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In April this year the online US law firm merger tracking service hosted by legal management consultancy Altman Weil reported 17 acquisitions in the first quarter of 2008.
According to Altman Weil principal Tom Clay, the number of mergers “significantly surpassed” the equivalent time period in 2007, when only 10 mergers were reported. “We don’t expect the pace to slacken in 2008, even in the face of a looming recession,” Clay added. “Many firms are talking and they’ll continue to make deals.”
Legal market mergers are nothing new, but the past few years have seen rapidly accelerating levels of consolidation throughout all levels of the market.
Bulk does not equal elite, but it is an indisputable fact that some of the most significant law firms of the next 10 years will be merger-related products.
As reported by The Lawyer earlier this year in its US Top 50 (24 March), it is not only merger activity that will shape the next decade’s legal market. Alan Hodgart of management consultancy H4 for one is also convinced that this year’s financial results from Latham & Watkins and Skadden Arps Slate Meagher & Flom, which saw both firms break through the $2bn (£1bn) threshold are the clearest evidence yet of the emergence of tomorrow’s leading firms.
“There’s absolutely no doubt,” he told The Lawyer (18 February). “You can certainly see it paying off for the firms that have made the international investment.” There is no doubt that this is true, but for getting there quick you still cannot beat a merger.
Another respected law firm consultant Bruce MacEwen, of legal blog Adam Smith, Esq, claims there are signs that firms are following an increasingly prevalent structural trajectory already seen in many other sectors, including the automotive, liquor and financial services industries.
This pattern, which he labels “the hollow middle”, sees firms migrating both to the high-end, high-value and premium-quality level as well as the no-frills, low-end commodity level.
As he says, the structure does not leave a lot of comfortable territory remaining in between. “My hypothesis is that our market is going in the same direction,” says MacEwen.
On his website MacEwen offers a number of verbatim comments from concerned lawyers reflecting the same point of view: “What happens to mid-sized firms in Europe? Will they disappear over the next 10-15 years as a result of the inflow of US and UK firms? What should our US strategy be, with many former sources of referrals now setting up shop next door? And if mid-tier firms are to stay, what will their role be?” What indeed.
Several of the firms The Lawyer believes will, in time, be leaders in this new market have already faced this new reality head-on. A significant number of the most dynamic firms in the market currently are the result of mergers, among them Kirkpatrick & Lockhart Preston Gates Ellis (K&L Gates), Reed Smith and to a lesser extent Dechert.
It is no coincidence that these firms are also headed by some of the most dynamic lawyers in the business (respectively Peter Kalis, Greg Jordan and Bart Winokur).
The current daddy of them all is DLA Piper.
On 18 February, in the same issue that revealed Latham’s and Skadden’s £1bn triumph, The Lawyer reported that DLA Piper had become the largest firm by revenue in the world. It achieved it by an aggressive policy of merger-driven international expansion.
Rivals may carp on about cohesion risks in the context of such accelerated growth, but DLA Piper is increasingly being seen as a go-to place for ambitious entrepreneurial partners willing to swap individual autonomy for the chance to build practices individually. Cahill Gordon & Reindel partner Roger Meltzer’s move last year is one clear example.
Not yet elite, at least not across the board, DLA Piper could one day make that investment bank relationship quantum leap.
Another recent entry to the merger-driven megafirm club is Dewey & Leboeuf, which sealed an accelerated (read ‘shotgun’?) marriage last year.
The truth is stark: Dewey Ballantine had stagnated in comparison with the white shoe elite; LeBoeuf Lamb Greene & MacRae knew it had to leap, rather than hire incrementally, to lift it up a notch or three. The component parts (Dewey’s New York M&A capability and LeBoeuf’s energy and insurance sector focuses) created a dynamic force in New York that is more than the sum of the previous partnerships.
Four firms that miss the elite
Jones Day made its big play for transatlanticism when it merged with mid-market UK firm Gouldens, but it has failed to translate this into a marketleading position. The US firm ripped the heart out of the diminutive City player, but what it replaced it with is anything but clear.
True, Jones Day has a significant Asia presence and its decent coverage around the globe is reflected in its strong showing in the M&A tables (it was third in North American M&A in terms of volume last year).
But the firm lacks transparency – a style that appears to be a throwback to a bygone age and which has hampered its efforts to build an international brand. It is also nowhere on Wall Street and absolutely invisible in London – and this by choice.
Shearman & Sterling is the firm that is likely to be most aggrieved at not being included in the elite. If its partners are honest with themselves, however, they will know the firm has blown it in recent years.
Shearman’s former stellar finance team had rock-solid links with top-tier clients, in particular Citigroup. But a lack of strategy and client development has weakened its position and slashed its share of the market.
“There was time when Shearman was nearing the top tier in New York,” says one US partner.
“The problem the firm had is that its partners didn’t want to share the relationships with more junior partners. Over the years, when more senior guys retired, there wasn’t anyone to take over the relationship with Citi properly. Other firms are bound to swoop in if you don’t stoke the fire.”
Recently managing partner Rohan Weerasinghe has made attempts to rescue the capital markets team by launching a review and a restructuring of the capital markets group.
Weerasinghe’s review was designed to refocus the team on its core banking relationship. It concluded with the bank finance, structured finance and project finance teams
combining into one group.
But while the review served to streamline the function, it is yet to get Citi and other clients back to where they once were. And in the meantime the likes of Cahill Gordon & Reindel and Weil Gotshal & Manges have built relationships with Citi in banking and leveraged finance.
The New York office still benefits from the expertise of well-respected Shearman banking partner Bill Hirschberg, who has an existing relationship with Citi – but this is not enough.
“You need to have people coming through the ranks who get to know these clients,” says a US partner. “It’s something every firm should impress upon its partners and its something Shearman, certainly in New York, hasn’t done well.”
Shearman had one of the best opportunities to become a transatlantic elite firm. However, its inability to maintain its core relationships, and the unhealthy competitive streak between offices in the network, hampered growth.
Herbert Smith has simply been too conservative to push itself into the transatlantic elite, or to rival the UK magic circle, despite its fond hopes at the beginning of the decade.
The election of leading litigator David Gold to senior partner offered a potential change.
To the outside world Gold is a bold decision-maker and it was felt that he would want to make a mark on the firm. But Gold’s style alienates as many as it inspires, and the political chicanery in Herbert Smith’s partnership has meant the firm has been unable to make any decisions that would involve strategic investment. It still makes its rival firms nervous, though: when is it going to leap? And if it does (with a Wall Street giant) it would be a heady transformation indeed.
Recently, Herbert Smith has shown some boldness in launching its Middle East operations and its London finance practice, and looks to be well positioned for the evolving Indian market.
But the firm has made little forward motion with its European allies Gleiss Lutz and Stibbe and has failed to attract Spanish firm Cuatrecasas to join it in the fray.
How long will its key partners have the patience to hold out?
Two years ago Orrick Herrington & Sutcliffe looked as if it would be a shoo-in for the emerging transatlantic elite. Since then it has failed to follow up on that momentum.
Orrick was the prime mover following the disintegration of Coudert Brothers. It bolstered its London corporate team, Russian office and Chinese offering with choice bits of Coudert, but has failed to translate that into global domination.
Orrick’s attempt to merge with Dewey Ballantine could have begun to propel itself into the transatlantic elite, but Dewey was not quite ready for the zeal with which Orrick (or chairman Ralph Baxter) pursued it.
So today Baxter has the personality, vision and leadership spiel, but not the goods to back it all up. You would not bet against him and his highly able management team rectifying Orrick’s failure to be recognised as a transatlantic powerhouse, but there are still holes in the offering.
London is yet to be a real force, despite numerous attempts to bolster it and the best efforts of head Martin Bartlam. France is much stronger, led by the indefatigable European managing partner David Syed, but Germany is a gaping hole that hinders the firm’s European ambitions. And the truly transformative New York- London merger is still required if Baxter is not to be remembered as an overenthusiastic leader who can talk the talk, but ran out of room to walk.
It is still unclear whether the same can be said of Mayer Brown. The firm also sealed its entry into the transatlantic club with a major merger in 2001 between Chicago-based Mayer Brown & Platt and UK mid-tier firm Rowe & Maw. And no amount of spin can hide the fact that this Chicago powerhouse is a wannabe in the key global financial centres. The woes of not being a New York-based firm.
What Mayer Brown has in its favour is a dynamic leader in the shape of global vice-chairman Paul Maher. If you have not quite got the institutional law firm brand yet, you need a dynamic individual who can energise an organisation.
The driven Maher is certainly that. Much of the current changes at Mayer Brown, which has seen the partnership trimmed drastically, are down to him. And while Mayer Brown may not be in the top tier yet, its decision to snap up Johnson Stokes & Master immediately makes it credible in Asia, which is one of the firm's key global battlegrounds.
But merger is not the only strategy to elevate a firm into the elite. For years White & Case has operated differently from most other US firms. While its headquarters remains in uptown Manhattan, White & Case was one of the first firms in the market to convincingly deserve the label ‘global’.
The firm was early to spot the necessity for a law firm with international pretensions to be in London. As MacEwen puts it on his blog: “If you’re like me, you have to wonder why it took so long for US firms to hear this wake-up call.
"Those who got there early (just for example Cleary [Gottlieb Steen & Hamilton] in 1971, White & Case soon after) have established leads it will be difficult to match.”
White & Case’s network, built off the back of a standout project finance practice, has long covered Europe, the Middle East and Asia. Its New York - London axis has also been solid for years, but the management crisis that came to a head earlier this year (resulting in the much-publicised defection of finance partners Maurice Allen and Mike Goetz to Freshfields Bruckhaus Deringer) proves there is still plenty to do.
Rarely has the momentum of one key global office been dominated by so few leading partners. The arrival of Allen and the transfer from New York of Goetz, the darling of Deutsche Bank, heralded an unprecedented growth spurt in the City.
Allen’s unique personal dynamism caused a cabal of the finest financing lawyers to jump ship – most notably from his former firm Weil Gotshal & Manges – and created a surging momentum in the City over the past several years.
Put simply, White & Case could not, or did not want to, cope with their demands for firmwide executive clout to be bestowed upon them. Empire building from afar was not to be welcomed. White & Case is solid and unspectacular among the Wall Street firms. Its challenge is to replicate the Allen /Goetz phenomenon in Europe, although using personalities who will not overshadow the New York hierarchy.
The firm has historically regarded London as a crucial part of its network, one that, with New York, underpins the rest of the firm.
There remains more than enough potential there among its finance and capital markets team to maintain its prominence in the capital and beyond, particularly into emerging markets. The question for White & Case’s new management is whether or not it is hungry enough.
Nice guys don’t come first… do they?
Lovells was one of the first UK firms to eye the US market. Back in 1995 it opened an office in Chicago to handle insurance litigation work. It was a farsighted idea, but Lovells never quite capitalised on its early start. Its US capability now numbers 24 partners and is squarely focused on litigation, one of its key practice areas. However, it has simply not had the killer instinct to make the tough decisions and keep its international corporate practice as a top-tier contender. Certainly it has undergone a lengthy partnership restructure, but its consensus-led culture has meant it has eschewed a Linklaters-style shake-up.
And yet its global reach remains promising: a good European spread, investment in the Middle East and a longstanding Asia practice. A perfect merger candidate for a more ruthless US firm, perhaps. Also, its recent investment in its global IP offering shows a certain amount of lateral thinking.
Baker & McKenzie is in a similar cultural mould. Long derided as a franchise operation, it has worked hard on knitting together a more coherent international operation.
London, one of the most profitable offices in the network, has become key to its newfound strength. It may not be getting the top-line cross-border M&A mandates, but in London at least it has developed a respectable corporate practice. Furthermore, it has plenty of clout in the boardrooms of multinational companies when it comes to IP and commercial work.
Bakers now exhibits a certain strategic opportunism – it snapped up Coudert Brothers’ New York office, which gave it more heft in the US, but it has not managed to move up the food chain on Wall Street. On the positive side, it too is spectacularly strong in Asia.
Ashurst, one of the group of elite silver circle firms in the UK (the others are Herbert Smith, Macfarlanes, SJ Berwin and Travers Smith), is the most international of its peer group. In some ways Ashurst is simply a more beautifully formed version of Herbert Smith.
While Herbert Smith does have significant overseas coverage, this is primarily via its unwieldy alliance with Gleiss Lutz and Stibbe. Herbert Smith has no say in the running of its alliance firms and cannot impose a growth agenda on them. Ashurst, whose French, German and Spanish operations have mushroomed in recent times, operates internationally as a single partnership with non-London revenue currently running at around 30 per cent of total fees.
Ashurst also understood the investment banking surge of the past decade better than Herbert Smith, while several of its US referral firms particularly appreciate its deal-doing prowess. Attitudinally, a number of Ashurst’s lawyers (think Charlie Geffen, for example) could easily relocate to New York and fit in.
In 2006-07 Ashurst had the largest increase in average profit per equity partner (PEP) among its peers, a 36.4 per cent jump that took PEP to £956,000. This year’s rise is likely to be more muted, with Ashurst’s focus on private equity and structured finance likely to adversely affect fee income and the bottom line.
On top of the practice area stress there are, of course, two big holes in Ashurst’s international network – China and New York. Ashurst’s one-time obsession with securing a US merger (it has, in fairly recent years, courted both Latham and Fried Frank Shriver & Jacobson) has been replaced by a single partner jetting in once a month. Corporate partner Giles Boothman filled the role for a three-year stint until January this year, when former Madrid head Duncan Stiles took over the meet-and-greet duties.
Early indications are that Stiles’ approachable style will pay off in terms of referrals and corporate contacts. In the long term, Ashurst is ideally placed for global
consolidation, unencumbered as it is by hordes of less well-performing foreign lawyers. It will, however, need to find yet another US suitor to dislodge any of the Sweet Sixteen.
Cadwalader Wickersham & Taft, with its aggressive culture and equity partnership shrunk to next to nothing, is discounted as a major international player by many of the elite New York firms. Its credit crunch related woes earlier this year will have given a few of the partners at those firms some satisfaction and confirmed in their minds that it was a write-off as an international power. That would be a mistake.
Historically, Cadwalader has focused on capital markets. Its focus in New York on the securitisation and collatoralised debt obligation (CDO) markets saw Cadwalader’s profitability rocket in recent years, reaching $2.9m (£1.59m) in 2006.
While New York focused intently on capital markets, London’s growth was largely due to former London managing partner Andrew Wilkinson. The former Clifford Chance partner built up a hugely impressive restructuring team that scored high-profile mandates on Eurotunnel, British Energy and TXU. Wilkinson defected to Goldman Sachs last year.
Meanwhile, Cadwalader refocused on its core capital markets capabilities, hiring ex-Allen & Overy (A&O) CDO partner Angus Duncan and Norton Rose securitisation partner Christian Parker while maintaining a restructuring practice with partners Michelle Duncan, Richard Nevans and Peter Baldwin.
In New York the firm has adjusted its practice areas post-credit crunch. Earlier this year (11 February) The Lawyer reported on Cadwalader snaring Latham private equity chief Ron Hopkinson to spearhead the firm’s assault on the private equity market.
The corporate and finance groups, headed by Frank Bevilacqua and Chris White respectively, were combined in March, with senior management being restructured, which saw White take up the post of firm chairman.
Cadwalader has had some tough times of late. Laying off 35 structured finance associates in January illustrates how badly the credit crunch has hit the capital markets firm. But while its profit dipped by 6 per cent in 2007 as a result of market volatility in the second half of the financial year, the fall still left the firm ranked fifth in terms of US profitability. Do not bet against a Cadwalader rebound.
There are certain US West Coast-based firms that are aggressively targeting this global emerging market, but Gibson Dunn & Crutcher is not among them. There is no doubt that Gibson Dunn is a top-quality firm, but in terms of global coverage it is not exactly known for rolling out the international offices.
Arguably that caution over overseas investment is part of the firm’s brand. As Gibson Dunn corporate partner Dennis Friedman puts it: “We may have only recently opened in Dubai [late in 2007], but we have a very large percentage of deals coming out of there as a result of us building relationships over years.”
In contrast, West Coast rival Paul Hastings Janofsky & Walker is on a mission for growth. And over the past five years it has not only succeeded, it has outstripped Gibson Dunn and all of it local rivals bar Latham (which now barely counts as a West Coast firm).
In Seth Zachary, Paul Hastings has a top-tier leader and it tells a great West Coast ‘heads east’ growth story. But it will have a tough time persuading London to get excited.
The battle of Hastings will be fought in New York and London. It has the armoury and the essential DLA Piper style of go-getting opportunism to capitalise on a superb blue-chip client base in the world’s financial centres.
It has yet to discover its ultimate unique selling point in an ever-crowded market, but that is not to say it will not do so.
