Shared wisdom

The Lawyer UK 200 Annual Report 2008 is out, so in our yearly fantasy stock market update, where should the smart money be placed?

Shared wisdomIn our fantasy stock market world, magic circle firms are the equivalent of the FTSE100: they are large, dependable and do not ­produce too many surprises. In current market conditions, where there is very little growth around, that is an asset in itself. The group’s financial results for 2007-08 did not disappoint, with Freshfields ­Bruckhaus Deringer standing out for its stellar growth in profitability.

Clifford Chance has remained a hold for our stock pickers for the past two years. This year is different – the firm has become a buy. There is no disputing its behemoth status on the transatlantic stage, but ­revenue and average profit per ­equity ­partner (PEP) growth this year were relatively muted. Fees, which hit an impressive £1.33bn, rose by 11 per cent, while PEP increased by 13 per cent.

Compared with last year, when the firm’s imaginary shares would have been expensive after a PEP rise of 25 per cent, Clifford Chance’s shares would this year be relatively cheap. The firm is far from hitting its peak – it has much to do on the international scene (specifically in the US and Asia), and with global managing partner David Childs running a tight ship this will almost certainly be done successfully.

Growth will not be immediate – amid current market conditions it could be several years before ­investment makes any kind of return, but investors would be well advised to take advantage of the firm’s pause in activity to snap up some bargain shares. They are sure to make a ­profit in the future.

Last year we reckoned Linklaters was a buy; this year the recommendation is hold. The firm has put the torrid times of a few years ago well and truly in the past and this year posted turnover growth of 15.3 per cent to £1.29bn, while PEP rose by 11 per cent to £1.44bn.

The firm is clearly following a steady course under the watch of new managing partner Simon Davies and, notwithstanding a bit of restructuring in Eastern Europe, its share price is unlikely to have changed drastically from last year’s. Selling would not realise much of a gain, and while new investors would stand to gain in the long term, they would probably find better value elsewhere.

Freshfields is an interesting case this year. While the firm clearly has great times ahead, it is tipped as a sell ­purely because its extraordinary year will not be repeated. Last year it was a hold, the year before a buy, but with turnover rising by 19.5 per cent to £1.18bn and PEP rocketing by a ­massive 39 per cent to £1.45m, only a foolhardy investor would choose not to cash in.

Like Clifford Chance, Freshfields is destined for even greater things in
the coming years, and is certainly well placed to pull off a potentially transformative transatlantic merger. Despite this, chief executive Ted Burke fully acknowledges that last year’s ­performance will not be repeated. While it is now time to sell, the firm will make a canny investment further down the line once its share price has readjusted to the market.

Allen & Overy (A&O) remains a hold. Having seen its PEP lag behind the rest of the magic circle’s, in 2006-07 the firm caught up and in the last financial year it broke the £1m ­barrier for the first time, rising by 9.5 per cent to £1.12m, while fee income increased by 14.5 per cent to £1.02m. This is a strong showing, but not enough to radically alter its share price.

The firm still has the potential for serious growth, but with its revenue figure still some way behind the rest of the magic circle’s, for now it remains a hold.

Elsewhere in the top 100, CMS Cameron McKenna remains a hold after another excellent year. There is still opportunity for growth in the firm’s booming Eastern Europe offices, but London dominance means it is unlikely to grow by as much next year.

Having put Simmons & Simmons down as a hold last year following a stellar year, with PEP up by 22 per cent to £647,000, this year we ­reckon it is time to sell. The firm has grown fantastically since its torpid years at the beginning of the decade and there is more potential for growth in places such as the Middle East and China, where it has new but expanding offices.

However, Simmons and its overseas offices have a history of mishaps. It has recruited heavily in Italy and China before, only for it to all go ­horribly wrong. The fact that Simmons has not fully shaken off its image as a ­laggard means its share price could still be undervalued, but despite that, we reckon, with a tough year ahead, Simmons may have peaked.

Ashurst has gone from buy to hold after a strong year, while Taylor ­Wessing, last year tipped as a buy, is now a recommended sell. General turmoil in Paris, while unlikely to affect Taylor Wessing’s finances, will shake investor confidence in the ­network as a whole.

Hammonds has not had a brilliant year, but at least its shares will be rock-bottom cheap. Managing partner Peter Crossley has outlined plans for international expansion, which could transform the firm. If they do not, its shares are so cheap that it would not be a massive loss. We ­reckon it is probably worth a punt.


What a difference a year makes. When last year’s edition of The Lawyer UK 200 Annual Report was published in early September, the credit crunch was just a few weeks old and law firms were predicting optimistically that its effects would be over by Christmas.

A year on and the economic situation remains precarious, with practically everyone eyeing the year ahead with more than a little trepidation. Troubles in the wider economy have been reflected in stock market turbulence, with investors losing fortunes almost as soon as they gain them.

For the past two years, as part of first the UK 100 and then the UK 200, we entered a hypothetical world where all 100 of the UK’s top firms were listed entities. Based on the firms’ prior 12 months, and on how we felt they would weather the year ahead, we gave our recommendations on whether the would-be investors who populated this imaginary world should buy, sell or hold their positions in said firms.

This process has again been repeated and, given that the firms in question have had to weather some pretty daunting hypothetical stock market conditions, it has been given more depth.

The methodology remains the same as last year. For firms that have had a strong year, but are not yet at their peak, the recommendation is a hold. This assumes shares in these firms are already owned, so the hold recommendation can also be seen as a tip to buy – we believe there is still money to be made from these firms.

At the same time, firms with a hold recommendation will already have seen their shares rise by a considerable amount over a long-term period. A cautious investor, of whom there will be many in the current market, may consider cashing in gains already made by selling.

The buy recommendation has been applied to those firms whose value is expected to increase, either because they have come out of an extended period in the doldrums or because some quality client wins or lateral hires are likely to translate into share price hikes in the not-too-distant future.

Alternatively, a blip in an otherwise strong partnership’s performance could have caused a firm’s share price to fall, resulting in a buying opportunity. The expectation in this case is that the firm will recover and be revalued in the coming year.

A sell can apply to those firms whose performances have been so poor that they do not warrant being held any longer. However, that implies an investor is selling at a loss due to a significant drop in share price.
The recommendation has also been applied to those firms that have seen strong performances, but which are considered to have reached their peaks; continuing to hold will not see any increase in value, so it is best to cash in shares while they are at a high.


While our buy, sell and hold tags are applied with the small-time investor in mind, when the Legal Services Act comes into force the way will be paved for big-time investors to acquire stakes in law firms.

The fantasy merger focus of The Lawyer UK 200 Annual Report 2008 has linked law firms with the aim of creating leaner, more profitable businesses. However, the big-business nature of law firms means that mainstream businesses are likely to want to invest.

Private equity houses, insurance companies and major conglomerates are all likely to want a piece of the action.

Of the larger UK firms, Lovells looks ripe for attracting external capital. While the firm falls well short of its rivals on profitability, on paper it has the makings of a sound business. It has an enviable global footprint and maintains a reasonably strong brand, despite major talent losses in recent years. Lovells could benefit from being bought out by a bigger business with a ruthless management team.

Smaller still, Travers Smith has had a poor year financially, with little hope of a pick-up in the months ahead. Fundamentally, though, it remains one of the strongest players in the City. Long the darling of the private equity world, a spell under the ownership of a buyout shop could be just what Travers needs to set it back on track. Maybe former private equity head Charles Barter, soon to join Bridgepoint Capital, could be persuaded to make an investment.

North of the border, all four of the Scottish big four firms – Dundas & Wilson, Maclay Murray & Spens, McGrigors and Shepherd and Wedderburn – are desperate to bulk up in the City. All four are also in favour of receiving external capital to fund this. Of the quartet, Dundas offers the best chance of a return.

Read the UK 200 Annual Report in digital format here.