Merged firm impresses market despite absorbing merger costs.
Hogan Lovells’ senior management were congratulating themselves last week after unveiling a 10 per cent rise in average profit per equity partner (PEP) eight months after last year’s largest transatlantic merger.In the firm’s first year as a merged entity average PEP rose by 10 per cent, from $1.042m (£650,000) to $1.144m, while total fee income fell by 0.7 per cent to $1.664bn from $1.675bn.
The latter figure is around $130m less than the combined figure of $1.8bn that was widely reported last year ahead of the merger, a calculation now described by Hogan Lovells insiders as “a crude calculation” based on simply adding one firm’s revenue to the other.
In compiling figures released last week, Hogan Lovells says it used an average monthly breakdown for legacy firms Hogan & Hartson and Lovells for the four months leading up to the merger and the eight months since the deal, giving an annualised figure for 2009.
And as for that pesky $1.8bn figure?
“This was a very rough estimate that the firm deliberately didn’t make because we knew there were too many variables,” said a source at the firm. “It was an external estimate made by simply adding two different firms’ financial years together.”
Hogan Lovells’ turnover was not the only financial metric to raise a few eyebrows last week. The firm’s 10 per cent profit hike, coupled with broadly flat revenue, is effectively directly in line with the majority of the results so far unveiled for this year’s reporting season.
“In the first year of any transatlantic deal that involves merging two accounting systems and periods there’s more flexibility with the figures,” said one London merger specialist. “I’m not accusing them of creative accounting, but I expect there’ll have been an element of them saying, ’What’s the market doing, what are firms reporting and what message do we want to send out?’.”
In a statement last week Hogan Lovells co-CEO David Harris described the results as “a strong performance, given the market conditions”.
He might have added that it was a particularly impressive performance given the transatlantic firm’s reduced headcount between 2009 and 2010.
On a full-time equivalent (FTE) basis, the pre-merger Hogan & Hartson and Lovells had a total of 2,569 lawyers, 852 of whom were partners, in 2009. Last year the figures had dropped to 2,363 and 809 respectively.
As for the 10 per cent hike in PEP, that figure was helped by a 3 per cent drop in equity partner numbers, from 528 to 512. Harris, however, maintained that the slight shrinkage of equity partner numbers had little impact on average profit.
“If you look at the size of the firm now, this reduction in equity partner numbers won’t have shifted the figures materially,” he argued.
Harris added that Hogan Lovells had “no net debt” at the year-end and that the firm had taken the bulk of the merger costs – around $20m – into the 2010 financial year.
Harris also argued that the results were particularly satisfying in that there had been a significant degree of disruption during Hogan Lovells’ first eight months of operation as a merged entity.
“After May there was a huge amount of merger-related activity, followed shortly after by the summer holiday period,” Harris said. “Then you have a few months before Christmas and the close of the financial period, which means these results have missed the engine room months of January, February and March. So we always knew it was going to be a challenge.”
The market’s reaction to the numbers was broadly positive last week. One legal market consultant described them as “consistent with what most US firms have been reporting”, adding that the 10 per cent PEP increase is at the “higher end” of the market.
Harris and his UK colleagues might not take kindly to being described as ’partners in a US firm’. But seeing as the single largest proportion of Hogan Lovells’ fee income last year was derived from the US, questions as to the extent of last year’s deal genuinely being a merger of equals, as opposed to a takeover by Hogan, will inevitably once again come to the fore.
Last year the US contributed 46 per cent of global turnover, followed by Continental Europe and London, each contributing 24 per cent. The remaining 6 per cent came from the firm’s Asia practice.
Corporate was the biggest-billing practice at 33 per cent, followed by litigation, arbitration and employment (29 per cent), regulatory (15 per cent), finance (12 per cent) and IP (11 per cent).
Average revenue per lawyer (RPL) rose by 8 per cent, from $652,000 to $704,000. The exchange rates the firm used for compiling the results were £1 to $1.54 for 2009 and £1 to $1.56
As Harris concluded in last week’s statement: “Our transatlantic capabilities and international strength, coupled with our depth of practice, are unique in the market.
“We’ve already achieved a lot through our combination and we’re pleased with our progress to date.”