Profits picture tells another story

US TOP 50

Small is beautiful for PEP supremos Wachtell, Cravath

Last month The Lawyer broke new ground when it ranked the leading 50 US firms by revenue for the first time. Today’s table, which ranks the same 50 firms by average profit per equity partner (PEP), skewers a number of firms with inflated claims of prominence based on revenue. It also sheds additional light on those that really are at the top of the US financial tree.

DLA Piper, the firm ranked first in last month’s table, is the most obvious casualty. It plummets to 33rd place when ranked by PEP. Skadden Arps Slate Meagher & Flom, in second place on revenue, also falls – albeit less markedly – to twelfth. Likewise, Latham & Watkins suffers a 10-place drop, from third to thirteenth.

“Everyone’s trying to break the billion-dollar mark, but that’s meaningless unless you have the profits to go with it,” says New York recruitment consultant Alisa Levin of Greene-Levin-Snyder.

In contrast to the revenue leviathans, the firm in 50th place on turnover rocketed to the number one slot when ranked by PEP. Wachtell Lipton Rosen & Katz, which made it into the top 50 this year with a total revenue of $559m (£281.94m), retains its traditional number one slot for PEP with $4.48m (£2.24m).

The US’s other best-known pint-sized heavy-hitter, Cravath Swaine & Moore, takes second place as opposed to 41st place on revenue. The firms in third and fourth positions on PEP are Sullivan & Cromwell (twelfth on revenue) and Simpson Thacher & Bartlett (seventeenth) respectively.

“I think it’s just like sex,” says David Bargman, president of New York recruitment consultancy Baum Stevens. “Size doesn’t matter – although, of course, that’s just my opinion.”

Bargman adds that it was “much more significant” that a firm such as Latham had posted a 22.7 per cent increase in PEP than the fact that it had crossed the $2bn (£1bn) revenue threshold.

“The more law becomes a business, and the more that law firms can deliver first-class service on the biggest deals, the more you’ll continue to see these firms being the ;most ;profitable,” ;says Bargman. “To my mind, that’s more important than one-stop shopping” (a pointed reference to jumbo firms such as DLA Piper).

The fact that the legal profession has now transformed into the legal business ;was ;most ;clearly evidenced by recent developments at Cadwalader Wickersham & Taft. Despite being one of the few US firms to post a drop in PEP last year (down by 6.2 per cent, from $2.9m (£1.58m) to $2.72m (£1.36m)), Cadwalader still scored the number five slot overall in the table.

But the firm’s strong standing in the PEP table was not enough to prevent it from laying off 35 associates earlier this year. Cadwalader’s action is enough to make one New York recruitment consultant argue that the firm is potentially storing up trouble for itself in the future.

“Cadwalader’s strong profits last year are part of the scandal,” the recruiter claims. “Instead of being generous like McKee Nelson [which extended a range of alternatives to its associates facing layoffs], it protected its profits by booting out dozens of associates. It won’t serve them well when they come to recruit again.”

Cadwalader board member Greg Markel hits back against the criticism, calling it “absurd” to believe this year’s layoffs had any effect on 2007’s profit as they occurred after the fact in January 2008 and only affected two departments. Markel also claims that the firm did everything it could to help its associates.

“As you know, we gave them a very generous severance package and provided the services of an outplacement firm to help associates with the transition to developing new skill sets and securing new jobs,” insists Markel. “We don’t believe, and have no evidence to suggest, that [the layoffs] will impact our recruiting efforts. If you’re a desirable firm and have interesting work, associates will want to experience that and will be – and they are – interested in a Cadwalader opportunity.

“We’re a prestige firm and we have cutting-edge work of all kinds in litigation, financial restructuring and private equity, to name just a few. Students tell us they want that, and Cadwalader can deliver.”

The firm with the best overall improvement in terms of PEP was Texas-based Baker Botts, which registered an increase of 30 per cent on the previous year, up from $1m (£543,478) to $1.3m (£650,000).

Walt Smith, Baker Botts managing partner, puts the strong results down to increased demand across all the firm’s diversified practices.

“We normally experience varying demand levels in our different practice groups,” says Smith. “Last year, however, all of our practice areas were very busy, which is highly unusual, but it produced strong results for us across the board.”

By contrast, rival Texas firm Akin Gump saw its PEP tumble by 7 per cent, from $1.29m (£701,087) to $1.2m (£600,000).

Akin Gump’s and Cadwalader’s PEP slides aside, the clear trend for US firms last year was to post strong, if not record, profits. As Greene-Levin-Snyder’s Levin puts it: “Even those firms that saw their profits drop were still strong.

Rank Firm
PEP
PEP
PEP
PEP
PEP %
2007
2007
2006
2006
increase/
($K)
(£K)
($K)
(£K)
decrease
1
Wachtell Lipton Rosen & Katz 4,480 2,240 3,900 2,120 14.9
2
Cravath Swaine & Moore 3,300 1,650 3,000 1,630 10
3
Sullivan & Cromwell 3,130 1,565 2,800 1,522 11.8
4
Simpson Thacher & Bartlett 2,870 1,435 2,490 1,353 15.3
5
Cadwalader Wickersham & Taft 2,720 1,360 2,900 1,576 -6.2
6
Paul Weiss Rifkind Wharton & Garrison 2,600 1,300 2,500 1,359 4
7
Kirkland & Ellis 2,550 1,275 2,270 1,234 12.3
8
Milbank Tweed Hadley & McCloy 2,530 1,265 2,170 1,179 16.6
9
Davis Polk & Wardwell 2,410 1,205 2,150 1,168 12.1
10
Dechert 2,300 1,150 1,980 1,076 16.2
11
Debevoise & Plimpton 2,290 1,145 1,800 978 27.2
12
Skadden Arps Slate Meagher & Flom 2,280 1,140 2,000 1,087 14
13
Latham & Watkins 2,270 1,135 1,850 1,005 22.7
14
Willkie Farr & Gallagher 2,230 1,115 2,030 1,103 9.9
15
Cleary Gottlieb Steen & Hamilton 2,140 1,049 2,120 1,152 0.9
16
Weil Gotshal & Manges 2,110 1,055 1,900 1,033 11.1
17
Paul Hastings Janofsky & Walker 1,920 960 1,600 870 20
18
Gibson Dunn & Crutcher 1,900 950 1,750 951 8.6
19
Shearman & Sterling 1,850 925 1,600 870 15.6
20
White & Case 1,670 835 1,500 815 11.3
21
Orrick Herrington & Sutcliffe 1,660 830 1,430 777 16.1
22
O’Melveny & Myers 1,640 820 1,600 870 2.5
23
Goodwin Procter 1,620 810 1,400 761 15.7
24
Fried, Frank, Harris, Shriver & Jacobson 1,601
800
1,526
829
4.91
25
Dewey & LeBoeuf 1,570 785 1,430 777 9.8
26
Proskauer Rose 1,550 775 1,300 707 19.2
27
McDermott Will & Emery 1,520 760 1,400 761 8.6
28
Morgan Lewis & Bockius 1,430 715 1,240 674 15.3
29
King & Spalding 1,390 695 1,300 707 6.9
30
Sidley Austin 1,380 690 1,300 707 6.2
=31
Greenberg Traurig 1,300 650 1,200 652 8.3
=31
Bingham McCutchen 1,300 650 1,200 652 8.3
=31
Baker Botts 1,300 650 1,000 543 30
=34
DLA Piper 1,280 640 1,180 641 8.5
=34
Winston & Strawn 1,280 640 1,200 652 6.7
=36