HSF generates £800m of revenue in first year post-merger

Herbert Smith Freehills (HSF) turned over £800m in its first full year as a merged firm, with a net profit of £232m giving it a margin of 29 per cent for 2013/14.

Following the combination of the respective firms’ profit pools and subsequent restructure of the combined firm’s remuneration system, average profit per equity partner (PEP) for the year was £741,000.

The firm, which was created via the October 2012 merger of Herbert Smith and Australia’s Freehills (28 June 2012), said the results represent a 5 per cent year-on-year rise in revenue, an 11 per cent rise in profits and 12 per cent rise in PEP. However, joint CEO Mark Rigotti admitted that the percentages were moot given that the firm merged part-way through the previous financial year.

Mark Rigotti

“We created pro-forma results by taking the actual seven months we were a merged firm and adding the five months of separate results to that,” he said, adding that the 2013/14 figures were compiled on a currency-neutral basis. Around 60 per cent of revenues are non-sterling and the firm, which bills in around 12 currencies, converted all income back to sterling to come up with a weighted average exchange rate for the year. The same rate was applied to the 2012/13 figures.

Despite the difficulty in coming up with an exact comparison, both Rigotti and fellow CEO Sonya Leydecker said they were pleased with the firm’s performance.

“I’m really pleased; we’ve had a good year with strong performance,” said Leydecker. “Our vision when we merged was to create a global elite law firm and we feel we’ve made excellent progress towards that.”

“It’s been a very good result for us,” added Rigotti.

While the CEOs refused to divulge how the revenue was broken down by region, Leydecker said the year was marked by challenging economic conditions across the globe in the first half followed by a return of activity in the second. In particular, she said the UK part of the business has benefited from an uptick in disputes work as well as a return of London IPOs, while the firm’s German and US bases, which opened in April 2013 (13 February 2013) and September 2012 (3 July 2012) respectively, had made good contributions.

Leydecker added that the firm’s Belfast base, which opened in 2011 (24 November 2010) as a document review centre for the disputes practice but now supports all practice areas, had an “exceptional year”.

Sonya Leydecker
Sonya Leydecker

In terms of practice areas, disputes and corporate generated roughly equal amounts of turnover, although in Europe corporate is slightly larger. Rigotti said that “part of our aspiration is to grow disputes in Europe to be more in line with the rest of the firm”.

Rigotti added that the firm’s finance team, which legacy Herbert Smith failed to expand, was producing a greater share of revenue than at the pre-merger firms. Ahead of the firms’ merger Herbert Smith combined its real estate and finance practices to mirror the set-up at Freehills (9 July 2012).

“The finance team post-merger looks very different,” said Rigotti. “I don’t pretend we’re a finance firm like some of our peers like Clifford Chance or Allen & Overy but there’s been a marked step-up as a result of the merger.”

Elsewhere, the firm has reduced its net debt figure by around £40m and revamped its remuneration system. Earlier this year The Lawyer reported that HSF reported a net debt of £124.9m in its global LLP accounts (7 April 2014).

The new remuneration system, which combines Herbert Smith’s 43-100 point lockstep with Freehills’ modified and managed lockstep, still uses the Herbert Smith points system but incorporates a seven-category balanced scorecard from which bonuses are allocated.

Certain partners in Australia can be remunerated above the top of lockstep but the total pool available for distribution in Australia does not alter. Rather, if anyone does break lockstep, the total left for the remaining Australian partners will be smaller.