The Addleshaws axe massacre
27 May 2002
Addleshaw Booth & Co's Paul Lee and Mark Jones have embarked on a huge gamble. If it pays off, and let us hope that it does, hats off to Addleshaws. If it fails, it could be disastrous. The gamble involved the culling of 11 partners in one fatal swoop, most of them believed to be at the high-earning equity level and ranging across the offices in Leeds, Manchester and London, in a move that was referred to by one of the axed partners as "the real night of the long knives".
If the gamble works, the firm will see fee income maintained and the remaining partners better off, which would not be at all bad. Addleshaws' recent end-of-year figures show profits per equity partner up by 15 per cent from £238,000 to £275,000, but it is not enough. DLA by way of comparison, recorded profits per partner up 16 per cent to an average of £457,000 compared with £395,000 last year.
Addleshaws has always had a reputation for being overmanned, with too many people for the amount of work available. And so the management decided to do something about it.
The gamble is entirely in the hands of the governance board, which is elected by the partners, and the management committee, which is handpicked by managing partner Jones.
The two-tier system works as the management committee implements the decisions made by the governance board. In essence, it is a model that is followed mostly by accountants, PricewaterhouseCoopers being one such example.
The Lawyer has information on who these partners are, and they range from corporate finance partners to litigation, PFI and intellectual property (IP), but the way in which the management has gone about the cull is probably more interesting than naming and shaming the partners involved.
Despite the protestations, billing must have been an issue.
Losing a partner who was generating impressive revenue for the firm is not exactly a solid management decision. One source close to Addleshaws told The Lawyer: "Some people amongst that number have fulfilled management roles in the past, and therefore hadn't been undertaking much fee-earning work. But this hadn't been taken into account when the decision to select them for redundancy was made." One report even came to The Lawyer of a partner who was working on a fixed salary within the firm who was asked to leave.
"They've [the management] made fools of themselves," says a managing partner from a rival firm, while another source believes that "the governance board simply didn't think it through". Indeed, Addleshaws' competitors are rubbing their hands in glee at the news and are quick to jump on the bandwagon of criticism.
One source, though, is more contemplative. "Partnership used to be about more than statistics," he says. There is, of course, a way of culling slowly but surely, agreeing individual leaving terms and maintaining goodwill with the outgoing partners. "More often than not it's the management's fault in the first place that they're reduced to making drastic cuts," says another source.
One source close to Addleshaws blames Lee for this strategy. Lee has total control over the partnership, and this has remained unchanged, despite the partnership-elected governance board. "He's good at seducing people to say yes, particularly the Manchester boys," says the source. "If he buys a new watch, they buy the same one. If he goes to a certain tailor, they'll go to the same tailor.
He flatters people's egos and pulls their strings."
Jones has spent the last few weeks since the news broke defending the governance board's decision. 'Capacity' rather than 'capability' is his favoured buzz word. Over the past two to three months, the governance board has been analysing capacity at both partner and staff levels. "We've come to the conclusion that it's more of an issue at partner level than it is at staff level," says Jones. "In fact, we'll be recruiting more assistant solicitors in the near future." So the partners were surplus to requirements. "Capability of these partners is not a reason for their selection," continues Jones. "There was no selection criteria. The decision revolved around the needs of the clients and the needs of the business over the next two or three years."
But Addleshaws continues to take on equity partners. One has to reconcile the news with the fact that, a few weeks prior, the firm took on - at equity level - well-respected corporate finance partner Tim Hamilton and competition partner Phil McDonnell, both from the Manchester office of the disintegrated Garretts. This could not have been pretty news for the 11 departees, especially as some of the partners who were asked to leave were from the corporate finance department.
"Tim Hamilton is a corporate finance guy with a proven reputation for generating work," insists Jones in defence of the move. "Whereas the decision to take Phil McDonnell on board is due to a continuing need for succession." One competition partner, Garth Lindrup, is retiring in the not too distant future.
Whatever the reasoning behind the decision, there is definitely a reason for the culling. And that reason has a lot to do with London.
Addleshaws' governance board of was overhauled at around
the same time as the management committee, in the summer of 2001. Before then it could be said that the firm did not have the need for a serious management board to look at strategy. It had a strong identity and knew what it stood for. It was a force to be reckoned with in Leeds and Manchester, with a strong reputation for corporate work and some highly enviable plc clients of the calibre of Kingfisher and Airtours.
But in order to be viewed as a serious corporate presence, a London office is a must. Addleshaws opened its London office in November 1998. The problem for the firm then, as now, was critical mass. Jones has frequently been quoted as saying that the intention is to grow the London office.
"Having doubled the size of the practice in three years, in five years [by 2007] we want London to be the same size as Leeds and Manchester," says Jones. Just to remind ourselves, Leeds has 55 partners, Manchester has 52 and London has 20 overall. Jones remains adamant about his intentions. The aim is to grow it, and grow it swiftly. In London, the firm has made several lateral hires. It took the PFI team of partners from Buchanan Ingersoll, consisting of Diane Wilson, Michael Park and David Hartley, in September 2001 as well as Berwin Leighton Paisner partner Michael Blackburne in 2000, giving the firm its first construction law capability. And it added barrister Andrew Rigby to its IP team this year, who came over from Tarlo Lyons.
Addleshaws must know the hardships associated with organic growth. Starting from scratch costs an inordinate amount of money for a start. None of the other firms have been able to achieve it, preferring instead to go down the merger route. They forge a solid reputation in the regions and then the lure of London-based corporate finance and private equity beckons. Take Hammond Suddards merger with Edge Ellison in the summer of 2000. At the time, Hammond Suddards managing partner Chris Jones told The Lawyer: "The key fit is corporate finance. We've both been looking to bulk up our finance teams, particularly in the City, and lateral hires are incredibly tough at the moment."
It has been a success story for Hammond Suddards Edge on the lower scale. Its initial public offering team managed to complete 19 floats on AIM between July 2000 and December 2001, according to The Lawyer AIM Survey 2001.
Similarly, Pinsent Curtis and Biddle & Co's merger, announced in January 2001, came about for the same reason.
Julian Tonks, managing partner at Pinsents, had a vision to grow the London office and drew up a shortlist of potentials. Tonks told The Lawyer at the time of the merger: "We had a strategy review and decided that we needed to grow. Merger was clearly one way to grow the practice… and we think that private equity is a market that is particularly buoyant and offers particular opportunities."
One source said: "The concern is that, if you go into London, there are any number of firms that have some sort of corporate presence. You have to be so different. And private equity is where Addleshaws' management sees the difference."
Hammonds' London office has 14 corporate finance partners, Pinsent Curtis Biddle has 18 corporate partners and Eversheds has a 27-strong corporate team. This compares with Addleshaws' two - Tim Bee, who does corporate finance work, and John Hiscock, who is the 3i relationship partner.
Corporate finance partner Mike McGrath was also based in London, but he departed for Pinsents in February 2002.
Jones comments that the opening of London was slightly premature. "We had no real plan to open in London when we did. The decision was as a result of client pressure," he says. Three clients, to be more precise. J Sainsbury, HSBC and 3i are the clients that gave the firm the nod, promising rich rewards if they took the road south. But was this another gamble, or have the clients been true to their word?
3i has undoubtedly been a loyal client to Addleshaws in the North, but in London it is up against the private equity expertise of Macfarlanes. Macfarlanes has recently advised on the acquisition of Go for 3i. The venture capitalist paid £58m for a 40 per cent stake in June 2001 and sold for £149m, making a 156 per cent gain. This must be the sort of work that Addleshaws has its eye on for the London office.
The firm is on 3i's national panel, a role shared with Osborne Clarke and Wragge & Co.
The only firm on 3i's London panel is Macfarlanes. Charles Meek, the relationship partner at Macfarlanes, says: "We've had a busy year with 3i in London, doing the larger-range deals, from the £2m to the £100m deals." One source within 3i told The Lawyer: "Historically, the work has gone to the Northern offices of Addleshaws. They've only really recently opened in London. But we do give them a lot of work there. It does tend to be the smaller investment and portfolio work rather than the bigger deals."
Sainsbury's has also supplied a good stream of work for Addleshaws, but the supermarket giant has a very strong relationship with Lawrence Graham in London. Robinda Chaggar is the relationship partner at Lawrence Graham, and he says the firm has been very busy on the food retail and asset development side. Ironically, Addleshaws lost partner Stephen Turnbull to Lawrence Graham in March 2001 (The Lawyer, 5 March 2001) as he had forged a strong relationship with Sainsbury's during his 12 years at the firm's Leeds office.
Whatever the speculation about Addleshaws' London office, its end-of-year figures have not been bad (see box). In London, fee income saw the most dramatic increase - up 107 per cent from £5.2m to an impressive £10.8m (although the prediction for the current year had been £5m). Admittedly, the firm has taken on far more partners in London over the past 12 months, which will at least in part explain the pace of growth. The firm also underwent a move to new premises, but even so, the London office apparently made a small profit compared with last year's.
Corporate finance and private equity is where Jones sees the opportunity. In April 2001 the firm had a good year, grossing £15.7m in corporate finance. "Up to April 2002, the firm has grossed £15.3m fee income in corporate finance, despite the fact that 11 September caused undue hardships for many firms," says Jones.
Addleshaws is gambling by looking to increase profits by making drastic changes. The governance board does not have to take one road - it can either decrease the number of equity partners or increase the top line while controlling costs. It appears that the management team wants to do both - axing partners, dramatically increasing profit margins, talk of doubling in size in the next year in London, focusing on corporate finance and private equity as the way forward.
"It's about improving profits so merger becomes a possibility," says one source. Addleshaws needs a merger, and fast. You know it, we know it. But do all of Addleshaws' partners know it?
The following are projections and actual figures for fee income from the London office based on a five-year business plan