Asia: The battleground in Asia

Arguably the most transformative recent events in the Asian legal market have come from the hungry pack of those challenging the Sweet Sixteen. Mayer Brown’s December 2007
merger with Johnson Stokes & Master (JSM) and Reed Smith’s capture of Richards Butler Hong Kong (RB Hong Kong) robbed Hong Kong of its two most successful independent practices.

While the Reed Smith-RB Hong Kong tie-up was trailed for a long time following the US firm’s merger with RB Hong Kong’s UK namesake (the two firms operated as separate entities), Mayer Brown’s capture of JSM rocked the local market.

The attention of many of the leading UK and US firms was focused on the Middle East during the past year, as Mayer Brown jumped ahead of rumoured suitors Ashurst and Norton Rose to merge with Hong Kong’s largest firm, a combination that gifted Mayer Brown offices in China, Thailand and Vietnam.

JSM’s key reason for going global was its need to service key clients such as HSBC and Cathay Pacific around the globe. It is also thought that the partnership might need
some sprucing up (a Mayer Brown speciality in the era of global vice chairman Paul Maher). The US firm cut 50 partners from its ranks last year.

Among the Sweet Sixteen, Linklaters has arguably the strongest offering in Asia. But it was not always this way. Global managing partner Simon Davies learnt the management ropes as Asia chief and his tenure was critical. He was brought in at a time when the firm’s Asia practice was in turmoil. Not only was there the Sars crisis in the region, but Linklaters was also haemorrhaging lawyers. Davies turned round the fortunes of the firm by playing a high-stakes game.

“During Linklaters’ darker days in Asia, when they were losing lawyers left, right and centre, Simon took a brave stance by going to the firm’s clients and saying that Linklaters wants to stay in Asia but would have to close if they didn’t help him out,” says one legal market consultant. “The gamble paid off in a big way, making Linklaters one of the players within the region.”

Davies successfully turned Linklaters’ Asia operations around to the extent that they now provide 11 per cent of the firm’s revenues. It has 130 lawyers in Hong Kong, about 50 in mainland China and 70 in Japan following the 2005 merger with Mitsui Yasuda Wani & Maeda. In Tokyo, it is the secondlargest international firm after San Francisco’s
Morrison & Foerster, which has more than 100 lawyers in the city.

Current Asia boss Giles White, who has returned for his second tour of duty following a spell in the region between 1992 to 1996, says he has been struck by the diversification of business lines since returning to Asia.

“There has been quite a lot of change from a product perspective,” he says. “For example, the structured finance and derivatives markets have grown enormously.”

Many of the UK firms built their Asian practices around their capital markets expertise but the growth of M&A in the region has also played in to their hands.

“There has been a great deal of investment from the rest of the world in Asian economies,” notes White. “So there has been inward investment of capital and strategic M&A activities from banks and corporates into China in particular, but also in to India and elsewhere. Asian corporates and Asian wealth funds are increasingly looking to invest in the rest of the world. And that’s good for us.”

Linklaters advised Chinese Bank ICBC on its Rmb36.7bn (£2.66bn) acquisition of a strategic interest in South Africa’s Standard Bank Group, one of the largest outbound foreign direct investments by any Chinese company to date and the largest financial institutions deal in South Africa to date.

And it is not just Linklaters that is profiting from the upsurge in the Asian economies. Last July, China Development Bank, which is part-owned by the country’s sovereign wealth fund, and Temasek made major investments in Barclays. Clifford Chance advised Barclays while Temasek turned to Lovells and China Development Bank instructed Norton Rose.

But Clifford Chance global managing partner David Childs strikes a note of caution: “We’re seeing the first signs that activity levels are going to start to fall. We always thought that the slowdown in London, New York and Washington would reach most of the rest of the world and there are early warning signs of that. Activity levels will start to
reduce slightly.”

Of course, the rise of M&A in the region has attracted the New York elite as well. Weil Gotshal & Manges may be relatively new to the region, launching in 2004 with the hire of Steven Xiang from Clifford Chance, but it has since had a major push on catching up in Asia. The US firm knew it had hit paydirt in Asia when, five months after opening in Shanghai, it acted for Lenovo on the landmark $1.25bn (£625m) purchase of IBM’s personal computer business, one of the first major acquisitions by a Chinese corporate of a US company. Last year it opened in Shanghai and it is expected that the firm will also open in Beijing later this year.

Weil’s model elsewhere around the globe is to practise a mix of local law and employ local lawyers. In China, though, US lawyers are not allowed to practise PRC law, so consequently Weil only practises US law (it is currently evaluating this option in Hong Kong, where local law is allowed). Also, where many of the other elite firms built their practices on capital markets work, Weil’s focus is M&A and private equity, the same as in its other non-US offices in London, Paris and Frankfurt.

Hong Kong-based corporate partner Peter Feist says: “We essentially act for private equity clients, such as Providence, globally. For example, Providence opened up in Hong Kong 12 months ago and we were there shortly after them. The timing was a bit of a coincidence but as a global firm it is important to be in as much of Asia as we can be.”

And there are not many among the transatlantic elite that will not be there. While there will almost certainly be more crises to come, the Asian economies look unstoppable right now. For any firm looking to join – or remain in – the Sweet Sixteen, a strong presence in the region looks like a must.

Slaughter and May maintains an outpost in Hong Kong, although its presence is primarily via its best friend network, while even Cravath Swaine & Moore, which pulled out of China four years ago, has not ruled out a return to the region.

For those firms with pretensions to genuine global client service that are not yet represented on the ground (current major culprits include Gibson Dunn & Crutcher and Ashurst for example), the lack of an office in China looks increasingly like a serious platform failure.