It has been four years since Freshfields Bruckhaus Deringer, with great fanfare, hired four Milbank Tweed Hadley & McCloy partners for its fledgling New York and Washington DC offices, and nearly three years since Clifford Chance merged with Rogers & Wells in the most ambitious effort to date to form a truly transatlantic law firm.
So what mark have these firms and their competitors, Allen & Overy (A&O) and Linklaters, made in the US?
It may be best summed up by a conversation the marketing director of a New York firm had not long ago with a lawyer-turned-banker at Goldman Sachs – a banker who routinely hired outside counsel. When the marketing director referred to Clifford Chance, the banker replied: “Who's Clifford Chance?”
He was not joking. Five years into the campaign by the London firms to establish New York beachheads, and despite hiring dozens of US-qualified securities lawyers, their practices have gone largely unnoticed by New York lawyers.
“We don't really see them at all in basic New York stuff – in private equity or cross-border M&A,” says the head of M&A at a New York firm with a strong global practice.
“The reality is, there's nothing,” echoes the head of corporate finance at one of New York's largest firms. “They've made no dent at all. In the finance world, we haven't lost any market share.”
Data service Thomson Financial tells the story more precisely. The public capital markets deals (those registered with the Securities and Exchange Commission) that Thomson records since the beginning of 2001 for the four UK firms consist almost exclusively of obscure debt products. Only A&O has been issuer's counsel on major SEC-registered equity issues: the $4.4bn (£2.75bn)secondary issue for Dutch telecom KPN in December 2001 and the $3.4bn (£2.13bn) stock issue this September for Dutch insurer Aegon. Solid M&A data is harder to come by (too many data providers give full credit to firms for peripheral roles), but if anything, the record is even weaker there.
The progress – or lack of it – fascinates me, because beginning in 1996, when I worked for The American Lawyer, I wrote regularly about the looming threat of the UK firms, both in the US and globally. I was impressed by the strategic vision of the top London firms, and later by their success in transforming the practice of high-end corporate law on the Continent. At the time, US firms seemed myopic about what was happening abroad. It was hard then to gauge the depth of the UK threat, but it was certainly something to be monitored. Of course, it made good, provocative copy, too.
It is much clearer now just how hard it will be for even magic circle firms to establish credibility in the US in the areas that were supposed to justify their globalising projects – capital markets and M&A. And it will be next to impossible for them to make much progress when so few deals are being done. The business environment is unrecognisable now if you fashioned your vision three or four years ago, when European companies such as Daimler-Benz, Vivendi, Vodafone, BP and Scottish Power opened up their wallets to buy big marquee US companies.
“Those guys had lots of European corporates looking west,” says a London-based partner in a New York firm. “Now they're not looking west. They're looking at their balance sheets.”
All of which raises the questions: do the magic circle firms really need to be big players in the US?; and if so, do their strategies still make sense? On the one hand, building up slowly may never achieve the goal, but the alternative, a major Anglo-US firm merger, now seems less likely than it did three to five years ago.
The incremental approach to the US market taken so far by A&O, Freshfields and Linklaters is certainly less risky than a merger. But the experience so far casts doubt on whether lateral hiring can achieve the kind of presence that the London firms want. It is a chicken-or-egg problem, US securities lawyers explain. You cannot have a credible securities practice unless you have a steady flow of SEC-registered deals, because the art is in understanding the SEC staff's concerns and priorities. At the moment, the investment banks will rarely accept an SEC opinion letter from a UK firm for major equity issues – even those with dozens of US lawyers. But they cannot build the credibility without doing the deals.
The Rogers & Wells merger has demonstrated that sheer numbers alone in the US will not create a dominant global corporate practice. The merger itself appears to have gone well from many standpoints: there have been few partner defections and the firm has lured Tower Snow and his substantial securities litigation team on the West Coast. But while the combined firm has chalked up dozens of SEC-registered debt offerings, bolting Rogers & Wells corporate practice on to Clifford Chance's network hasn't altered the competitive landscape.
“It was unlikely to happen off that [platform],” says a partner in a New York firm. “It hasn't meant we've seen them in domestic [US] M&A or capital markets transactions. But we didn't see them much before.”
What about the alternative strategy of a top-tier merger?
It has been fun for everyone – not least us journalists – to speculate about that. But such a merger is less likely now than it was in 1998, largely because of what the magic circle firms have done in the meantime. A 400-lawyer New York firm in 1999 might have at least pondered merging with Linklaters or Freshfields when they had 1,000 or 1,200 lawyers. But partners at top firms that have not invested substantially in overseas networks – the Davis Polk & Wardwells and Sullivan & Cromwells – find the notion of being subsumed into a global 2,000-plus lawyer firm laughable now.
“How do I, as a quality firm with a name, get over combining with a firm that outnumbers mine by two or three to one?” asks a partner in a New York firm that is high on London firms' lists of dream merger partners.
Top New York firms have survived the global competition wars very nicely, thank you, with higher profits and revenues per lawyer than the magic circle firms. And most have done so without having to fret about quality in far-flung offices, and without having to cede power from partners to management in the way mega-firm partners must. Moreover, the profits differential is even greater than the published comparisons suggest, because almost all US firms use cash-basis accounting for revenue (they book revenue only when the clients' cheques come in), while UK firms' books are kept on an accrual basis, which makes results look better, particularly when a firm is expanding.
Even luring a top non-New York firm with a strong corporate practice would be very difficult, given the arithmetic of profits and headcounts.
“Do you think Gibson Dunn & Crutcher imagines that it will be absorbed by someone?” asks the New York-firm partner, referring to the Los Angeles-based firm. “It's going to be hard for a quality US firm to submerge into a UK firm.” (Gibson is just one of a dozen or so excellent firms based outside New York that has a big New York corporate practice; but these firms never seem to figure in the calculus in London.)
Law firm mergers are almost always driven by problems; at least one firm is vulnerable. But the kinds of practices that London firms would want are not hurting – not in the least. It is therefore hard to see a merger in the offing.
(After the recent brouhaha over the complaints of neglect and oppressive hours by associates in Clifford Chance's New York office, UK lawyers could be forgiven, too, for having second thoughts about taking on hundreds of overpaid, whining US associates.)
If the means to the end is so problematic, we have to ask if the globalising agenda still makes sense. It certainly seemed to at a time when clients – in particular financial institutions – were crashing through the border checkpoints.
The German and Swiss banks were snapping up London and New York banks, while HSBC was buying up mid-sized US retail banks, and US investment banks were acquiring whatever they could in London. All of this was taking place while Arthur Andersen and the other accounting consultancies were preaching the gospel of one-stop shopping for professional services. Why should law be different? Could law firms even survive if they did not mirror their clients' structures? That was the world in which the dream of the global law firm was hatched.
Come 2002 the logic is less compelling. With Andersen's demise, the big five are now four – they have been shedding their consulting wings and their legal operations are dead-ended or are being disbanded.
Although the impetus for global banks remains, with the need for massive amounts of capital to support large deals, at the end of the day only two investment banks – Goldman Sachs and Morgan Stanley – have succeeded in being leaders around the world. UBS Warburg has nowhere near the market share in the US that it has in Europe, and Deutsche Bank is not even in the first tier outside Germany. Citigroup and JPMorgan Chase's investment banks are also-rans in Europe.
Moreover, the concept of one-stop banks has come under intense scrutiny in the US over the conflicts of interest between investment banking on the one hand and lending and retail brokering on the other. With hindsight, the synergies of the one-stop banks seem often to have taken the form of loss-leader loans (JPMorgan Chase & Co faces billions in losses on loans it made to Enron in part so that it could win investment banking work), or misleading stock analyses (allegedly issued to bolster bids for underwriting assignments).
Merging UK and Continental firms and setting up offices in Asia had a clear logic: Europe was becoming increasingly a single market and, on the Continent and in less developed business centres, the mergers boosted the sophistication of the practices, raised standards of service and brought better internal management.
But none of those factors counts in favour of an Anglo-American merger, and the arguments for investing in deep local law capacity across the Atlantic from home are at best debatable. The only real reasons are defensive (we'll lose the business otherwise), or that it is more efficient to have partners of the same firm handling a deal. Although other things being equal the latter might be true, too often they aren't equal, and clients prefer having the best lawyers they can find in each jurisdiction. US and UK firms have a long history of working side by side on transatlantic deals; in the relatively clubby world of high finance, many know each other from past deals and know how to work with one another, and the efficiency of a one-stop law firm in practice hasn't been an overwhelming factor on transatlantic deals.
So, while I figured five years ago that some kind of top-tier merger was likely in the foreseeable future, I now think US and UK firms are probably positioned for an extended standoff, with minor encroachments on each other's turfs. That has big implications for how London firms should proceed.
These days, if lawyers look to their clients for business philosophy, they will find that the “go global” mantra of a few years ago has likely been replaced by one intoning “shed non-core assets”. Although corporate ideology is famously faddish, there may be a lesson here – and in the strategy of US firms in Europe.
While US firms shook up the London talent market in the 1990s, few set out to be full-service firms. Most followed a few clients – a handful of corporations, banks, insurers and private equity funds – and focused on the capacity they needed for those. Even now, no one would think of turning to a US firm in London for a public takeover, points out the M&A head of a New York firm with a large London office staffed heavily with solicitors, adding that there is too much good local talent. “Who'd want an American firm negotiating with the Takeover Panel?” the M&A partner asks.
The relatively modest ambitions of US firms in London is worth noting, because they came armed with some powerful factors on their side. For starters, the City and Canary Wharf are crawling with thousands of US bankers; and generally, financial innovation has moved west to east across the Atlantic, with US bankers and lawyers pioneering new financial structures. Thus US lawyers were viewed as being on the cutting edge. When high-yield bonds were first floated in Europe, for example, “the banks wanted someone from a US firm alongside local counsel”, a New York partner recalls.
Three years ago, during the wave of hostile takeovers that swept the Continent in 1999, Davis Polk, Skadden Arps Slate Meagher & Flom and Sullivan & Cromwell parlayed their M&A experience into key roles in the hostile takeover fights on the Continent in 1999: LVMH v Gucci; Vodafone v Mannesmann; Banque Nationale de Paris v Société Générale & Paribas; and Olivetti v Telecom Italia. More recently, as US buyout houses have spent their war chests in Europe, they have tended to bring along their lawyers from firms such as Debevoise & Plimpton, Kirkland & Ellis, Latham & Watkins and Simpson Thacher & Bartlett.
But still, the firms have mostly stayed modest in size.
It is a cautionary observation, because UK firms do not have the comparable advantages of expertise and ex-pats as they enter the US, nor are their clients investing in the US in the way they did in the late 1990s. Also, they do not have the profits to lure away top US partners in the way that US firms did for several years in London.
It brings to mind a remark by a consultant – David Maister, I believe – that I read some years back: “No professional service firm ever was a leader internationally unless it was a leader in its domestic market.”
That seems true. And if it is, it raises interesting questions about what London firms are doing in New York. Freshfields, Linklaters and Slaughter and May have dominant market shares in public M&A in the UK, and the first two increasingly across Europe. Will Rogers & Wells, as well as global reach and strength in private equity and other private European M&A, be enough of a springboard for Clifford Chance to break into the US M&A market? One has to be sceptical.
The track record to date – and the prospect of another year or two with anaemic deal activity – makes the time ripe to ask these questions.
John Morris is assistant managing editor of The Deal, a New York-based financial newspaper. He was posted in London from 1999-2001
