Halfway decent: top firms make strong start to year
21 November 2011 | By Katy Dowell
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A quiet optimism has come over the profession at the half-year point, with many leading firms reporting turnover rises. However, turmoil in European markets and a foggy economic agenda in the US threaten to stall full-year growth.
Addleshaw Goddard, Allen & Overy (A&O), Ashurst, Bird & Bird and Clyde & Co have all posted double-digit growth for the first six months of the 2011-12 financial year. With the exception of Addleshaws all stand out for their international bases and for having at least attempted to find new geographical growth areas due to the continuing slump in the West.
A&O partners were surprised to learn that the firm had achieved 11 per cent growth in the period, from £526m to £582m.
A&O managing partner Wim Dejonghe says: “The results were slightly better than we expected, although we were expecting pretty good numbers because we’ve invested in a couple of new markets and there was bound to be more revenue on the back of that. Also, we’ve been expanding through lateral hires in Paris and in Germany.”
The firm has identified an expansionist strategy and pursued it fervently. It is this strategy that is starting to pay off, as the firm derives revenues from South East Asia and the Middle East, where many national economies are stronger.
In 2009-10 A&O opened offices in Doha, Sydney, Perth, Athens and Jakarta - although the latter two are representative and associated offices respectively.
In 2010-11 it sought to cut domestic overheads with an offshore branch in Belfast, and then there was the opening of another US office in Washington DC.
In the first half of 2011-12, despite the wider economic outlook, the firm has announced that it is looking at a tie-up with Linklaters’ Singapore alliance firm Allen & Gledhill, although Dejonghe says the forecast for the next six months makes further expansion unlikely.
Ashurst and Clydes have also ploughed investment into new international office bases. Both posted 12 per cent revenue rises for the first half of 2011-12, with Ashurst’s turnover increasing from £138m in the first half of 2010-11 to £154m, and Clydes’ going up from £94.6m to £106m.
The Clydes figure does not include revenue from its recent merger with Barlow Lyde & Gilbert (BLG), which went live on 1 November.
The boldest move by Ashurst over the past three years has been its proposed tie-up with Australian firm Blake Dawson. The deal is yet to be voted through, but the fact that it is even being discussed shows that the firm is looking for new ways to grow. That said, it has not ignored its Western client base. In 2009 it opened two offices in the US, one in New York and one in DC, on the back of the hire of 13 partners from McKee Nelson.
Ashurst managing partner Simon Bromwich says he is pleased that the firm posted a 12 per cent increase for the first half, but harbours reservations about economic stability.
“We feel we’ve done pretty well,” says Bromwich, “but what’s to come is extremely difficult to predict at the moment.”
Slaughter and May, which does not disclose its financials, is also worried about the current financial uncertainty, but senior partner Chris Saul is optimistic that the uncertainty will create plenty of work for lawyers.
“The wider business and economic climate is, of course, challenging,” Saul stresses. “This has meant that M&A dealflow has been patchy, although we’ve been pleased with our share. But it’s also meant that our financing, restructuring, regulatory and dispute resolution teams are experiencing strong activity levels”.
Slaughters is the most profitable firm in The Lawyer UK 200 Annual Report 2011, with equity partners receiving an average profit share of £1.93m in the 2010-11 financial year.
One way of managing costs to ensure profitability is to manage people, something that has been a priority at Ashurst.
“The most obvious thing,” Bromwich says, “is that you watch recruitment carefully, but that’s no different from what we’ve been doing for the past three years.”
Ashurst’s partnership figure speaks for itself.
The average headcount for the past year may have increased by 2 per cent, but the firm has seen 26 partner exits and has taken steps to control spend by moving 17 equity partners down the lockstep.
The trend at Clydes has been to plough investment into people. In the 2010-11 year the firm made 26 lateral hires internationally.
Approximately 72 per cent of Clydes’ revenue is generated through contentious work, meaning it is well-positioned for the multijurisdictional litigation boom.
Rather than shying away from office openings after the banking crisis of autumn 2008, the firm put expansion at the top of the agenda. This has led to office openings in Canada through a tie-up with insurance firm Nicholl Paskell-Mede, India, New Jersey, Saudi Arabia and Tanzania.
Domestically Clydes has seen a revenue boost in its transactional insurance practice, but the bulk of growth in the first half of 2011-12 came from its international offices.
Chief executive Peter Hasson comments: “We’re pleased with how the Middle East and Asia performed, and particularly pleased that some of our laterals are starting to shine through. We also think BLG had a good start to the year, so it’s looking promising for the full year.”
Hasson believes the firm has benefited from its international base and is witnessing some recovery in the Middle East, driven in part by the Arab Spring, which has prompted many companies to relocate to Dubai.
The outlook is not rosy for everyone, however.
Eversheds posted a near 7 per cent rise in turnover at the half-year stage, with revenue sitting at £184.1m.
There has been growth in financial litigation, according to chief executive Brian Hughes, but instability in Europe is starting to take its toll.
“In the past six weeks things have slowed down a bit, but there’s still a pipeline of activity,” Hughes explains. “However, with the uncertainty in the EU, that’s understandable. We hope there’ll be a structured default for Greece and clarity in Italy so there’ll be some stability. If we get that we may see a return to activity in the New Year.”
There has certainly been a shift in international focus since the collapse of Lehman Brothers in September 2008. Firms are looking for work from the East to hedge recovery in the West.
On the domestic front, while management across the board is clinging to some hope of recovery, the reality is that the hard work has only just begun.
Adapting to life in an uncertain world
Recent announcements by a few firms of their half-year revenue numbers (to 31 October) are revealing and give some indication of those that are pulling ahead in this difficult market.
As we enter the fourth year after the Lehman Brothers collapse it is apparent that there will be no rapid return to what used to be ’normal’. Indeed, uncertainty and occasional market paralysis are perhaps the ’new normal’ as we get used to the effects of the euro crisis, the US budget deficit, the political paralysis pending the US presidential election next November, the impact of the Arab Spring and facing down Iran over its nuclear programme, together with natural disasters such as those that have hit Japan and New Zealand.
It is apparent that the UK economy will be pretty flat for 2011 and 2012. Accordingly, in the domestic market growth will come primarily from taking market share from others. As a result clear winners and losers will start to emerge. Some firms have aggressively re-examined their businesses and, after an initial reorganisation, are embarking on targeted hires of teams and individuals to develop their market positions. Others have refined their offerings to clients and are targeting clients with clarity.
With panel reviews becoming the norm and panels getting smaller, firms need to demonstrate the depth and breadth of practice their clients need and achieve a price-point their clients find acceptable if they are to make the cut.
Some firms - as in the recent cases of Clyde & Co and Barlow Lyde & Gilbert, and Beachcroft and Davies Arnold Cooper - will choose to merge to obtain critical mass and improve their market positions.
This is not just happening at larger firms. Those of £10m-£30m turnovers are considering mergers too as they battle to differentiate their offerings in a crowded market. The merger of Martineau and Sprecher Grier Halberstam to create a £30m firm is likely to be the first of many.
The standout trend from the half-year results is the importance of a firm’s international platform to its revenue growth. Allen & Overy, Ashurst, Clyde & Co and Olswang all achieved double-digit revenue growth in the first half, but attributed much of this to their international footprints. As global markets slow it will be interesting to see if such impressive growth can be maintained for the full year.
Many firms have clearly decided to follow, or even anticipate, their clients’ moves into new markets, not only to keep existing clients, but also to attract clients from those locations that are eyeing international expansion.
The period since the Lehman collapse has seen more cross-border merger activity and new office openings than the five years before. Firms have focused on new and emerging markets and those with strong natural resources bases. Target locations have included Abu Dhabi, Australia, Brazil, Canada, Indonesia, Morocco, Qatar, Singapore, South Africa and Turkey. Some are large deals - the Ashurst-Blake Dawson combination is an example of a major transaction focused on building a strong presence in the Asia-Pacific region. New markets for 2012 will include Korea, Latin America and Africa.
So at the halfway point in this financial year the market is segmenting into firms that intend to use the downturn to broaden and deepen their offerings to enhance their relationships with leading clients and attract major new ones, and those that are hoping, perhaps forlornly, for the market to improve.
As we move into 2012, will such ambition be rewarded, or will some firms regret their expansion plans if the global economy wobbles again? I back strategy and ambition against inertia any day.
Tony Williams, Jomati Consultants
Additional reporting by The Lawyer staff