One track mind

If it looks like a duck, swims like a duck and quacks like one too, then it probably is a feathered, mostly water-dwelling bird of the Anatidae family. Sometimes though it’s more complicated than that.

The “duck” in question here is CMS. Identifying precisely which family it belongs to has never been trickier. Is it a loose-ish affiliation of independent firms, or a tighter network in which the constituent parts regularly - if not exclusively - act together? Or is it, to all intents and purposes, a single organisation? If it genuinely looks, sounds and behaves like a firm, is it one?

The question is pertinent for two reasons. This year, for the first time in its near 15-year history, the CMS network of 10 firms has produced single revenue and - more importantly - average profit figures. The consolidated financial figure is one of the more obvious results of a decision taken in 2007, following an extensive strategic review led by Deloitte, to pursue a strategy of convergence, a direction that involved a series of projects aimed at the member firms working more closely together.

Key individuals within CMS would dearly love to see this year’s single, combined revenue figure reflected in the industry benchmark ranking, The Lawyer UK 200 Annual Report. The reasons behind this desire bring us to why the question ‘what is CMS?’ is currently more pertinent than it has ever been.

As The Lawyer exclusively reported last month (25 June 2012), CMS has set its stall out to seek a US member. In any other multi-jurisdictional organisation formed by several firms that don’t share profits – let’s say Norton Rose – this development would be described as the ‘firm’ seeking a merger partner. It narks CMS that its network (actually the word ‘network’ is all but banned internally) is treated differently from the likes of Norton Rose, Taylor Wessing and King & Wood Mallesons, all of which have their global financial results reported but don’t share profits.

“I don’t distinguish between different law firms,” claims CMS Cameron McKenna managing partner Duncan Weston, “I just want to compare apples with apples.”

Like with like

Weston claims, possibly disingenuously, that he doesn’t actually care whether or not a combined CMS appears in the UK 200 table, so long as like is compared with like in any table of global firms. In practice, the only way to achieve that is to put an end to The Lawyer’s current reporting of Camerons as a UK firm and replace it with the combined figure of the CMS network. Either that, or unpick the financial reporting of the increasingly prevalent vereins. If nothing else, that would clearly be a move counter to the prevailing direction of travel in the global legal market.

It was the comparison with Norton Rose in last year’s table that particularly irked Weston and others within CMS. The Lawyer’s decision to include all of Norton Rose’s revenue (£488m in 2010-11, a figure that includes the revenue from its merger with Australian firm Deacons) but not report a combined figure for CMS was seen by insiders at the organisation as creating an unlevel playing field.

The Lawyer’s rationale was that Norton Rose’s deal with Deacons, like its later ‘mergers’ with Deneys Reitz, Ogilvy Renault and Macleod Dixon, were effectively takeovers by a larger, UK-headquartered parent.

In the case of CMS, the network was seen as precisely that - a grouping of 10 independent firms that continue to operate with their local names but happen to share a degree of common branding and pooled costs. The argument was also based on differences between the two organisations’ governance structures (see Governance box).

Nothing obvious has changed internally at CMS to create a reason for the organisation’s senior partners to be seen as one whole. The firm has simply decided to do it to lend weight to its increasingly strident contention that it should be treated in the same way as any other firm in the revenue rankings.
“We’ve been on a path of convergence as the result of a decision taken around five years ago,” insists Camerons’ senior partner Dick Tyler, referring to CMS’s implementation of the Deloitte review. “This is the first year that we’ve provided a single PEP and single revenue figure.”

CMS is also craving recognition for what it sees as a seamless international network that operates in the same way as any other multi-jurisdictional firm.
This is not a UK-led initiative. The managing partner of the Portuguese member firm CMS Rui Pena & Arnaut, Jose Luis Arnaut, speaks for others on the Continent when he says: “We think it’s time to give a full revenue picture. Internally, it is motivating for staff – and future recruits – to have an accurate view of the size of the group that they are part of. Externally, the single figures will mean that CMS takes its proper place in industry rankings and tables.”

Back in the UK, line partners are also banging the drum.

“The CMS brand is gaining recognition,” claims IP partner Jeremy Morton, who joined the firm in 2011 from Simmons & Simmons. “That’s my impression from talking to clients and people we’re looking to recruit. How we present ourselves is something we’re working very hard on. The strength of the network is one of our key strengths. We’re the largest provider of legal services in Europe. It’s a tremendous network and very joined up. It’s not just a loose network.”

Single identity

Since its formation on 1 July 1999, the European Economic Interest Grouping (EEIG) that is the framework within which CMS operates (CMS Legal Services EEIG) has used a single corporate identity and logo - CMS Law Tax. And since the Deloitte review, senior partners have been repeatedly attempting to bang the message home internally as well as externally.

“Duncan [Weston] was always dead keen on getting us to use just ‘CMS’,” recalls one former partner.

But recognising the brand in marketing messages is one thing. Overhauling The Lawyer’s UK 200 ranking to include the CMS group in its entirety is something else entirely. It would certainly be a radical step. But would it also be only a fair reflection not only of how the organisation sees itself but, more importantly, how its clients see it?

“An EEIG is a network arrangement vehicle that is to all intents and purposes very similar to a Swiss Verein,” says Fox Williams partner and partnerships specialist Doug Preece. “I’d have some sympathy with the CMS view, I can’t see why it’s not a logical argument [to publish a combined figure]. That’s not a legal opinion, though.” (see Swiss Verein vs European Economic Interest Grouping box)

The combined firm’s inclusion in the UK 200 would certainly have a dramatic impact. For 2011-12 CMS Cameron McKenna has posted a total revenue of £167.58m, a figure that in the 2010-11 table would have placed it 20th. Net profit at the UK end of the business was £49.29m, a margin of 29.4 per cent, while average profit per equity partner (PEP) was £631,883.

But by taking into account all 10 CMS member firms, PEP plummets to £464,796. Net profit, however, rises to £233.42m (a 33.7 per cent margin), while the total revenue goes through the roof to £691.97m.

That figure would have put CMS in seventh place last year (assuming that DLA Piper and Hogan Lovells, both verein firms, were also represented by their global results).

This year’s final ranking won’t be available for several weeks, but the combined CMS total would easily put the firm in the top 10, raising its profile significantly.

Put it this way, Baker & McKenzie regularly tops the international table as the world’s largest firm but is also a verein. It is unlikely the firm would enjoy the profile it does if its constituent parts were singled out and ranked separately. In essence, CMS is looking to be treated in the same way as Bakers.

Bigger picture

To a large extent, the question of whether or not CMS is a single entity or not is one that primarily concerns legal market anoraks, such as the legal journalists who compile the revenue rankings. But there is a bigger picture.

“What really matters is the client experience,” says Jeremy Dutton, a director at Huron Consulting Group. “How closely do they work with each other? It’s very easy to put a wrapper on a network like this but delivery is what matters.”

“To be honest, clients don’t care about the structure,” argues CMS executive director Matthew Gorman, who as the former head of business development at Clifford Chance knows a thing or two about mega firms. “Do I think there are differences between our structure and that of any of the big international law firms? In terms of how it comes across to clients, no.”

Gorman is refreshingly candid about the reasons behind CMS’s decision to produce a single revenue figure this year for the first time.
“It’s not because of anything that’s changed at CMS,” he admits. “But it’s a pretty competitive environment out there these days and any of the firms that have set themselves up as a Swiss Verein expect to be represented as such. We’re mindful of the fact that we live in a world where people compare us with our competitors. We think that needs to be reflected.”

CMS is able to back up Gorman’s assertion that clients only see a single firm with some admittedly impressive statistics. For starters, CMS claims to have “the most extensive legal coverage in Europe”, with “more offices than any other law firm” (52). In 2011, it had 681 partners, 2,540 fee-earners and around 5,000 staff.The network says that last year it serviced 75 clients which billed more than €1m (£778,847) apiece and 210 that billed more than €500,000.

Among the major multi-jurisdictional matters on which CMS advised last year was a big deal for expansionist Belgian retailer Delhaize Group, which acquired 450 Delta Maxi stores in Serbia, Bulgaria, Montenegro, Albania and Bosnia for €932.5m. The deal was led by Louise Wallace, the head of the consumer products group in the UK and since December last year a CMS executive committee member.

“We have offices in all those places apart from Montenegro, and that part of the deal was handled out of the Serbian office,” recalls Wallace. “It was a complex deal. It came in via Brussels, was done under English law which I led, the competition aspects were handled in Brussels, the due diligence in Serbia and so on. With a deal like this it’s more a question of how you service it.”

Delhaize general counsel Philippe Dechamps knows CMS from his days at pharmaceutical company Solvay. CMS pitched for the M&A work when he moved to Delhaize and won.

“I think they had this deal in mind,” adds Wallace. “We very much consider ourselves as one firm and clients see us as one firm.”
And what do they say about the fact that the CMS member firms do not share profits, asks The Lawyer? “They couldn’t care less,” insists Wallace. “They still think of us as CMS. What they say is ‘Louise, get it sorted’.”

Head of UK corporate Andrew Sheach echoes Wallace when he claims that CMS’s ability to deliver a “one-stop shop for clients who want that” is a major selling point.

“We’ve won more than 50 per cent of our pitches because of the experience and local knowledge we have,” says Sheach (the figure last year was in fact 63 per cent, with an average of four CMS member firms featuring per pitch, representing on average six countries). “It plays well with clients. Our competitors just don’t have as many offices or strength in depth and size.”

According to Gorman, the one-firm ethos at CMS goes through it like letters through a stick of rock. “[The commonalities are there in] the way we deal with clients through the practice groups and sector groups, training, business development and so on,” he claims. “Then the firm’s infrastructure, the business technology that holds it all together. Then there’s the cultural and mindset stuff. There’s a core curriculum for associates from London to Moscow. Everyone who joins the firm joins an induction webinar where you get the full picture of CMS. We see it as one corporate group, for example.”

Clearly as the firms are independent there is not one P&L for any of the groups but as Gorman confirms: “There is one business plan and we hold their feet to the fire on performance.”

American dream
The stats are impressive and admittedly the strides CMS has taken in the past five years to look and behave like a single entity are convincing. So let’s come to the real reason behind CMS’s desire to be seen as one giant firm.The fact is, it’s all part of a master plan to find a US ‘merger’ partner.

In the US, where image and size really do matter, there’s a world of difference between a cute and cuddly UK firm generating just over £150m and a European behemoth with revenues closing in on $1bn (£640m).

For CMS, the time was judged right to get that message out: ‘We’re big and we’re looking to get bigger.’

Portuguese managing partner Arnaut sums up CMS’s current strategic approach: “As the US is the biggest legal market globally, it makes sense to focus our attention there. As CMS now has the strongest presence in Europe, we take the view that we have a good proposition to offer a US firm. Discussions so far confirm this.”

On paper, a deal with CMS could indeed be a good proposition for the right US firm. But there are potential sticking points.

It’s probably worth noting, for example, that Arnaut was acting as a spokesman for the other eight Continental managing partners. Why does this matter? It’s probably a minor issue but The Lawyer contacted each of the European managing partners individually for their views. None called back or acknowledged the email while a decision was taken via central marketing for Arnaut to act as the single spokesman. In the UK, this level of arm’s length protectionism went out with lockstep.

Is this logical time saving? Or a move that highlights the continuing cultural gap between the European approach to the media and that of the more press-familiar lawyers in the UK? Weston confirms that the matter of a response was discussed at a CMS board meeting, with a decision taken to appoint Gorman as a single spokesman along with an on-the-record comment from Arnaut.

But that level of media control highlights the cultural differences that any future US member will have to recognise and deal with. That said, some US firms might approve.

A far more significant barrier to a deal is CMS’s governance and consensus-led approach to decision making (see Governance box).

“The absence of a properly empowered top-level excom doesn’t lend itself to an argument that it’s a single firm,” claims one London management consultant. “Yes, it sets policy and so on but ultimately it’s down to individual firms to decide if those policies and decisions are implemented.”

Under CMS’s governance structure it would only take one of its 10 member firms to vote against a deal with a potential US new member to nix the deal.

There’s no doubt that that is a considerably more unwieldy approach than over at Norton Rose where, apparently, what chief executive Peter Martyr says goes. That said, most of the partners The Lawyer spoke to at CMS don’t believe that in practice this will be a major issue.
“It’s true that the constituent firms will have to agree,” says Sheach. “The excom will come up with a plan but then it would be a board decision at the individual firm level. But unanimity has never been an issue.”

The reality is that if the UK, Germany and France come up with a deal, the rest of the network is unlikely to vote against it.

Another issue facing CMS in its hunt for a US member is the small matter of the current parlous state of Europe’s economy, coupled with the prevailing negative perspective on the situation on the part of many Americans.

“Getting any serious firm to do anything in Europe at the moment is going to be a challenge,” comments the consultant. “Even if a US firm’s management wanted to do a deal, the rest of the partners are likely to be very reluctant. So I’d say the likelihood over the next six to 12 months is low.”
The very nature of the network that, to CMS insider eyes is such a plus, may also be a barrier.

“Some US firms will struggle to understand how they operate,” claims the consultant. “US firms can be a bit binary.”

Throw into the mix the sizeable gaps in CMS’s much-vaunted platform, notably Asia, where the network has only 15.4 FTE fee-earners in Shanghai and Beijing. Tyler claims this is not a priority right now.

“We have enough on our plate thank you,” he says. “Asia is a different challenge. To be trying to do what we’re doing on two continents is plenty, never mind three.”

Back to Europe then. According to some sources, the network is said to be patchy, with French firm CMS Bureau Francis Lefebvre in particular singled out for criticism.

“France was the real weak link when I was there,” claims a former partner. “It’s principally a tax firm, not really very good at anything else. It was a real issue if ever we had to use them, it was very difficult. You were supposed to use the member firms in the network unless the client directed you otherwise. In practice, you’d find a way of making that happen.”

Finance generally is also considered by some to be a weak link.

“Overall it needs bulk and depth and probably the network needs higher profits to get it,” claims one source.

Hidden jewels

But on the flip side CMS does have some definite jewels buried among its bulk. Germany’s CMS Hasche Sigle stands out, with some of the strongest M&A practitioners on the Continent.

“It’s the biggest corporate practice in the whole of Germany, with around half of its roughly 200 partners in that area,” says Aled Griffiths, editor at German legal magazine Juve.

The German firm has also snared roles in some of the top European deals including Volkswagen’s recent takeover of Porsche, the restructuring of E.On and the proposed merger of RWE and Iberdrola. Added to that it is one of the house firms for BC Partners and has a raft of star partners including Thomas Meyding, Christian von Lenthe and senior statesman Ludwig Linder.

“Martin Bell is one of the leading mid-cap private equity lawyers in the market plus there’s probably the top VC partner in Germany, Stefan-Ulrich Müller,” adds Griffiths. “It’s also very good on IP, has solid litigation and has one of the two market-leading employment teams.”

In recent weeks the hunt for a US CMS member has begun to gather steam with Weston, Brandi and French managing partner Pierre-Sebastien Thill driving the search.

If nothing else, the identity of that trio reinforces the suggestion that the US firm idea is a strategy that is being led by the UK, Germany and France. But clearly there’s a high level of buy-in from many of the partners across the network and practice groups.

“We’d love to do more North American projects and having a base there would give us more credibility,” says Jonathan Dames, a partner in the international finance department’s infrastructure and project finance group. “In South America, there’s also lots of work in dollar loans and it’s North American firms doing much of it.”

“As for the corporate group, we’d be looking for a serious firm with good M&A, private equity and corporate finance experience that also has good track record in at least some of our sectors,” says Sheach. “Ideally the areas that are highly regulated, such as financial services and energy, because that generates more work and it’s more difficult to say you can do it without having a track record in the area.”

Gorman provides some specifics of what Weston, Brandi and Thill will be looking for. “It would most likely include a New York capability, a Washington capability and decent national coverage, which means capability on the east and west coast,” says Gorman. “And then the right cultural fit. We think we’re an attractive proposition but it’s a two-way street. Any [US] partner would have to offer us things in return.”

Gorman is enigmatic when quizzed about the progress that has been made since January. “We have conversations and we learn a lot,” he says.
What have you learned? asks The Lawyer. “How strong our proposition is.”

Is there a shortlist? “We have a list. I won’t say if it’s short or not.”

As Gorman admits, transatlantic deals have a tendency to happen quickly or not at all. So while the firm is not saddling itself with a fixed timetable, at least publicly, internally there is thought to be a considerable impetus to get a deal done within the next 12 months.

CMS’s comparatively low PEP won’t matter on the deal because it wouldn’t be structured as a merger. And if it came to it, internal sources suggest they would be prepared to bin the CMS brand altogether if it was needed to do a US deal.

“But the US firm would need to give ground on their name as well,” confirms the source. “What we think will be really attractive to a US firm is that if it already has some European offices they’ll be subsumed into the CMS local partnerships, and therefore the cost of them will be taken off the US firm’s balance sheet.”

Received wisdom is that the vast majority of US firms’ overseas offices lose money, so this could go down well stateside. It might even be enough to convince wary Americans that now is the right time to be investing in Europe, no matter what’s going on in those crazy places like Greece, Italy and Spain.

CMS is not one partnership and it’s not pretending to be. But to all intents and purposes it is one organisation. Its task now is to make sure the market agrees.