Scotland’s mightiest firms face up to the downturn
Scottish chiefs put brave face on stagnant figures as deals conveyor belt keeps rolling.
Richard Masters
Scotland’s leading law firms continued to have a tough time in the 2010-11 financial year, with even those firms with presences in the higher-margin London market failing to post significant hikes in turnover or profitability.
Leader of the pack
McGrigors remains the largest player in terms of turnover, although its revenue figure for the year (estimated, as the firm has a September year-end) was up by just 1.5 per cent to £70m, despite continued investment in the business. The results include the second full year of turnover from the firm’s enlarged Belfast presence following its October 2009 merger with L’Estrange & Brett, as well as the revenue from a significantly expanded Manchester office. The firm also launched in Doha in March.
According to managing partner Richard Masters, the results are fair considering the toughness of the market, although he conceded that the firm’s profit margin of 20 per cent was lower than he would like it to be.
“It’s still very difficult out there, but I think we’ve shown top-line and bottom-line growth,” he says. “[The profit margin] is inevitably lower than I’d want it to be. Against [a difficult] backdrop I’m pretty happy that we’ve put in a pretty solid performance. I’d expect to see the margin continue to grow over the next three years.”
While McGrigors stands out among its Scottish counterparts for eyeing markets beyond Scotland and London (in addition to Belfast, Manchester and Doha the firm also has a referral agreement with US firm Husch Blackwell), the bulk of its revenue is generated along the Scotland-City axis.
For the 2010-11 financial year 10 per cent of total turnover was generated by the firm’s Belfast office, with 7.5 per cent coming from Manchester and Doha contributing a negligible amount at this stage. London accounted for 29 per cent, with the remainder being generated in Scotland.
That said, Masters says the types of deal the firm is working on means it is often difficult to separate out revenue streams on an office-by-office basis.
“There’s a much larger chunk of fee-earners sitting in Scotland, but many of them are up and down to London all the time,” he explains. “The London revenue’s attributed to people actually sitting in London, but we’ve got people in Edinburgh winning London work and doing it from Scotland.”
An example of such a deal is the December 2010 takeover of oil services group PSN by John Wood Group. While John Wood Group is Aberdeen-based, it is listed on the London Stock Exchange (LSE) and is a member of the FTSE100. On the £607m deal Slaughter and May acted for John Wood Group, with McGrigors Glasgow corporate partner Rosalie Chadwick leading the advice for PSN.
South organ
Another firm that has been putting significant emphasis on its London practice over the past few years is Dundas & Wilson. In 2010-11 the firm turned over £62m following a rise of 2 per cent on the previous year, making it the second-largest Scottish firm in turnover terms. Of the total, £24m, or 39 per cent, was generated by the London office.
According to managing partner Donald Shaw, this performance was “acceptable” and “reasonably solid”, although he adds that he remains committed to growing the firm’s London base.
“It’s pretty deliberate [that London contributes such a large share of firmwide turnover],” he stresses. “We invest in London. We’d like to see London increase, long term, to an appropriate size in the UK legal market, but we’d need to maintain a balance between our offices.”
One way to expand London would be via a merger. While it is understood that Dundas has held talks with London firm Bircham Dyson Bell over some kind of tie-up, Shaw dismisses this assertion, saying that the two firms have simply become close because they undertake work on parliamentary matters jointly.
That said, in the last financial year the Edinburgh-headquartered firm increased the amount of floorspace it has in its Bush House offices, taking on an extra floor from Deloitte that Shaw denotes as “client reception space”.
One benefit of having such a large London presence is that higher fees have the opportunity to work down to the bottom line, with City work being charged at a premium compared with that being done out of Scotland.
Aside from Dickson Minto, whose model sees it focus almost exclusively on top-end private equity work, Dundas has the highest profit margin of the firms in the Scottish top 10. The firm maintained its 41 per cent profit margin in 2010-11, helped in part by the fact that it is one of the few firms in the UK that still operates an all-equity structure. Its 79 equity partners received an average payout of £325,000.
A PEP in the right direction
Despite the high profit margin, this figure is still significantly lower than the average profit per equity partner (PEP) posted by Dickson Minto. The firm, which focuses on investment trust work in Scotland and private equity in London, had a return to form in 2010-11, seeing turnover rise to £34.7m and net profit reach £18m. This represents a profit margin of almost 52 per cent, giving an average PEP of £1.39m.
While Dickson Minto suffered at the beginning of the global recession, when the bottom fell out of its core market, senior partner Alastair Dickson says the firm handled “a myriad of deals” in 2010-11.
This included acting on the SKr12bn (£1.15bn) sale of refrigeration products manufacturer Dometic to Swedish buyout house EQT, with partner Andrew Nuthall leading. Swedish firm Vinge advised the buyer, while Clifford Chance and Linklaters took on the financing roles. While this was not strictly speaking a private equity deal, Dickson Minto won the instruction because Dometic had previously been owned by the firm’s longstanding client BC Partners. At the time of the sale Dometic was bank-owned.
In another deal the firm advised private equity house PAI Partners on its £637m sale of Kwik-Fit to Japanese conglomerate Itochu Corporation. The firm acted opposite Baker & McKenzie, which represented the buyer, and Berwin Leighton Paisner, which advised Kwik-Fit’s management.
Four bidding
While Dickson Minto is the only firm in the Scottish top 10 making City-style profits, the firm with the next highest PEP is Brodies, which focuses its business solely on the Scottish market.
In 2009-10 Edinburgh-headquartered Brodies broke into the so-called big four Scottish firms by turnover, usurping Shepherd & Wedderburn (S&W) to achieve fourth place, behind McGrigors, Dundas and Maclay Murray & Spens. In 2010-11 S&W regained its big-four spot with a growth in revenue of 6 per cent to £37.3m, overtaking Brodies’ 3 per cent hike to £36.9m.
That said, despite the fact that both firms posted profit margins of 27 per cent and S&W’s net profit was £10.25m against Brodies’ £9.9m, the latter’s PEP is £100,000 higher than the former’s. Brodies’ 27 equity partners took home an average of £365,000, while S&W’s 39 equity partners received an average share of £262,000.
Looking back over the financial year, Brodies managing partner Bill Drummond said it had been a “game of two halves”.
“The first half was dead slow - I think it was Scotland lagging behind the rest of the UK coming out of recession,” he recalls. “The second half was much better. We started to see month-on-month improvements in terms of new business generation. The second half also saw some investments starting to have an impact.”
While the firm opened an Aberdeen office towards the end of the financial year, Drummond says its impact on the 2010-11 results was negligible.
He points to the raft of lateral hires the firm made throughout the year as having a bigger impact. In Edinburgh Brodies added Addleshaw Goddard solicitor advocate Mark Clough QC and Dundas banking partner Michael Stoneham, while in Glasgow it brought in Biggart Baillie commercial property partner Richard Smith and Harper Macleod employment head Paul McMahon.
For S&W chief executive Patrick Andrews, the fact that his firm’s net profit figure rose by 23.5 per cent over the year represented the culmination of a reshaping that began during the recession.
“We’ve reduced headcount in some areas and invested in other areas over a two- to three-year period,” he recounts. “We’ve successfully looked at aspects of the business where we could improve our performance, not through doing anything other than looking at what we’ve got and working smarter with it.”
The firm’s performance was also boosted by a number of standout deals, such as advising Cairn India, which is part-owned by Edinburgh business Cairn Energy, on a $9.6bn (£6.1bn) cash injection from Vedanta Resources. The deal, which was led out of Edinburgh by partners Paul Hally and Stephen Trombala, saw the firm take a seat opposite Latham & Watkins, with Indian firms AZB & Partners and S&R Associates also advising.
North star
While the managing partners of all the firms in the Scottish top 10 agree that the Scottish market remains sluggish in comparison with the wider UK economy, the firm that is projecting the greatest turnover growth has no footprint south of the border.
Burness, which like Brodies has no plans to expand beyond Scotland, is still finalising its figures for 2010-11, but is anticipating double-digit turnover growth. Assuming growth of 10 per cent, this would put the firm on a turnover of £23.3m.
Despite this, Burness chairman Philip Rodney says the picture in Scotland “isn’t looking particularly optimistic”.
“I’m not optimistic about the next few years,” he continues. ”Projected growth for Scotland is lower than for England.”
Triple dipped
These sentiments are shared by Maclay Murray & Spens chief executive Chris Smylie, who says things are “tough north and south of the border”.
Maclay was the only firm in the top 10 to post a fall in revenue for the 2010-11 year, with the total figure dropping by 7 per cent, from £52.5m to £48.6m. Around a quarter of this was generated in London, with the remainder coming mostly from Glasgow and Edinburgh and around 10 per cent from Aberdeen.
This is the third consecutive year of falling turnover at Maclay, and the revenue figure represents 20.5 per cent shrinkage from the firm’s 2007-08 high of £61.1m.
Smylie says part of the reason for the decreased turnover is that the firm’s headcount has decreased since the start of the recession: in 2007-08 the firm was home to
256 lawyers, of whom 72 were partners, while in 2010-11 there were 250 lawyers, with 61 of those in the partnership.
“I’d have preferred not to have seen that [turnover] figure, but I’m not surprised by it,” says Smylie. “We’ve got fewer partners delivering turnover and we’re still in the process of getting back on the front foot.”
In terms of the firm’s profit margin (with a net profit of £12.4m Maclay’s margin stood at 25.5 per cent), Smylie says: “I’d like to see the margin grow. If we can get it starting with a three, that would be a happier position to be in. I’m confident that, during the course of my three-year term, we’ll be looking at those levels.”
No grow area
None of the managing partners are expecting particularly strong growth to come out of Scotland in the current financial year. Masters at McGrigors speaks for all of them when he says the market is “not set for growth in any way”.
However, the firms in the top 10 continue to win solid mandates and panel places. Dickson Minto, Dundas, McGrigors and Maclay have all won spots on Barclays’ revised roster, while McGrigors also bagged a place on the coveted BP panel.
Meanwhile, the Scotland-only firms are winning an increasing number of roles on deals with international elements. An example is Axa Private Equity’s June 2011 acquisition of a £740m portfolio of funds interests from Barclays, on which Brodies and Burness both had roles alongside major international firms.
A team from Bakers, led by Paris-based private equity partner Bruno Bertrand, advised Axa Private Equity on the transaction, with Burness partner Alan Soppitt providing Scottish law. A team from Freshfields Bruckhaus Deringer, led by partner Karen Fountain, and Brodies partner Alistair Campbell advised Barclays on the deal.
Despite this, the market remains tough and, with a large portion of the Scottish economy reliant on the public sector, there is no prospect of a major recovery in the near term.
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