Business is booming in banking as companies strive to provide a one-stop shop for their clients' global ambitions. But are the UK's law firms up to the task or will they lose out to the worldwide might of the US? asks Chris Dignan.
Across the world, the banking business is undergoing fundamental change as banks fuel their appetite for mergers to adapt to the global demands of their clients.
The UK has seen several mergers: Lloyds/TSB; a string of link-ups between banks, building societies and insurance companies; and the current battle over NatWest.
US banks are increasingly joining forces with Continental firms, as seen with Bankers Trust and Deutsche Bank, and Warburg and UBS. The mergers continue and the full effect on firms who service the banks looks certain to change the way they do business now and in the future.
Those in banking firms seem split between optimism and pessimism. Some practitioners believe this is a golden opportunity to expand business, while others warn that several firms will be squeezed out because they do not suit the new-look business.
Maurice Allen, joint head of US firm Weil Gotshal & Manges in London, believes the situation derives from banks wanting to become global one-stop shops, in the same way as major accountancy firms have done and law firms are starting to do.
This accounts for the spate of mergers, as banks buy new services and reduce costs through economies of scale.
“Some banks had reputations as advisory banks but now they want to deal with loans, for instance,” says Allen. He points out that in a major transaction, it is more attractive for banks to deal with one firm than split services between companies.
Allen adds: “That also applies to banks who want to deal with one firm who can provide all the services they need. They then look for firms who can offer this.”
In a banking transaction, such as the Olivetti and Telecom Italia deal, the senior debt will often come under English law, while the high-yield will go through US law, but the sourcing may come from the Continent. Therefore only those firms with UK, US and European capability will be attractive to clients.
“It is very unattractive to split a deal between several firms who can deal with individual pieces of the transaction. When banks come together to sell a range of services to their clients, they are looking for law firms who can handle it,” says Allen.
He says US firms lead the field because they have either come into Europe and linked up with Continental firms, have recruited or have well-established UK offices staffed
with quality English lawyers.
Few UK firms have so far started down this road, with the exception of Clifford Chance, whose merger with US firm Rogers & Wells has given it a head start over rivals. Firms such as Linklaters and Freshfields must be seriously considering doing the same to keep their share of banking business.
“English firms need to develop US capability. Clifford Chance can say that they have done so, but few others can,” says Allen.
Not everyone agrees with this scenario. David Morley, managing partner of Allen & Overy's global banking practice, agrees UK firms need to boost their US side but for different reasons.”We and other firms need more US capability because US debt markets have products marketed in Europe, not because US banks are linking with Continental banks,” he says. “Also, high-yield offerings will be distributed in the States so you need US lawyers to deal with those transactions and we need to get a foothold in the US securities market.”
The major effect of current turbulence in banking will be the victims that lose out as banks cut their panels from around 60 to a dozen law firms in a drive to exercise more control over quality and adherence to their policy. “They will be the middle-sized firms who are not big enough to have the critical mass in finance or too large to be a niche firm. They are finding it difficult to maintain their banking business and could easily be squeezed out,” believes Morley.
Firms in that category appear to be Wilde Sapte, soon to merge with Denton Hall, which has lost its banking star James Johnson to Freshfields, and Simmons & Simmons, which has also been losing banking expertise.
Sean Pierce, banking partner at Freshfields, disagrees. He thinks mid-sized firms may flourish. “There will be big firms doing the jumbo transactions but this leaves a lot of second-tier banks out there as clients. They don't need the very top firms so I see this more as an opportunity for them rather than a problem.”
He believes the volume of work around at the moment means there is enough to go around: “We have seen a huge upsurge in work. There has never been a year like this for loan markets or refinancing.”
Firms also have to compete for business from the big three US investment banks – Goldman Sachs, Merrill Lynch and Morgan Stanley – as most of the major cross-border deals involve at least one of them.
However, the muddying of banking waters can be seen as an opportunity to adapt rather than events overtaking UK firms, says Clive Barnard, head of international finance and banking at Herbert Smith.
He says it is possible that banks will cut the number of firms they use because of the mergers, but believes this will create new contacts. “It is a question of attitude, whether you regard this as options being closed down or other options being opened up,” Barnard says.
“Recently we had a situation where we were not on a bank's list but they came to us asking us to quote for work after talking to the bank they were linking up with. It is all a question of getting exposure we didn't have before.”
He also says that if partners were sacked by a firm, they could take banking clients with them because a bank often thinks dealing with the right individual is more important than the firm they work for.
“It is a myth that the market is sewn up by a small group of firms. It is there for those prepared to succeed,” believes Barnard.
Firms who bid too highly will have to bring down profit margins in one side of the business and make them up in other areas if they want to develop a client.
Most practitioners say the current spate of UK banking mergers will not seriously threaten business for law firms, pointing to a fairly steady level of activity and the fact that from the law firms' point of view, the banks involved are not major players in the international market.
And even if firms feel the pinch from the shift in banking practice, they may enjoy a spin-off. The cut-throat hiring and firing bonanza among the heads of banks and building societies as they jostle for position holds potential for legal work. Peter White was sacked earlier this month as chief executive of Alliance & Leicester during talks with Lloyds TSB and Bank of Scotland. He has now hired Simmons & Simmons to consider a case of unfair dismissal.
Where one leads, others are sure to follow.