception is Dechert, which at £624,000 boasts the highest PEP of any of the merged firms. Ranked 48 on turnover, the firm rises to 34 in the profit tables.
Indeed, average profits at Clifford Chance are lower today than in 1999. From £685,000 that year, profits rose to £721,000 in 2000 but have fallen ever since, last year dropping 12.7 per cent to £562,000. The drop has come at the same time as a series of partner de-equitisations and the number in the equity sliding from 441 in 2002 to 406 last year.
Undeniably, the firm to suffer most in the profits stakes post merger is Jones Day. It has been a full UK financial year since the February 2003 takeover by 312-partner Jones Day Reavis & Pogue of 43-partner Gouldens. Global profitability has slipped 33 per cent in the last year alone, and in London, PEP has fallen 16.7 per cent from around £620,000 to £516,000. This is a significant decline from last year and represents a 23 per cent drop in profit from Gouldens' pre-merger figure in 2000. And this is in spite of a 20 per cent turnover increase and the number of equity partners in London shrinking 11 per cent, from 36 prior to the merger to 32 at the end of 2003.
Unsurprisingly, the merged firms have all seen a shakedown in staff and partner numbers. Clifford Chance's US operation has watched as its elite club of defectors continues to swell. Since the 2000 US merger, 64 partners have joined the firm, including 18 laterals, 17 partners from Brobeck Phleger & Harrison and 29 partner promotions. But over the same period, more than 56 partners have left the firm's fragile US operation and, in the last year alone, 22 partners have left in the US.
At Dechert, partner numbers have slumped by more than 6 per cent in the last year, from 176 in 2002 to 165 in 2003. Global lawyers have also fallen slightly, from 708 to 697. And at Mayer Brown, while global equity partners have risen from 420 in 2002 to 426 last year, global headcount has fallen by 4 per cent to 1,249 lawyers.
Despite strong global profits, Dechert has struggled to hang on to its London partners. The headcount in London has fallen dramatically, from 151 lawyers in 2001 and 141 in 2002, to 120 in 2003. The firm has watched as a swelling tide of partners has walked out of the London office, bringing the number of equity partners in London down by a whopping 43 per cent to 25. The result, not surprisingly, was last year's 11.1 per cent dip in gross to £42.5m from £47.8m in the previous 12 months.
Jones Day, however, is a notable exception. Since the merger, the firm has piled on 159 lawyers, an increase of 8.8 per cent on lawyer numbers at the two firms prior to the merger. At the same time, it has added an extra 45 partners to the global equity.
On the international expansion front, following Reed Smith's 2001 merger with Warner Cranston, the firm has since conducted a tie-in with California's Crosby Heafey Roach & May, and is now casting its expansionist eye over Continental Europe. According to Reed Smith UK managing partner Tim Foster, the Crosby Heafey match released more than $18m (£11m) in additional referred work to Reed Smith. The mergers have seen turnover since 2001 rise 64.7 per cent to 2003's £270.2m. At the same time, global profit has risen steadily by more than 40 per cent since 2001 to £343,000 per partner. London PEP is £381,000.
In efficiency terms, the merged firms underperform relative to their rivals in the Global 100. Mayer Brown, ranked 10 by turnover, slips to 36 on revenue per lawyer (RPL), while Clifford Chance, the world's largest firm, slips to 59 and Jones Day tumbles from seven for turnover to 71 for RPL.
Unsurprisingly, the New York powerhouses - Davis Polk & Wardwell, Sullivan & Cromwell and Wachtell Lipton Rosen & Katz - dominate the top spots in the global RPL stakes. But at the transatlantic firms that have grown organically rather than through merger, RPL figures remain comparatively high. Shearman & Sterling, Skadden Arps Slate Meagher & Flom and Weil Gotshal & Manges, with footprints in the UK legal market worth £53.4m, £43.1m and £50m respectively, all boast average RPLs of more than £453,000 per year.
But with the exception of Jones Day, the London lawyers at all the US-based merged firms bring in less than their global counterparts. Of the top 20 US firms in London, lawyers bill more in London than their firm's global average at every firm except for Cadwalader Wickersham & Taft, Dechert, Mayer Brown, Reed Smith, Shearman and White & Case. And with the exception of Jones Day, London partners at the merged firms are less profitable than the global average.
Remuneration remains, as ever, a key battleground for the merged firms and a reason for the collapse of so many would-be marriages. Ashurst's inability to part with UK lockstep in favour of Fried Frank Harris Shriver & Jacobson's merit-based system is a case in point. But there is a certain inevitability about the shift towards merit-based remuneration. Of the transatlantic mergers, all but one have seen a shift away from UK lockstep towards a merit system. Titmuss Sainer Dechert and Warner Cranston both ditched lockstep in favour of merit systems following their US mergers. Rowe & Maw always had a powerful merit element in its remuneration system, but is diluting it further following its merger. Partners at Nicholson Graham & Jones (NGJ) will relinquish lockstep following the firm's 1 January 2005 merger with Kirkpatrick & Lockhart, while DLA already operates a largely meritocratic remuneration system.
Clifford Chance remains the only firm in which UK lockstep has been retained post-merger. But according to US partners, the firm is now flirting with the idea of shifting to a modified lockstep in a bid to attract and retain US legal talent. How this sits with the oft-repeated claim that "there are no names bigger than Clifford Chance" is not clear.
The varying successes of these transatlantic mergers have not deterred a slate of new firms looking to gain a foothold on the other side of the pond. On 4 December this year, DLA and Piper Rudnick partners will vote on their merger. The 32nd-largest firm in the Global 100, Chicago's Piper Rudnick posted a turnover of £307.2m in the last year, while DLA came in at 35th place with a turnover of £275.4m. The merger, if successful, will catapult the firm into the global top 10. NGJ, as mentioned above, will formally merge with Kirkpatrick on 1 January 2005, creating the 950-lawyer Kirkpatrick & Lockhart Nicholson Graham. On last year's turnover figures, the merged firm can expect to sit at around 60th place in the Global 100.
If nothing else, these mergers are guaranteed to add bulk, at least in the immediate term. As DLA mangaging partner Nigel Knowles puts it: "In future we will be able to say to any client, 'Whatever you do, you will never outgrow us'."
|
| US FIRMS IN LONDON |
| FIRM |
TOTAL REVENUE
(£M) |
UK REVENUE
(£M) |
% OF TOTAL |
PEP
(£K) |
 |
| Baker & McKenzie |
694.0 |
84.0 |
12 |
335 |
|
| MBR&M |
497.5 |
79.0 |
16 |
370 |
|
| Shearman |
447.0 |
53.4 |
12 |
916 |
|
| White & Case |
496.3 |
51.9 |
10.5 |
535 |
|
| Jones Day |
633.4 |
50.0 |
8 |
516 |
|
| Latham & Watkins |
632.2 |
50.0 |
8 |
761 |
|
| Weil Gotshal |
490.2 |
50.0 |
10 |
875 |
|
| Skadden |
813.9 |
43.1 |
5 |
1,000 |
|
| Dechert |
248.5 |
42.5 |
17 |
424 |
|
| Sullivan & Cromwell |
420.4 |
42.0 |
10 |
1300 |
|
| Sidley |
566.7 |
36.8 |
6.5 |
492 |
|
| Cleary |
354.9 |
28.5 |
8 |
771 |
|
| Cadwalader |
216.6 |
27.0 |
12.5 |
1,300 |
|
|
|
|
