…Stop the press…

Brobeck Phleger & Harrison

Brobeck Phleger & Harrison’s year has truly been a tale of woe. A stream of exclusive stories by The Lawyer has tracked the firm’s troubles to its current last-ditch attempt to secure a life-saving merger partner.

Back in May, The Lawyer broke the news that Clifford Chance had scooped an initial 11 Brobeck partners as part of yet another groundbreaking move, this time to open an office on the West Coast.

As part of the biggest lateral hire in legal history, Clifford Chance’s hiring of Brobeck lawyers, led by the firm’s erstwhile chairman Tower Snow, soon gave way to tales of financial instability at the US firm.

By September it became clear that Brobeck was creaking under a hefty financial burden, and after a series of acrimonious discussions, the firm was refusing to pay back more than $10m (£6.4m) of partner capital to those who had jumped ship.

Just a month later, The Lawyer again revealed the extent of Brobeck’s monetary problems.

These included thousands upon thousands of square feet of empty office space that the firm had little or no chance of getting rid of in the face of one of the worst commercial property markets to hit the West Coast in recent years.

The Lawyer then reported that the firm had spied a potential merger partner in Hogan & Hartson, only to see a link-up founder before talks really got moving.

The Lawyer rounded off the year with a rather curious tale of Brobeck asking its partners to swear an oath of loyalty, as well as forgoing profit distribution, as talks with a new suitor Morgan Lewis & Bockius got underway.

It takes a lot to shift the spotlight away from Clifford Chance. This year Brobeck ma-naged it, but unfortunately for all the wrong reasons.

Linklaters

Linklaters almost generated more stories this year than Clifford Chance – but for different reasons.

Squeamish in the spotlight, the magic circle firm’s ingrained reticence probably did it no favours as market rumours grew. By the time it admitted it was actively managing out lawyers as part of a plan to keep keep its attrition rate healthy, there had already been reports about disgruntled associates, a cost-cutting drive and partner departures.

In the summer came the revelation that Linklaters’ average profits per equity partner had dipped to £650,000, leaving it trailing the rest of the magic circle. As Catrin Griffiths pointed out in The Lawyer 100, the answer may paradoxically lie in the huge increase in turnover, up 25 per cent to £631m from £505m. Much of that came from international mergers, which clearly had cost implications (Oppenhoff in particular was bloody, with dozens of partners surplus to requirements).

But by the autumn it was clear that Linklaters was undergoing some fundamental restructuring of its own. A refocusing on core clients – something which underlined the ascendancy of the corporate department – and a hard look at the bottom line led to mounting rumours in the marketplace. There was a shake-up in intellectual property with two partners leaving in November, and across the firm, with two partner exits from corporate, including Chris McFadzean to Latham & Watkins. Writing in Grapevine, part of the Lawyer News Weekly email, City editor Helen Power asked: “Every firm has a number of expensive partners they feel could more appropriately work elsewhere, but was McFadzean one who Linklaters wanted to lose?”

And yet Linklaters persistently tops the deal tables and, for the first time this year, topped the Thomson Financial global tables, beating off US firms. So why, as the whole City seems to be asking, were its profits hit so hard this year? That question – like so many others at Linklaters – remains unanswered.

Ashurst Morris Crisp

Despite moving from plaintive cries of denial to stoic silence, by mid-2002 law firms from London to Los Angeles knew that Ashurst Morris Crisp was in merger talks with US firm Fried Frank Harris Shriver & Jacobson.

Any transatlantic talks make the legal market sit up and listen, but many saw this round of negotiations as Ashursts’ last chance to secure a US partner, since only two years previously its attempt to tie down Latham & Watkins had failed; before that, talks with Clifford Chance had also foundered.

This tale of ‘will they, won’t they’ has been particularly pertinent given the seemingly impossible financial hurdles both firms still have to surmount.

In September, The Lawyer took an in-depth look at the structural differences between Ashursts and Fried Frank, which worryingly revealed two firms as different as chalk and cheese.

It was revealed that Ashursts’ strict lockstep was at odds with Fried Frank’s highly individual remuneration system, which sought to reward senior partners outside lockstep.

However, as associate editor Dearbail Jordan remarked in September, other issues stood in the way of success, since Ashursts seemed to think it was taking over Fried Frank,
while the US firm appeared to believe it was the acquirer.

“If the merger did go through, which firm would be in the driving seat?” she wrote. “With Clifford Chance it was the thought of being subsumed into the firm that scuppered things for Ashursts.”

Yet towards the end of the year negotiations between the two seemed to be speeding towards some sort of conclusion.

By November, The Lawyer revealed that Ashursts was believed to be considering relaxing its hard-and-fast lockstep rule, making a Christmas decision all the more likely.

But even if a merger is agreed, a niggling feeling remains that a significant shake-out will be inevitable in the New Year.

Elections and politics

2002 was a year of power struggles. Two magic circle firms – Clifford Chance and Allen & Overy (A&O) – and national firm Eversheds went through very public elections.

The most protracted was Clifford Chance’s, in which six candidates stood for senior partner. Favourite was banking head Stuart Popham, but it took him three rounds of voting before triumphing over arbitration partner John Beechey. As Dearbail Jordan noted in Grapevine (2 October): “No one thought the election would stretch out this far. However, a positive thought to take away from all this meandering is that, even at the world’s largest law firm, which turns over £1bn a year, the top management is still elected by the people who work there. There aren’t many corporates that can claim that privilege, no matter how many EGMs shareholders might requisition.”

The Clifford Chance vote was probably the most publicly scrutinised, but the Eversheds election opened up more internal tensions than any, with the partnership pretty much aligning itself on a North-South divide.
Leeds/Manchester managing partner David Gray and London managing partner Michael Brown went head-to-head for the leadership in a contest that became increasingly fraught. Gray made the early running, and then Brown got the support of most of the practice group heads. But by October Gray had pulled off a shock win by 10 votes.

The surprise election was for A&O managing partner, after John Rink quit early. A story in itself, but then topped by the revelation in The Lawyer (14 October) that Rink was asked to step down a year ago by an influential group of partners as the friction between him and senior partner Guy Beringer was becoming unmanageable.

In Grapevine (16 October), Catrin Griffiths wrote: “Ah, the sound of spin. Certain sections of A&O are now seeking to suggest that these sorts of conversations between partners ‘happen constantly’. Of course they do. And of course powerful department heads quite often go en masse to the managing partner of a £580m-turnover law firm and tell him he ought to step down. A&O might call that damage limitation; the rest of us would call it talking nonsense.”

Rink’s successor – and the clear favourite for the job – David Morley won the managing partner election last week.

Garretts

2002 gave us the total collapse of Andersen Legal, a monster global network supported by one of the world’s best accountancy firms.

Freshfields Bruckhaus Deringer supremo Alan Peck once predicted that Andersen Legal’s UK arm Garretts, managed by Tony Williams, would rival the magic circle. Enron intervened and Williams’ dream of going head-to-head with his old firm Clifford Chance bit the dust. Williams has since established his own law firm consultancy.

For Andersen Legal, the crunch came in March when the US Andersen limited-liability partnership was indicted over Enron. On 18 March, The Lawyer revealed that Spanish member Garrigues and Scottish firm Dundas & Wilson were poised to quit the network. Along with Singapore firm Rajah & Tann, these two were regarded as jewels in the crown of the global firm.

Over that weekend, Williams staved off desertions as Andersen’s non-US operations entered talks with KPMG. Of course, an Andersen Legal-KLegal tie-up would never have worked for Dundas, but it offered a glimmer of hope for the rest of the network.

It was not to be. As revealed in The Lawyer (25 March), a first lawsuit against the worldwide Andersen partners, including key Andersen Legal lawyers, was imminent.

Many more serious suits followed. Many settled, but by then the brand was tainted, the KPMG talks collapsed and firms fled.

Andersen’s accounting and consultancy arms did a life-saving deal with Deloitte & Touche, but the legal arm was left high and dry. In a sad denouement, UK member Garretts was itself split between Addleshaw Booth & Co, Taylor Wessing, Olswang and Pinsent Curtis Biddle as Williams sought new homes for his staff.

The whole saga is already yesterday’s chip paper, but it is not every day you get to see the likes of an Andersen Legal implode.

KLegal

KPMG’s law firm KLegal was not immune from Enron fallout either. The firm had a dream start to the year, sealing a merger with top Scottish firm McGrigor Donald, but then the consequences of economic stagnation and anti-accountant sentiment kicked in.

By July, KPMG had decided to make across-the-board cuts of 700 UK staff. At KLegal, this meant that 42 support staff, 20 fee-earners and several partners were earmarked for the chop. The support staff were a mixture of KLegal and legacy McGrigors people, but fee-earners and partners were axed exclusively from the accountancy-tied firm.

In what is now a long-running mess, KLegal deferred some of its 2002 trainees by offering payoffs of £10,000 to delayed starters. This is the sort of tactic the accountants have been using for years, but it was the first time this strategy had been used by a UK law firm.

However, just last week it emerged that Norton Rose offered the same amount to induce trainees to defer. It appears that the firm miscalculated the number of acceptances it would get in the current economic climate.

For KLegal, though, the story continues: while 2002 trainees were offered £10,000, some 2003 trainees selected at random were offered just £2,500 to defer for a few months. Unsurprisingly, they were not happy and this has proved an embarrassing strategic mistake by KLegal’s management.

However, there is no doubt those in charge at KLegal are now taking the matter seriously. There are moves afoot at the firm to clean up the mess. Then KLegal needs to get back to what it is good at – exploiting niche multidisciplinary practice areas and cross-selling McGrigors’ quality client base. Next year it will not be good enough just to be better than Landwell.

Gouldens/Jones Day

The news that Gouldens and Jones Day were in merger talks was first broken by Grapevine on the Lawyer News Weekly email (see page 19) on 28 November. Within a few hours of the news, the market was buzzing.

The fact that mid-tier Gouldens – often erroneously lumped together with Travers Smith Braithwaite and Macfarlanes as one of the top corporate boutiques – was selling at the top of the market to the third-largest firm in the US went against market orthodoxy. But as The Lawyer revealed, Gouldens partners were getting guaranteed profit levels for the next two years. Given the slowdown in the transactional market, Gouldens partners looked to be getting a rather good deal.

Catrin Griffiths commented in The Lawyer (2 December): “The best case scenario is that Jones Day gets immediate strength in depth in the UK and Gouldens gets international access. Worst case? That two parallel universes of control-freakery just refer bits of business to each other, with all the attendant fallout. Ladies and gentlemen, place your bets.”

Stephenson Harwood

It has not been the best of years for Stephenson Harwood. A lot of people had already begun scratching their heads when it merged earlier this year with Sinclair Roche & Temperley – hardly the most profitable of firms.

The official line is that it wanted Sinclair Roche’s ship finance capacity. The unofficial line is that, by getting bigger, it would become more attractive to a possible US merger partner. No coincidence that Stephenson Harwood and Holland & Knight were in talks several months before the Sinclair Roche merger was concluded.

However, it is arguable that this year Stephenson Harwood has burnt what transatlantic bridges it had by losing its Madrid office to DLA in October, coinciding with the calling off of its merger talks with Paris firm Barbe Thibault Carpentier Groener. A month later one of the two partners from its Paris office, which it had set up in 2001, joined Simmons & Simmons.

Despite this the firm has not backed down on earlier statements that it intends to have a presence in every key jurisdiction within the next five years.

The firm has also had to weather storms over its merger with Sinclair Roche. The Hong Kong office of Sinclair Roche – from which Stephenson Harwood was keen on cherry-picking – scattered, with Richards Butler picking up the most partners. Then two out of Sinclair Roche’s three international trade and commodities team also failed to join the merged firm.

It did not end there. Stephenson Harwood’s sole partner in its pensions team joined DLA in March and, two months later, the firm made 14 lawyers and 20 support staff redundant, blaming it on post-merger restructuring.

Now combine all this with average profits per partner plummeting, as well as the unfortunate incident involving its shipping litigation partner Joe Atkinson, who provided evidence “at the expense of the truth” in the trial of his former Sinclair Roche colleague Harvey Williams.

Suggestions? Try to put 2002 behind you and in the future look to reform strategically and culturally if you are to move forward.

Paddinggate

If there is one word that sums up the year’s most intriguing story, it is this: paddinggate. It is probably a word that the management of Clifford Chance wants to forget; and frankly, who can blame it?

The infamous memo, containing the complaints of nearly 150 of the firm’s New York lawyers, was drawn up by six representatives after Clifford Chance came bottom in The American Lawyer’s associate survey.

Unfortunately, despite Clifford Chance’s best efforts at transparency when it chose to send the memo to everyone in the firm, the document soon found its way to every major practice around the world. But that day in October was nothing compared with what happened the following Saturday, when the Financial Times led with allegations that lawyers were encouraged to pad their hours.

The memo itself did not say that the associates padded their bills, simply that, as one Clifford Chance associate told The Lawyer in November, “the way the billable hours are structured lent itself to proving an incentive to do so”.

However, that one spark soon kindled into a full-blown forest fire.

And unfortunately, a PR gaffe worthy of John Prescott himself managed to keep the flames burning after Clifford Chance said it had put together a “council of war” to address the furore. A war against whom? The associates? The press? Saddam Hussein?

But as The Lawyer editor Catrin Griffiths pointed out, all the gadding about meant that one important point had been overlooked: “No one seems to have made the point that time recorded is not the same as hours charged to the client.” Which is a pretty fundamental piece of information, since it is up to the partners to decide on a fair bill to the client.

Towards the end of December, the story has died down, as have claims that Clifford Chance clients are on the warpath.

However, unfortunately for Clifford Chance, it is the one piece of news that lawyers will remember for a long time. That, and the associates’ frankly loopy demands for free shoeshines.

Ford, Carillion panel reviews

As the effects of the economy really take hold, creativity has become the buzzword when it comes to costs. Any general counsel worth their salt is looking to squeeze external advisers on fees, as a number of stories this year has revealed.

On 4 October, Ford Motors general counsel Michael Maracki called his legal advisers to a meeting. The news was not good: the ailing car giant needed to cut its legal spend by around 30 per cent. And the message to its advisers was clear: the pressure is on you to find a way of reducing our costs.

Rather than cutting hourly rates, Maracki suggested firms come up with “creative” ways of saving money, such as success-based billing. The company is also currently undergoing a panel review.

Just two weeks later we revealed that Carillion was aiming to axe its spend by more than 25 per cent. Head of legal Richard Tapp had already had a panel review, slashing firm numbers from 40 to 11. At the first group meeting of the new panel, the firms were expected to present creative ways to keep costs down.

“We were looking for something that differentiated them [the new panel firms] from others in terms of the way that they proposed to do things – if they could do the job in a way which reduced the cost,” Tapp told The Lawyer at the time.

In the same month The Lawyer also revealed that PPM Ventures and Taylor Woodrow were cutting their firms in a bid to make their panels that much leaner.

These are just a few of the many that we covered in The Lawyer this year. And with the economy the way it is, you can bank on there being a few more stories like this next year.