Living on the Edge
8 November 2004
When any firm’s profits drop, the partners complain. But the communication between a group of Hammonds’ Leeds partners and the management (as reported in The Lawyer on 18 October), voicing serious dismay over the firm’s performance, was unprecedented.
The partners said they were "extremely disappointed" over financial results. They singled out the discrepancy between profits in Hammonds’ London and Birmingham offices compared with the Manchester and Leeds bases. Figures for 2002-03 gave profits per point, before central costs, as £50,700 for Leeds and £28,500 for London. At the time, Hammonds’ lockstep went from five to 13 points, although it has since been adjusted (and point values halved) to 16-26 points.
The performance of the corporate finance department was also highlighted as an area that needed to be addressed urgently, as the partners questioned the continued viability of the London practice.
Four years ago, expanding the corporate capability of the firm and boosting critical mass were the two main objectives of Hammond Suddards’ 2000 merger with Birmingham’s Edge Ellison. Has it been worth it?
The Yorkshire partners certainly don’t seem to think that London is a success, but Hammonds’ management argues that it has been. Managing partner-elect Peter Crossley and senior partner Richard Burns both express satisfaction over the way the merger has gone. They say the principal prompt was Hammonds’ desire to expand its corporate practice beyond the regions.
"To achieve the service proposition that we wanted to offer our clients we needed to be a bigger firm to justify the investment that needed to be made," says Burns. "The merger gave us that critical mass."
Pre-merger, Hammond Suddards had 42 partners in London and Edge Ellison had 28. Together, the newly merged firm had 70 London partners out of a total workforce of nearly 400. Four years on, although there are more lawyers in London, the partnership has dipped to 66. Figures from The Lawyer UK 100 Annual Report show that London turnover has dropped from £50m to £46m over the last three years, while global firm turnover has risen by just £1m.
Compare this with Addleshaw Goddard, arguably Hammonds’ closest rival and, since Addleshaw Booth & Co’s merger with Theodore Goddard, a similar model.
Theodore Goddard had 64 partners, all in London, the year prior to its merger with Addleshaw Booth. This year Addleshaw Goddard reported a London turnover of £52.5m with a London partnership of 80. Globally, its turnover is £125.2m.
Addleshaws turns over £25m in corporate nationally, while another rival, Berwin Leighton Paisner (BLP), which now turns over £26.5m in corporate, has managed to colonise the midmarket in exactly the way Hammonds would like. Last year’s corporate turnover for Hammonds was £17.7m, 13 per cent of the total figure of £136m.
Burns and Crossley admit that London is the least profitable office in the firm. Indeed, this bald fact is the reason the Leeds partners appealed to the management. Hammonds’ leadership says it has addressed the issue by talking more to the partners. Once Crossley’s election had been confirmed, he and Burns spent the summer travelling around the firm’s offices.
"We can always improve communication," Crossley admits. He and Burns argue that it would be odd if Hammonds’ partners had failed to express disappointment over this year’s financial results. Turnover dipped by £1.1m to £136m, while profit per equity partner (PEP) tumbled by 17.5 per cent to £272,000 from 2003’s £330,000.
Burns is clear about the importance of London for Hammonds, despite the profitability issues. He says all partners agree that it is "fundamental" for the firm. "London has been an investment for Hammonds partners," he concedes.
The corporate strategy
With the merger, Hammonds gained bulk. The next step was to refocus the firm’s corporate strategy on the capital. Edge Ellison offered new, large corporate clients such as Hazelwood Foods, advertising giant WPP and the Compass Group, which now account for millions of the firm’s turnover. Although WPP instructs Hammonds regularly, both the firm and the company are publicity-shy over their relationship (indeed, Burns and Crossley declined to comment on clients). The largest WPP deals to hit the headlines have all been handled by Allen & Overy (A&O). Hammonds has not been able to win the bigger value deals, but has shored up Compass as a client since the merger. Other major clients are understood to include ClearChannel, Nestor and Alba.
There are 29 corporate partners spread throughout the firm, with one of the key figures being current corporate head William Downs, who is based in London and Manchester. The former head of corporate, legacy Edge Ellison partner Nick Allen, is the WPP relationship manager. Other high billers are London’s Ged O’Neill, Birmingham’s David Hull and Patrick Somers, Manchester’s Stephen Levy and Leeds’ David Armitage.
Hammonds tends to be stuck in the £50m-£100m deal bracket. Standouts include the disposal of partnership interests and a direct investments portfolio for Abbey National Treasury Services Overseas Holdings, valued at £748m and carried out by Simon Sale in London. Stephen Levy has handled two buyouts, for Montagu Private Equity and Pets at Home, together valued at nearly £400m.
But Hammonds is still barely ranked in the London corporate finance or M&A tables in the legal directories, although it does appear in the regions. The firm’s great hope in the City, Ged O’Neill, wins a solitary place in the Chambers directory for mid-sized corporate finance work.
However, the firm has been one of the top 20 firms in Mergermarket’s league tables of UK transactional corporate work by volume for five years, achieving a high of tenth place the year after the Edge Ellison merger. For the first three quarters of 2004 it was twelfth in terms of the number of deals and 39th by value. Addleshaws, Hammonds’ closest rival when it comes to turnover, is placed third by volume and 40th by value.
Burns is sure that Hammonds’ aim to grow corporate work has not failed. He is happy that corporate has improved across the board, and adds that growing the firm’s share of transactional work is still an aim.
But that target has been sorely hit by the recent loss of AIM rainmaker Martin Thomas to Hunton & Williams. A year ago, Hammonds was top of The Lawyer’s AIM league table, having completed 18 floats in 2002-03, thanks largely to Thomas’s solid client base of both corporates and nominated advisers – including Collins Stewart and KBC Peel Hunt.
Three partners carrying out AIM work remain – Simon Gordon, Nick Williams and Tom Cartwright. Burns says the practice will continue "strongly" without Thomas, adding that the firm "is successful in AIM because, as a firm with a national reputation, we source a lot of AIM operations". Four possible floats are currently on Hammonds’ books.
Burns and Crossley are bullish. The corporate practice, particularly in London, has increased revenues by 35 per cent compared with the six-month mark last year – the best start for the corporate practice for three years.
"We’ll find by the end of this year that the [gap in the] performance in London relative to the performance elsewhere has narrowed," says Burns. "We’re looking to achieve improvement and we’ll see improvement."
Meanwhile, Crossley insists that the majority of the firm’s departments (Hammonds registers income on departmental lines) are doing better than last year. He is also promising a reduction in the firm’s overdraft.
Undoubtedly, Hammonds has to improve its financial performance, and more importantly maintain that performance, to prevent more partners expressing their disappointment next summer. This year’s strong start in corporate is excellent news for the firm, but it does not mean the corner has been turned. Four years since taking on Edge Ellison, it is time to make good on that investment.