Shearman & Sterling: Shear drop?
12 May 2008
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Shearman & Sterling: Shear drop?" /> Nestling neatly alongside this week's issue of The Lawyer, you should find the inaugural copy of The Lawyer Transatlantic Elite.
This new book examines the strategies of the world's top law firms, with the emphasis on those that have made the grade in both London and New York. It unveils the 16 firms that, according to marketplace consensus and The Lawyer's own research, are currently leading the international pack.
As with any group of this kind, the candidates that do not make it are at least as interesting as those that do. And arguably, the firm that will be most aggrieved by its exclusion from the indisputably elite group (dubbed the 'Sweet Sixteen') is Shearman & Sterling.
The ;story ;of ;Shearman ;- described by Tony Williams of legal consultancy Jomati as a "tragedy" - is one of missed opportunities and squandered leads. In New York, London and most visibly (in recent weeks) Germany, the venerable Wall Street giant has been the elite US firm most guilty of surrendering its first-mover advantage.
"Of all the New York firms, it was the one with a very clear and tremendously successful international strategy," says Williams. "That was back in the late 1990s."
How things change. According to numerous sources, the most appropriate description for the key offices along Shearman's US-European axis is that of three independent island states. The result? Internally Shearman may still think of itself as elite; externally the market has passed it by.
One of the key reasons for Shearman's exclusion from this year's Sweet Sixteen is the perceived lack of effective communication and cross-referrals between the firm's network. In Germany former partners describe the practice as "virtually self-sufficient", with very little work coming in from the US and only dribs and drabs from the UK. One exception, proffered by Shearman, is the 2006 merger of Nokia and Siemens' communications service provider businesses, one of the few inter-regional deals. But this was led by M&A partner Jonathan Coppin, who has since decamped to Hogan & Hartson.
According to another former partner, the referral traffic from Germany to New York in corporate is best described as "an absolutely one-way street".
Elsewhere, Paris is successful in capital markets and arbitration, but suffers from a relative weakness in corporate - a charge that is also regularly laid at London's door, where Peter King is still seen as the sole genuine big-hitter in M&A.
But ;it ;is ;Germany ;where Shearman has most obviously lost ground in terms of its international network. In April the firm lost its entire 30-lawyer Mannheim office (TheLawyer.com, 22 April) when it split off to form independent firm Schilling Zutt & Anschütz.
A more familiar issue is Shearman's financial performance. True, its financial results over the past couple of years or so have rebounded. But frankly, if Shearman could not make money during the biggest bull market ever, then it would have been time to pack up and go home.
Internal squabbles and defections, the historic failure to capitalise successfully on the post-dotcom boom in Chapter 11 work earlier in the century and the lack of a clearly defined (or at least communicated) international strategy have created the impression of a firm on the decline.
Shearman's average profit per equity partner (PEP), although rising last year to $1.8m (£923,000), appears to confirm it. The average among the Sweet Sixteen US firms last year was $2.7m (£1.35m). Even taking the super-boutique Wachtell Lipton Rosen & Katz out of the equation only reduces the average to $2.53m (£1.26m). Despite its undoubted gains over the past three years, Shearman's PEP still lags considerably behind those firms' it would consider its peers.
Last month was potentially a pivotal moment for the firm. The exit of Shearman's Mannheim office coincided with the unveiling of a new management structure, which saw the executive committee slashed from six to three members and an injection of new blood into the running of the firm.
The Lawyer spoke to Shearman senior partner Rohan Weerasinghe, last Wednesday (7 May) and asked him to respond to the market's perception. What does he say to those critics who claim Shearman has slipped from its elite perch?
Flying in the face of reason?
"I don't look upon ourselves as benchmarking on profitability vis-à-vis those other firms," claims Weerasinghe. "I look upon ourselves as having performed extremely well in the last three years. Just as an example, we've increased our PEP by almost 60 per cent in that period, including a double-digit increase last year, which I think is extraordinarily strong."
If Shearman is not benchmarking itself against its key rivals - a claim that is frankly incredible - then perhaps it should. And please excuse the slight nitpicking, but in fact the 60 per cent growth took place between the 2004 and 2007 financial years, a four-year boom period for most firms.
But ;with ;Shearman's ;new management structure now in place, Weerasinghe is more interested in looking forward, not back.
"The financials are important, but what's really relevant in my mind is the kind of work we're doing," he argues. "Because we're clearly doing, as our strategy has directed us to, the most high-profile and significant matters for the largest companies in the world. And that's really the indicator in my mind of the direction and trajectory of this firm and where it's going to go."
As a strategy, it is hardly revolutionary. And according to Weerasinghe, the mantra trotted out by the Shearman faithful has remained unchanged since he took over as senior partner three years ago. There is no doubt its global platform positions it well to participate in those kind of matters. The question is, how well is it capitalising on that platform?Internationally, the most obvious pressure point in recent months has been Germany. Shearman's newly revamped management structure has given it a new leader of the German practice in the shape of corporate partner Harald Selzner, now co-head with iconic partner Georg Thoma. Selzner certainly has a challenge on his hands after last month's mass walkout in Mannheim.
Weerasinghe dismisses the German question, claiming it was "an amicable separation", before (conveniently) adding: "We have an agreement with them, so I'm not in a position where I can get into any more detail."
Hardly illuminating. Shearman also blocked its German partners from officially speaking to The Lawyer, with all enquiries directed to the resolutely party-line new London head Anthony Ward.
But former partners were willing to talk. And as one puts it: "The Hengelers of this world are laughing themselves silly - Shearman used to be a dangerous threat."
Shearman's German practice has always been dominated by its corporate strength. With blue-chip clients such as Allianz, BASF, Daimler and E.ON, it was acknowledged to be giving the top tier of Germany's corporate firms - Freshfields Bruckhaus Deringer and Slaughter and May's German soulmate Hengeler Mueller - a run for their money. That is not something that can be said about Shearman's corporate capability in many other jurisdictions, including London and New York, where even insiders admit that coverage is patchy.
But in the past year Germany experienced a flow of major defections. Johannes Kremer and Andreas Diem, the German practice's only finance partners, left for rival US firms Skadden Arps Slate Meagher & Flom and Latham & Watkins respectively in 2007. And in January this year one of its biggest stars, global M&A head Rolf Koerfer, defected to Allen & Overy, later convincing partner Birgit Reese (who had only been made up in 2006) and another associate to join him (TheLawyer.com, 31 March).
The exits left Shearman's German finance capacity all but dead and its corporate practice - which depends strongly on a small number of old-guard heavyweights - seriously weakened.
While it is true that the Mannheim office handled work other than big-ticket M&A, including IP, employment and corporate advisory, German market insiders consider the departure of the office a significant blow ;to ;Shearman's ;German corporate ambitions, both in terms of reputation and of legal capacity.
Weerasinghe, however, claims his firm continues to have "a world-class German practice", adding: "We'll have an even stronger German practice because it's very focused."
Additional focus was one of the chief reasons behind Shearman's recent management overhaul. While the executive committee has been cut in half, Weerasinghe's real plan is for broader representation at a senior level throughout the firm. The aim, which appears sensible, is both to increase the number of people familiar with management in the firm and to develop the future leaders.
While Weerasinghe has broadened responsibilities for management into different teams, he has given them more narrowly defined, specific roles. For example, Asia head Matthew Bersalis, New York M&A partner Creighton Condon in the Americas and Thoma in Germany have all become members of the new global strategy group.
As Bersalis puts it: "My sole function on the strategy group is to deal with strategy."
Weerasinghe's ;management changes are more in line with a UK firm than one of the US elite. "Many US firms don't necessarily have the same level of management sophistication that you may be used to with your magic circle firms," he admits. "What I've wanted to do for a while is to broaden the number of people involved in the management of the firm and get greater involvement by partners at all levels in managing the firm. So what looks like a reduction in the executive group is really masking the fact that I've broadened the number of people in what I'd characterise as senior management."
From 15 May many of these new managers will have their first opportunity to prove their mettle. Weerasinghe will host Shearman's annual global partners' conference in the heat of the US's Sunshine State, Florida. Although (in typical Shearman style) he preferred to keep the precise date and location top secret (perhaps fearful that a hack from The Lawyer would gatecrash the Miami hotel en route to a well-earned sojourn in Disney World), he was nevertheless willing to provide a clue as to what was on the agenda.
"The key focus is on trying to get partners to spend more time talking about opportunities," says Weerasinghe.
Shearman's senior partner says one of his key focuses is on encouraging cross-selling, teamwork "and getting our 19 offices to work together". According to Weerasinghe, there is nothing particularly new about this being a focus of a partner retreat. Helping partners to get to know each other better is ultimately the function of any such partner retreat (that and the golf presumably).
But it is surely no coincidence that, in a year when Shearman has lost an entire office and numerous partners, it puts cross-selling across its international network and practice groups at the top of its agenda.
"Frankly, I'd certainly never look at it the way you're looking at it," argues Weerasinghe. "The way I look at it is any organisation could do better. Any organisation that's global could do better and I'm always pushing this firm to do better at the things that they're good at because they should be excellent at it."
Certainly the firm played a key role on several high-profile cross-border deals last year, among them the unwinding of DaimlerChrysler and for RBS on the US end of the sale of ABN Amro. But for a top firm such as Shearman, deals lists are simply proof that they are not going bust. For it to recapture a place among the global elite, it needs more.
According to several legal market consultants, the eventual way out for Shearman is a merger, preferably with a magic circle member.
Right now, though, Weerasinghe is not interested.
"I have no interest in a merger," he confirms. "I think we're extremely strong as we are."