No firm in the Sweet Sixteen typifies the downturn and recovery more than Simpson Thacher. After a gloomy 2009, it’s bullish about 2010
On 17 May The Lawyer will publish its annual analysis of the world’s elite firms, The Transatlantic Elite. This year the focus is primarily on the investments the leading firms – the group we dubbed the ’Sweet Sixteen’ – have made throughout the recession and are continuing to make as the fragile recovery shows signs of strengthening.
Firms do not come much more elite than New York’s Simpson Thacher & Bartlett, which has consistently ranked among the most profitable in the world.
Yet halfway through last year it looked like being a very different story for Simpson. To external eyes the firm looked vulnerable thanks to the virtual disappearance of one of its core markets, the highly leveraged private equity buyout. Then, in December 2009, an internal memo from executive committee chairman Pete Ruegger leaked onto US legal market website Abovethelaw.com.
The leak that was
The memo described what can only have been a particularly glum partnership meeting held on 8 June. In the memo Ruegger laid out in detail the pressures facing his firm and the steps it would need to maintain profitability, and even survive. The note related specifically to Simpson, but its contents were germane to the pressures facing any of the Sweet Sixteen.
Jumping forward several months, there is no doubt that some of Simpson’s core markets have recovered since Ruegger penned the memo (the firm has never commented on the memo, or indeed its validity). But many of the pressures that were facing the top firms back then, particularly client demands and pricing pressures, are still as acute today.
As a way of highlighting the pressures currently facing the Transatlantic Elite, the Simpson memo is hard to beat.
“As we dig out of the recession, hopefully with increased utilisation and decreased headcount,” ran the memo, “we should do better in 2010 and beyond, but we do not think our gross revenues and premiums are going to return to 2007 levels and our net income is unlikely to return to 2007 levels in the next couple of years.”
In his memo Ruegger followed this bald statement with some of the actions Simpson would need to take to maintain profitability. For some – particularly aspiring associates or older partners – it didn’t make for comfortable reading.
“We are going to need to continue to be extremely circumspect in making new partners, and we need to continue to have partners take advantage of our very attractive retirement benefits that commence at age 55,” Ruegger continued.
Ultimately in 2010 Simpson promoted six lawyers into the partnership, one more than in 2009. Back at the time of the memo, however, confidence was clearly low that the number of new partners would grow. Ruegger went on to offer more detail on exactly how dire the straits in which Simpson found itself were in mid-2009.
“[F]or the first five months of ’09, we are running at 1,530 annualised average hours. [May’s client hours per day were at a 1,669 annualised average hour pace.] If we run at the May pace for the next seven months, we will be at 1,612 average hours for the year. Obviously, this is not the 1,850/hr pace we would consider healthy.”
The price is light
Among the Sweet Sixteen there are several firms that could reasonably claim to be excepted from similar chargeable hours drops last year, in particular the restructuring powerhouse that is Weil Gotshal & Manges. But even Weil is unlikely to have escaped the impact of Ruegger’s next revelation.
“As you are all aware,” wrote Rueggers, “our pricing power is diminished. In more and more areas, clients are seeking discounts or other billing arrangements. On new business pitches, discounts are routinely being sought. In 2007, our realisation was 110 per cent; in 2008, our realisation was 97 per cent; for 2009, we originally budgeted 93 per cent, and we are now running at a realisation of around 89 per cent.”
Ruegger went on to deliver some more home truths to the Simpson partnership: “We want incremental business and we are realistic about what is needed to obtain attractive incremental business. We think we are value-added and should be paid as a top-tier firm with top-tier talent, but we need to be competitive with rates. We are giving discounts on some litigation; we are giving discounts on bank and investment bank house account matters; we give busted deal discounts; we are willing to fix fees. If a particular partner rate or particular class rate is a sticking point, we can discount those rates to be competitive. We can quote a blended rate. In brief, we are flexible on rates and want to do what we need to do in order to expand our share of the high-end business out there.”
Better? You bet
To some extent, that was then and this is now. Certainly, if you quiz a Simpson partner today on the state of the market, they will tell you that things have on the whole improved.
“Maybe what you’d heard from our competitors is more hopes than reality,” says one Simpson partner, only half joking.
True, as a fully paid-up member of the world’s legal elite, Simpson continues to feature prominently in this year’s Transatlantic Elite as one of our Sweet Sixteen, whatever last year’s memo might suggest.
Partners are now more than happy to highlight how the recovery in the global legal market – and some of the investments the firm has made during the downturn – has translated into a sharp upturn in Simpson’s fortunes.
Take Simpson’s decision to open in São Paolo late last year. This was primarily a defensive move made after the firm recognised it was losing business to firms with offices there.
“Historically we’ve been one of the top two or three New York firms in Latin America, but it wasn’t efficient any more not having an office there,” admits the Simpson partner, who preferred not to be named. “Also the wear and tear of going down there regularly was starting to get to some of our colleagues. It’s a very small, modest investment and it will pay for itself in its first year.”
Best of British
Arguably the firm’s star hire recently – and certainly in London – came in August 2009 when it brought in Clifford Chance M&A partner Adam Signy.
“We’d built up an English law acquisition finance practice, but frankly, although we had it on the finance side, we didn’t have the English law M&A capability,” admits the partner. “So Adam coming in was a defensive move. We then picked up the Pets at Home and Broadgate deals. It was reflective of our strategy of responding to a demand.”
The firm might not be gearing up to compete with Slaughter and May here but in terms of finding a natural fit for an elite English law M&A practice, Signy fitted the bill
In terms of the practice, the opening up of the corporate bond market and a good run in restructuring has helped offset the continuing softness in the M&A market.
By the year-end the firm had recovered enough to be able to post reasonably solid financial results, with only a slight drop in average profit per equity partner, from $2.48m (£1.64m) in 2009 to $2.41m.
Yet the pressure from clients is unlikely to go away as quickly as markets such as high-yield returned. “Firms such as Davis Polk [& Wardwell], Cravath [Swaine & Moore] and Simpson will continue to struggle,” says the managing partner of one New York rival. “Their old core clients have either gone out of business, been acquired or are becoming much more aggressive on fees. They’re not always going to be happy to pay $1,000 an hour, so some work’s going to get farmed out to second- or third-tier firms. They know they don’t always need a Cadillac service. Sometimes a Chrysler is fine.”
As Ruegger himself acknowledged in his memo, “the high-end, full-service firms are not going to escape the change in pricing that has occurred – [and] that includes S&C [Sullivan & Cromwell], Cleary [Gottlieb Steen & Hamilton, Davis [Polk and] Skadden.”