Rose from the ashes
31 August 2009 | By Kit Chellel
12 February 2014
5 May 2014
23 October 2013
10 September 2013
9 December 2013
From an explosive setback in the 1990s, the past decade has seen Norton Rose consolidate its business - yet its key overseas ambitions remain a work in progress
You could forgive Norton Rose’s leadership a moment of quiet satisfaction after securing a tie-up with Australian outfit Deacons in June. After all, the firm has had a troubled international history from which it is only just emerging.
Over the past decade Norton Rose has had to overcome everything from fractured alliances, failed mergers and even IRA bombs in its quest to become a recognised global player.
And still, despite its recent successes, not everyone is convinced by the brand.
As the firm enters the next phase of its international strategy, there are inevitably questions about whether it has learnt from its old mistakes.
Having been left behind in the race for globalisation in the late 1990s, Norton Rose has in the past been accused of expanding beyond its means.
“On one side you have to give them credit for having turned it around. But there are still the same fundamental problems lurking beneath the surface,” argues consultant Alan Hodgart of H4 Partners.
The firm now has offices across Asia, the Middle East and Europe and chief executive Peter Martyr has pinned the firm’s future on international growth. He has even talked openly about the prospect of a US merger.
Martyr and his team certainly have the ambition. Does Norton Rose have the firepower to match?
Ask anyone at the firm and they will tell you that the story of Norton Rose as an international law firm starts with the moment an IRA bomb decimated its Bishopsgate headquarters in 1993.
No employees were killed, but it was a blow from which it took several years to recover. During that time its City rivals were already forging ahead with overseas expansions.
“It took us quite a few years to get ourselves straight again,” reveals Martyr. “In that time our biggest competitors had gone international.”
So Norton Rose started out some way behind the other large UK firms with an awareness that it needed to act quickly to catch up.
At around the same time the firm decided to go it alone in Hong Kong, ditching its alliance with Johnson Stokes & Masters (JSM).
The partnership officially came to an end in 1998 and then, as a result of small print in the original agreement signed in the 1970s, Norton Rose was barred from opening in the territory for three years.
If it seems like harsh punishment, it was. The firm decamped to Singapore and came close to losing one of its most important clients, HSBC.
Martyr concedes that, with the benefit of hindsight, agreeing to the punitive aspects of the JSM deal was a mistake. “You can criticise it now,” he adds, “[but] I’m sure at the time they thought they were doing the right thing.”
Norton Rose finally relaunched in Hong Kong in 2001 and JSM eventually merged with Mayer Brown in 2007.
Meanwhile in Europe the firm was busy playing catch-up with its competitors. It already had a strong finance practice in Paris, but needed to be in Germany.
The problem was, all the best merger targets had already been snapped up by other international firms.
Norton Rose began merger talks with little-known Gaedertz in 2000, which broke down acrimoniously after the German firm failed to approve the link-up. Gaedertz would eventually splinter into different offices, with Norton Rose securing the Cologne practice.
It was, by Martyr’s admission, a messy process. The entire Cologne office would eventually defect to CMS Hasche Sigle in 2004, leaving Norton Rose with the practices it had built in Frankfurt and Munich following the merger.
“We went into it for the wrong reasons in the wrong way,” admits Martyr, adding that the debacle had given him renewed focus on what sort of international practice Norton Rose should have.
The European problem was compounded by a series of high-profile departures in Paris, including two partners to White & Case in 2004 and a group of insurance partners who left to set up on their own in 2003.
It was against this backdrop that Martyr took the reins as chief executive in 2003, taking over from managing partner Roger Birkby. From the start he set out his stall as the man who could sort out the international network.
“My first task in becoming managing partner in 2003 was to address what was wrong with this strategy and why it wasn’t working,” recalls Martyr.
The cost of running under-performing overseas offices was having a huge impact on the entire firm. Between 2001 and 2003 the average profit per equity partner (PEP) at the firm slumped from £520,000 to £390,000.
It is understood that, during the darkest days, London equity partners would have been taking home almost double what they actually received had it not been for the overseas offices.
“The money was being made in London and lost pretty much everywhere else,” admits Martyr.
His strategy was to reorganise the firm around sectors where it was among the market leaders. The idea was to make sure that every lawyer was focusing on the same key areas and to tidy up what had been a patchwork of diffuse practices across the globe.
Take Germany as an example. While the loss of the Cologne office was undoubtedly a blow, its IP specialism had never really aligned with the rest of the German practice, which focused mainly on finance and banking.
The other priority was to stop the damaging partner defections by bringing PEP up to more competitive levels. In the 2002-03 financial year the firm introduced ‘The Floor’ - a system whereby the bottom of equity figure was propped up by pay cuts for plateau partners. That was a temporary measure, but PEP has risen every year since.
More recently Norton Rose has introduced a ‘super-pointers’ equity rung to prevent star partners jumping ship. Equity partners had previously been awarded between 100 and 200 units. Under the new system those making what Martyr describes as an “exceptional contribution” can receive up to 300 points.
Doing their bit
A measure of how successful Martyr’s strategy has been can be found in the turnover figures. In 2001 London accounted for some 80 per cent of revenue; now the international offices provide around half of the firm’s income.
In Asia the 2001 relaunch in Hong Kong saw almost instant reward when the firm reclaimed its place on the HSBC panel. The bank remains a vital client - as evidenced by Norton Rose’s instruction on its £12.5bn rights issue in March.
Martyr has now put the region at the heart of Norton Rose’s strategy. The Deacons deal was carried out in large part to give the firm a base from which to target Asia.
However, critics have pointed out that Deacons has few lawyers outside Australia and that a deal with Deacons Hong Kong, a separate firm that is highly thought of in the local market, would have made more sense.
“I’m somewhat surprised Norton Rose didn’t merge with HK Deacons given its strong reputation and three licences to operate in the mainland,” says Hong Kong-based consultant Robert Sawhney of SRC Associates. “Many large-scale Chinese deals involve state-owned enterprises and relationships are crucial in this area.”
What the practice needs is more visability and a place on some really eye-catching deals. The firm has made progress here: HSBC relationship partner Martin Scott acted for China Development Bank when it bought £136m of Barclays shares in June last year (part of a larger share issue) - but more is needed.
In Europe, meanwhile, Norton Rose has rebuilt in both France and Germany. Paris and Frankfurt in particular have benefited from lateral hires. The Paris office now has 23 partners, making it the largest branch outside London. It is also the home of some of the firm’s most important banking clients, including BNP Paribas, Calyon and Société Générale.
Former partners question whether the office has sufficient expertise in M&A, but there is no doubting its value when it comes to asset and project finance.
While there have been defections in Europe, the exodus has stopped. Head of corporate Tim Marsden has spent the past few years working with the European partners to ensure better cooperation.
Martyr is satisfied with the firm’s progress in Europe. “It took three years though to get that working better,” he says. “By 2005 we were pretty much there.”
The Middle East has also recovered after being left with a skeleton staff by a series of raids in early 2007.
The American reality
The next big challenge for Norton Rose is achieving its long-stated aim of a US merger. The firm first began exploring a US tie-up in the late 1990s, but was met with resolute indifference from the white shoe firms.
Now a deal is back on the cards. Earlier this year chairman Stephen Parish said the firm needed a US branch within 20 years. It is not exactly now, but it is something.
H4’s Hodgart believes one of the reasons Norton Rose has so far failed to find a partner is confusion over the firm’s strategic message.
He has long argued that, beyond the fact that it has a strong finance practice, there is little to set the firm apart from its peers.
“Strategically it’s not clear what they’re trying to achieve,” he adds.
Martyr disagrees, arguing that this summer’s Australian tie-up increases the chances of a US deal.
“Most US firms are a bit thin in Asia. I actually think Deacons makes us more attractive,” he insists.
This time Martyr is taking a more openminded approach than the one that led to a humiliating retreat from the US a decade ago.
“In the ’90s the one thing we could see was New York. We have realised that the US is more than just New York,” reveals Martyr. “There are some quite powerful players who want to be more international - there’s a list of about 20 firms in that category.”
Coming so soon after the Deacons deal a US merger might seem a long way off, but Martyr argues that the firm cannot wait forever.
Martyr’s comments, and the resurgent mood among his fellow partners, suggests that the firm has rekindled its appetite for global expansion.
But it should be wary of history repeating itself. If the Norton Rose story tells us anything, it is that international goals are best pursued with caution.