Shearman & Sterling: Empire state
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Shearman & Sterling: Empire state" />Shearman & Sterling had the most powerful brand of any US firm in the City at the start of the decade. But not anymore. As US rival Weil Gotshal & Manges advanced its presence in the capital to become a private equity powerhouse, Shearman failed to capitalise on the multitude of lateral hires it made in the late 1990s and early 2000s.
Yet Shearman is now trying to rejuvenate its London offering by pledging to grow organically, by increasing its trainee intake and reducing the number of lateral hires.
But with Shearman being slammed by ex-employees for its lack of promotion prospects and with its New York headquarters firmly controlling the growth of every office in the network, the aim of organic growth is a mammoth task. Can London managing partner Kenneth MacRitchie pull it off?
MacRitchie, himself a lateral hire, is facing a host of structural problems.
"US firms don't have trainees. Is it likely that Shearman's headquarters will support the extra cost of more trainees in London?" asks one former partner. "I think they'll struggle to get support for something that New York doesn't have, and that has not been done in London before."
This cultural divide between London and New York has been the key obstacle for growth and promotions in the capital. Associates and counsel felt duped by the firm when hopes of partnership were dashed in recent years.
Earlier this year (21 May) The Lawyer reported that nine counsel left the London office due to a lack of promotion prospects. Eight of the nine previous Shearman counsel left to become partners at other firms, including Adam Cooper, who moved to Simmons & Simmons, Elisabeth Baltay, who joined Bingham McCutchen, David Manny and Raminder Singh, who went to Vinson & Elkin, Stephen Jurgenson, who joined Dewey Ballantine, and Angus Rollo, who moved to Sheppard and Wedderburn in May this year. Andrew Regan has left the law while Penny Madden joined Skadden and John Schmidt also joined Sheppard and Wedderburn.
"Everyone knows it's hard to make partner at US firms," says one former counsel at Shearman. "The problem was that so many were promised partnership and told they were on the right track. If you're constantly being told that partnership is well within your reach, it's very disappointing to discover this is not the case. This, in my view, is why a number of people left."
While New York, London and Paris were the offices in the network with the most promotions in 2006, the bulk of Shearman's London promotions were from associate to counsel, of which there were 14. However, counsel is widely considered to be used as a sidelining position for those deemed unlikely to make partner.
In 2007 only one associate, James Comyn, was made up. Only Patrick Clancy was promoted in 2006, while no London associate was promoted in 2005.
MacRitchie's change of strategy, from a lateral hire focus to organic growth, may come as a surprise to those who were recruited during the office's heyday, when the firm was striving to build a team that rivalled the magic circle purely by hiring stars from UK and US rivals.
"Shearman was considered to be the model for any US firm striving to be successful in London," explains former Shearman partner Stephen Peppiatt, now at Bingham McCutchen . "It managed to create an office that could compete with the magic circle and developed some excellent clients, particularly in finance."
High-profile lateral hires, such as Ashurst's former head of investment banking Adrian Knight and former head of banking Stephen Mostyn-Williams, were instrumental in Shearman making a mark in London. Mostyn-Williams, who brought with him a team of three - partners Clifford Atkins, Iain Goalen and Anthony Ward - launched the leveraged finance practice, creating a formidable force in London.
Capitalising on an impressive client base, including Morgan Stanley, Merrill Lynch and Goldman Sachs, Shearman was fast achieving its goal of rivalling the magic circle. But, despite excellent corporate hires, including Peter King from Linklaters in 2003, the office failed to make its mark in the private equity sphere - the key City phenomenon of the past four years.
"We do have work to do in London," admits MacRitchie. "We've come a long way, but we need to advance in M&A and corporate to be able to rival the magic circle."
With the likes of Weil, Simpson Thacher & Bartlett and Kirkland & Ellis having thrust themselves into the private equity market, Shearman's inability to do the same is a disappointment for the firm and one that has certainly hindered growth.
"What surprised me is the lack of growth the office has experienced in recent years," says one former partner. "They had some great people, but they lost them because of politics and this has really held them back."
King and the Mostyn-Williams crew were certainly success stories for Shearman in London.
Mostyn-Williams brought his relationships with Bankers Trust, Morgan Stanley and Goldman Sachs to the firm and got a number of major acquisition finance mandates.
In 1999 his team was instructed on 14 out of the 15 major leveraged buyouts, signing 10.
King's track record at Linklaters in big-ticket M&A with a German flavour immediately recommended him to Shearman, which has one of the best German practices of any US firm. King brought strong relationships with Depfa Bank and E.ON to the firm.
While finance star Anthony Ward fostered relationships with Merrill Lynch, Barclays Capital and Citigroup, King's relationship clients Depfa and E.ON have served the London office well.
Project finance trio MacRitchie, Nick Buckworth and Peppiat, who joined from Milbank Tweed Hadley & McCloy, also proved Shearman's London team was committed to taking on the magic circle.
With the defections of Knight to Skadden Arps Slate Meagher & Flom in 2003, Peppiatt to Bingham in 2006 and Mostyn-Williams, who became a consultant in 2000, the hires that advanced London had dried up, although Shearman's opportunism in landing litigators Jo Rickard and Louis Moore from Freshfields Bruckhaus Deringer was a neat move.
"Anyone who says you can build a successful office without lateral hires is talking rubbish. It's absolutely crucial to bringing in and maintaining core clients," explains MacRitchie. "We're now in the next stage of our development and this means more emphasis on trainees. Growing through the ranks will be healthy for the office."
Between 2003 and 2006 the London office proved itself to be a powerful force, reporting year-on-year growth. It reported a 10 per cent increase in turnover from $58.7m (£32.25m) in 2005 to $64.6m (£35.11m) in 2006. But success in the capital brought tension between New York and London due to unimpressive global growth.
In 2005, The Lawyer reported that New York announced an increase in turnover from $730m (£430.7m) in 2003 to $780m (£445.71m) in 2004. By comparison, London put in one of the best performances in the network, turning over $110m (£62.86m) in 2004, compared with $85m (£50.15m) the year before.
"London suffered because of its success," says one former counsel. "It was certainly around this time that we started to realise promotion to partnership was unlikely."
New York tightened its grip on London at a time when the headquarters was experiencing problems in profitability. When capital markets partner Rohan Weerasinghe became global managing partner in 2005, a review of the capital markets practice was launched, aimed at tackling dwindling profitability amid complaints that lawyers were resting on their laurels.
Later that year Weerasinghe combined the three departments - bank finance, structured finance and project development - in order to refocus on core investment banking clients such as Merrill Lynch and Goldman Sachs. The former heads of each group became product area heads, with capital markets partner Bill Hirschberg becoming the firms capital markets leader.
Despite evidence that New York had run into difficulties the office still remains coy about discussing its capital markets overhaul.
But with the firm's largest practice area in New York lagging behind while London stormed ahead, it is not surprising that tension in the ranks resulted in greater control on internal promotions.
"New York was not unhappy that London was doing well, but they weren't happy we were doing better than them," says one former counsel.
However, MacRitchie denies any ill-feeling or tension between the two offices. "I don't think I've ever experienced tension from New York," he says. "Integration between offices is always difficult, but success has not been a problem for us."
Now that times are changing for Shearman in London, MacRitchie says the psychological impact of strengthening organic growth is vital.
"I think everyone will be pleased when our first trainee makes partner," he concedes, adding: "We have a presence on the global policy committee. I think this helps us push forward internal growth in London and helps people feel they are represented."
MacRitchie's positivity is admirable and will encourage the junior ranks to strive for the heady heights of partnership. But with New York's control of its satellite offices stunting promotions, the reality of internal growth may not be quite so rosy.
"To expand in London you need partners to be committed to recruitment and the whole recruitment process," explains a rival US London managing partner.
Given the previous years' promotion figures in London, global commitment to recruitment in the capital may be something Shearman is struggling with.
MacRitchie and Bright may have their work cut out to get the internal support and commitment needed to fulfil their ambitious organic growth strategy.