McKee Nelson’s split from its structured finance practice may be excellent news for Ashurst, but it also looks like a decisive move away from a damaged market for the US firm.
McKee Nelson, thwarted by the credit crisis, is parting company with 11 partners and a team of associates, who were promptly snapped up by Ashurst last week (24 February).
The team, led by partner Bill Gray, is launching a US fee-earning practice on behalf of the silver circle firm. The focus, bizarre as it may seem in current market conditions, is structured finance. In particular, the new team will focus on derivatives and municipal bonds.
For Ashurst the move gives it a coveted presence in the US. For McKee Nelson the move represents a significant downsizing of a practice that once generated around 60 per cent of the firm’s total fee income.
According to both sides the split was amicable and has been in the works since the second half of 2008.
“We’ve been talking to our partners in structured finance, and in particular Bill Gray, for some time now,” says McKee Nelson chief executive Reed Auerbach. “We talked about where the practice was heading and how the markets were developing. It was agreed that the best thing would be to move that practice to a firm that’s agreeable to us.”
Good thinking, it seems. For McKee Nelson the amicable split represents an opportunity to diversify its practice. A statement issued by the firm said it would remain committed to maintaining its market leadership in structured finance, although whether that is a realistic ambition with a team that has been cut almost in half (the number of partners post-Ashurst will drop from 28 to 17) remains to be seen.
However, McKee Nelson is certainly ramping up in other areas such as litigation and enforcement, tax and regulatory areas.
“The way the market was moving, it was clear we really needed to counterbalance that practice,” says Auerbach.
The sea change came in February 2007 when the firm hired litigation partner Jeffrey Smith together with a 16-lawyer team from King & Spalding. It has developed quickly. Today litigation is a 37-lawyer group.
“That’s pretty rapid growth,” insists Auerbach. “We’re looking to grow even more. I think we need 50-60 lawyers, so we still have a way to go.”
In this new era for McKee Nelson, securities litigation and regulatory work will represent the bulk of the firm.
“We’ve always had these practice groups, but what we’ve done is shift the weight from one side of the stool to the other,” says Auerbach.
Auerbach is realistic. In the current market any structured finance-focused firm is going to struggle to keep afloat during 2009 and possibly beyond.
McKee Nelson has already made two rounds of layoffs. The firm announced its first round in November 2007, when it shed 32 in total, including 17 associates and 15 support staff (in October that year the firm also introduced a programme aimed at encouraging lawyers to leave or take sabbaticals). In February this year 46 more were let go, including six lawyers and 40 staffers.
It has been a tough few months. But Auerbach is upfront about the firm’s structured finance capabilities. “We think the markets will pick up,” he says. “I expect in April or May we’ll see some activity, but this will be lumpy and in no way anything like we experienced in 2006.
“We simply can’t have loads of lawyers sitting and waiting for work levels to return any time. It won’t happen.”
Now it seems there is a new McKee Nelson, one that is more diverse but which still has links with its structured finance roots ready for when markets do recover.
“We’ll be able to compete when the markets recover,” insists Auerbach. “We’re still top of the league tables in structured finance, it’s just that the numbers are much lower. We’ll continue to be top of the pile.”
For Ashurst, though, McKee Nelson’s loss is very much its gain. Gray and his team are ready for action despite poor market conditions.
“There’s going to be a lot of consolidation in the market,” says Gray. “We see this as an evolution of our relationship. The focus over the next year will be on integration. This is crucial.”
Ashurst and McKee Nelson lawyers will be jetting between London and the US to kick-start the new office and integrate Gray and his team into the silver circle firm. But it may be that they will not need too much hand-holding.
Ashurst’s and McKee Nelson’s relationship stretches back to 2004, when the two firms cemented a non-exclusive transatlantic alliance.
At the heart of this alliance is Gray and London-based Ashurst structured finance partner Erica Handling. During the 1990s the pair also worked together at US firm Weil Gotshal & Manges.
“Looking at all the options, this is the best move for us,” argues Gray. “I’ve known Erica for a long time and our two firms have worked very closely in recent years. The move makes a lot of sense.”
On all sides, it seems.