The 2007 financial results for most of the US top 50 firms belie the current turbulence in the market. The mood among lawyers in New York after the US’s fifth-largest investment bank, Bear Stearns, was snapped up for $236m (£117.03m) by JPMorgan Chase last Monday (17 March) suggests that in 12 months time there will be some US law firms posting significantly poorer numbers than they managed last year.
But for the moment, for all this year’s market tumult, 2007 will go down as a standout year for the top US firms. The average increase in total revenue was 16.2 per cent while the corresponding rise in average profit per equity partner (PEP) was 11 per cent. By any standards, these are healthy results.
An exceptional first half
For almost every firm in the market, the first half of 2007 was exceptional and the second quieter. But some firms were hit hard by the downturn and inevitably not all enjoyed a banner year.
Cadwalader Wickersham & Taft’s PEP fell 6.2 per cent last year, from $2.9m (£1.58m) to $2.72m (£1.36m) – the biggest fall of any of the top 50 US firms. The publication of the firm’s results came a month after Cadwalader laid off 35 lawyers in the US following what it called “unexpected and persistent volatility” in the financial markets.
“This is a firm that built its success on structured finance, which has evaporated now,” says one US recruiter. “As a result it became one of the first firms to suffer as a result of the subprime crisis.”
While its PEP suggests Cadwalader had a tough year, the firm’s deal list demonstrates that it still won strong mandates. Highlights include taking a lead role advising the lending syndicate for Blackstone’s $21bn (£10.5bn) acquisition of hotel group Hilton in October.
After laying off 35 associates in structured finance and capital markets last year, Cadwalader has since made moves to reduce the impact of the credit crunch and reshape the firm. These efforts included restructuring its management team, promoting head of structured finance Chris White to firm chairman in place of incumbent Bob Link last month and hiring private equity star Ron Hopkinson from Latham & Watkins.
“Although it is not out of the woods yet, hiring Hopkinson and building a private equity team could bring Cadwalader out of the dark,” believes one US consultant.
Other US firms that faced a glitch in their finances include Heller Ehrman, which saw revenue drop 2 per cent to $491m (£245.5m) and PEP fall slightly from $1.04m (£565,217) to $1m (£500,000); and O’Melveny & Myers, where PEP remained all but flat at $1.64m (£820,000).
Fried Frank Harris Shriver & Jacobson recorded solid results for revenue, up 14 per cent to $537.4m (£268.7m), but as The Lawyer reported last Monday (17 March) PEP failed to match that rise.
Justin Spendlove, Fried Frank’s US-based co-managing partner, says the low (5 per cent) increase in PEP was largely down to the firm’s investment overseas – notably in its still relatively new Hong Kong and Shanghai offices.
Anecdotal evidence in the US suggests that this small group of firms will be expanded next year by several more unless there is a radical shift in the current economic climate.
Powered by mandates
At the other end of the spectrum, Debevoise & Plimpton recorded outstanding results, posting the second-highest increase in PEP of any US firm. Debevoise also recorded the fourth-highest increase in revenue of any US firm last year at 23.5 per cent, taking it four places up the table, from 38 to 34. (The merger-hungry Reed Smith posted the third-highest rise of 38.2 per cent, Kirkpatrick & Lockhart Preston Gates Ellis (K&L Gates) a stellar 51.3 per cent, and DLAPiper up 110 per cent because Emea’s revenues were included for the first time).
Debevoise’s year was powered by mandates such as representing the supervisory board of ABN Amro on its £50.2bn takeover by a Royal Bank of Scotland-led consortium and Phelps Dodge in its $26bn (£13bn) merger with Freeport-McMoRan Copper & Gold.
Fellow Wall Street titan Davis Polk & Wardwell also enjoyed a banner 2007. The firm’s long-standing courtship of ABN Amro paid off when it picked up the lead M&A mandate (along with NautaDutilh) on the bank’s sale. That deal, led by Paris partner Meg Tahyar and Tom Reid in London, also included a $21bn (£10.5bn) sideshow in the shape of Bank of America’s acquisition of LaSalle Bank – a deal led in New York by partners Bill Taylor and William Aaronson.
Private equity powerhouse Simpson Thacher & Bartlett’s 20.6 per cent revenue hike from $801m (£435m) in 2006 to $966m (£483m) in 2007 illustrates the buoyancy of the markets during the first six months of last year. Simpson’s much-envied relationship with buyout shops KKR and Blackstone was a major contributor in pushing the firm’s revenue up towards the symbolic $1bn (£495.88m) mark and its PEP up to $2.87m (£1.44m).
Headline deals for Simpson last year included advising Enel and Acciona on their $58bn (£29bn) joint tender offer for Endesa and KKR on its $45bn (£22.5bn) acquisition (with Texas Pacific Groups) of TXU Energy in 2007.
“The firm did extremely well in 2007,” says one US-based consultant. “The relationship with KKR and Blackstone would certainly be enough to ensure the firm was extremely profitable. For 2008 the firm looks to be in pretty good shape. While its private equity capabilities are superb, it also has a 200-strong litigation team. Given the likelihood that disputes will increase in 2008, this is going to be much more of an asset.”
Another firm that made great strides up the table was Proskauer Rose. It leapt four places from 44th to 40th. The firm also made some waves in the UK during 2007, launching its first European office and snaring O’Melveny & Myers private equity chairman Matthew Hudson to lead the firm in the capital. Proskauer reported a 19.2 per cent hike in PEP to $1.55m (£775,000) while revenue grew 22 per cent from $514m (£279.35m) in 2006 up to $627m (£314m) in 2007.
The London office launch underlined Proskauer’s intention to succeed in the European private equity market. Just days before the London office, the firm announced its merger with Paris private equity boutique SGDM.
The $2bn club
At the head of the table, the leviathans of the legal market broke new ground in 2007 as Skadden Arps Slate Meagher & Flom, Latham & Watkins and DLA Piper all smashed through the $2bn (£1bn) revenue mark for the first time.
Most lawyers, if you catch them in an honest moment, will tell you that revenue is irrelevant and that PEP is all that matters. But in terms of growth the performance of this trio amply illustrates the benefits of the investment all three firms have made in recent years. Their results arguably provide a useful indicator as to the future shape of the international legal market.
The most significant increase in revenue among the trio was at Latham. As www.thelawyer.com first reported (7 February), Latham became the first US firm ever to break the $2bn (£1bn) revenue barrier when it posted a 23.5 per cent hike on 2006’s $1.62bn (£880.43m). PEP also grew by a double-digit margin, up 22.7 per cent from $1.85m (£1m) in 2006 to $2.27m (£1.14m).
DLA Piper operates separate profit pools for Europe, the Middle East and Africa and the US, but is an integrated firm in all other respects. Its combined average PEP rose 8.5 per cent, from $1.18m (£641,304) to $1.28m (£640,000), while global revenues were up 19 per cent to $2.1bn (£1.05bn).
Other firms managed some serious bulking up during the year, although this was more down to merger activity than organic growth (not that there was too much of that at DLA Piper).
The merger of 2007 was without doubt that between US M&A heavyweight Dewey Ballantine and energy and insurance-focused LeBoeuf Lamb Greene & MacRae. The new 1,300-lawyer firm, Dewey & LeBoeuf went live on 1 October 2007, catapulting both firms up the table to a new position of 14.
Dewey & LeBoeuf’s first financial results showed global revenue was just over $1bn (£500m), representing an approximate increase of 8.5 per cent on the combined revenues of Dewey Ballantine and LeBoeuf for 2006, which added up to $922m (£501m). On a similar basis, PEP increased by almost 10 per cent last year to $1.57m (£785,000).
Also on the growth trail is K&L Gates. The firm was formed on 1 January 2007 with the merger of Kirkpatrick & Lockhart Nicholson Graham and Preston Gates & Ellis. Since then, the firm has also merged with Hughes & Luce (on 1 January 2008), the mid-sized Texas firm with offices in Dallas, Austin and Fort Worth.
K&L Gates’ results show revenue increased by 51.3 per cent during 2007 while PEP was up 2.6 per cent. The results do not include revenue from its merger with Hughes & Luce. Peter Kalis, K&L Gates chairman, says the firm is now poised for a strong 2008.
“The firm is not over-exposed in practices affected by credit issues,” he says. “And, as always, our partners are invested in the firm’s growth. We continue as one of the few international firms with no bank debt.”
If the beginning of 2008 is any guide, there may well be even fewer firms this time next year that will be able to make that claim.
To view table, click here – Top 50 US firms by revenue, 2007.
Most firms gave all financial information. Only a handful of firms gave no financial information at all and figures for those firms have been estimated after interviews with individuals familiar with the financials. We do not identify which firms did or did not offer information.