Is Shearman & Sterling turning the corner? Senior partner Rohan Weerasinghe certainly thinks so. “We’ve been very actively focusing on getting the firm structured so that when the upturn comes we’ll significantly benefit from that,” he says. “I’m fully expecting that we’ll go right back to the trajectory we were on before the downturn.”
That trajectory saw Shearman increase its average profit per equity partner (PEP) by 60 per cent between 2004 and 2007. Although the global economic meltdown has affected Shearman at least as much as the other top New York full-service firms, the firm has also faced internal issues that have led to the loss of a string of key partners.
But there are definite signs that the most turbulent period in its history is behind it.
Don’t look back
Weerasinghe has been in the hot seat during that period. Over the past two years Shearman has faced not only the impact of the economic crisis and the attendant falloff in deal volume, but the exits of partners such as Peter King in London, in Germany Rolf Koerfer, Gottfried Breuninger and Astrid Krüger and most recently a pair of antitrust partners in Brussels, not to mention the entire Mannheim office last year.
The firm’s financials were also hit by the downturn – although it is hardly alone there. Global revenue dipped by almost 5 per cent last year, from $921m (£579.26m) to $876m, while PEP was down by around 10 per cent to $1.67m.
Now, however, Weerasinghe is confident that the future looks decidedly brighter. The week The Lawyer met him in the firm’s Manhattan office coincided with the first anniversary of Lehman Brothers’ bankruptcy filing.
Weerasinghe recalls “a reasonable degree of excitement” about what was happening, mixed with concern, “because we were obviously cognisant of the troubles these institutions were going through and the issues faced by people we’ve worked with for many years”.
When quizzed about the shape of the firm, and in particular the finance practice, Weerasinghe highlights the relationship with key client Merrill Lynch, one of the highest-profile casualties of last year and now part of Bank of America (BofA). Shearman advised Merrill on the deal.
“We continue to represent BofA and the people who were both there and who went there as part of the combination,” insists Weerasinghe. “Even though Merrill is no longer an independent institution, we’ve worked with BofA before and we continue to work with BofA. It continues to be extremely strong. Absolutely.”
However, Weerasinghe refuses to comment on the controversial litigation with the SEC, in which Shearman received a prominent slap last month from Judge Jed Rakoff.
Weerasinghe is less interested in events a year ago than today’s markets and is far happier discussing what the future might hold than Shearman’s rather checkered recent history.
“We’ve been operating under an overall strategic vision for several years, certainly since I started as senior partner, which is a mid- to long-term strategy,” he says. “Our financials improved very rapidly on a profit per partner basis and, although in 2008 those numbers were down, it was still our second-best year. I certainly don’t expect this to be more than a one- to two-year hiatus in this trajectory.”
Weerasinghe’s optimism can be backed up by a decent dealflow (see box). Two former partners (who prefer not to be named) endorse his claim that the firm is on the up.
“Shearman got hit quite significantly in capital markets and M&A during the downturn, but now Germany’s been booming like hell and is still booming like hell,” says a former partner.
There’s a strong dealflow.”
Another recent departee says he still believes Shearman is “a good firm”, adding that he “never really thought it was in as much trouble as people said”.
These comments are backed by Aled Griffiths, editor of German legal market magazine Juve, who says the firm’s practice in that country is “absolutely outstanding”.
“By a long way they have the highest revenue per lawyer of any firm in the market at e1.19m [£1.1m],” says Griffiths. That figure is e200,000 higher than Hengeler Mueller’s. (See page 4 for an analysis of the German market.)
So it seems there is a momentum gathering around Shearman, although it might not have filtered through to the wider market yet.
“They’re in an interesting place in Europe at the moment, but seem to be struggling a bit with some misconceptions on performance and the London brand, particularly when recruiting,” comments Sloane Poulton, a director at recruitment consultancy SR Search. “We often find the market’s generally a bit out of date.”
Going up in the world
Europe, particularly the UK and Germany, has long been an issue for Shearman. Last May, when The Lawyer profiled the firm (12 May 2008), it described the pivotal US-UK-Continental Europe axis as “three independent island states”.
Since then the firm has relocated New York M&A heavyweight Creighton Condon to London in an attempt to foster cross-selling between departments and improve inter-office communications.
There is precedent in Shearman relocating its top M&A partners to London. Between 2002 and 2005 current co-head of global M&A George Casey was based in the City.
“It’s great to have Creighton there,” says Casey. “He’s a trusted adviser.”
Since his relocation there are signs that the attempts at improving office referrals have paid off, with a raft of cross-border deals resulting from better communications. These include the German office’s referral of Qatar Investment Authority’s Canary Wharf investment, the Abu Dhabi office’s referral of work throughout the network on deals for Mubadala, Ipic and Aabar, and London’s referral to jurisdictions including the US, Italy and Germany of restructuring mandates for Head and Ineos.
“There’s been much better cooperation recently on cross-border matters, such as the Novartis deal,” says Griffiths. “Before, Germany was effectively a standalone practice. It felt it always fed into the network but there wasn’t enough coming back.”
A former partner echoes Griffiths. “Creighton’s very good at integrating and since his efforts cross-selling has picked up significantly,” says the ex-partner. “He’s a great moderator and integrator.”
Condon is undeniably a heavy hitter. He is also the regular outside-US lawyer for Cadbury, which Shearman is representing (with Slaughter and May) on the takeover bid by Kraft. It is entirely coincidental that Condon was based in the UK by the time Kraft’s bid was launched, but that is just the type of good fortune any firm needs from time to time. It looks as if Shearman might be getting the rub of the green.
The firm’s litigation group is also thriving. In the summer it hired four laterals in the US with the aim of building a global platform in white-collar crime.
“At the strategic review last year it was determined that litigation would be a core practice group,” recalls another former partner. “Immediately there was more investment in that area.”
The firm is also benefiting from its geographic spread, particularly in the Middle East, where the strength of the Abu Dhabi office has had a positive impact on the entire regional practice.
“Shearman’s had a long-term commitment to the region and has got very close to some influential people,” says a former partner. “And not just in Abu Dhabi, but also Qatar. It’s paying off at a time when other jurisdictions might be finding it tougher.”
Last week Shearman’s international winning streak continued when São Paulo-based partner Andrew Jánszky advised the underwriters on Brazil’s biggest IPO to date, the $8bn listing of Banco Santander’s Brazilian subsidiary.
The previously frozen debt capital markets, which at the start of 2009 were effectively open only to investment-grade deals, have also been showing signs of defrosting, to Shearman’s benefit.
New York partner Lisa Jacobs has been involved in fundraising for the automotive sector, including a string of debt buyback deals relating to Ford’s restructuring. And in the same week as the Santander IPO Paris partners Hervé Letréguilly and Robert Treuhold advised Société Générale on its e4.8bn rights offering.
The problem of profit
But there are still plenty of issues to address. For one, Shearman still has nothing like the team or relationships it needs outside Germany to build a credible corporate practice.
The loss of King to Weil Gotshal & Manges last year was a blow both to the London office’s capabilities and credibility. It left just Laurence Levy as a heavy-hitting M&A partner, although that has since been partly addressed by Condon’s arrival.
Still, the market perception is that Shearman has struggled to build a credible M&A practice in London.
“It’s a mystery why,” says one former partner. “There have been frantic efforts to hire laterals. Some have come and not stayed. Others, the real stars they wanted, they didn’t get. The bottom line is they still haven’t created the M&A footprint in London, and also in Paris.” (That said, the firm will point to recent solid ranking in M&A deals tables.)
Part of the reason is undoubtedly PEP. Contrast Shearman’s $1.67m with Weil’s $2.3m and the mystery of King’s move is at least partly solved.
PEP is also partly to blame for the market perception that Shearman is not playing in the same game as the firms it thinks of as its peers. One New York Shearman partner describes it as “a gross simplification” to say the firm’s PEP is to blame for the defections, but getting it back to the level of Sullivan & Cromwell or Simpson Thacher & Bartlett certainly would not hurt.
In the longer term it needs to be featuring regularly on the kinds of critical matters that those firms garnered during last autumn’s meltdown.
“I don’t think the lower PEP is really the issue,” says a former partner. “They see themselves as being in a peer group with Sullivan and Simpson and so on, but the reality is they’re in a different league, not only in terms of PEP, but also of the quality and nature of the work in which they regularly get involved. Yes, they did the Merrill-BofA deal, but look at the instructions at the height of the downturn and who did what. Shearman got some sovereign wealth deals, but not much more.”
For Weerasinghe, the game plan must be to play to Shearman’s strengths. That means continuing to build up in the Middle East and capitalising on the long-term investment, mining the German contacts and leveraging off Condon’s ability to motivate partners, and accessing the highest level of financial institutions for capital markets mandates.
“Make that the engine of the future growth,” says one former partner.
To be fair, that seems to be what Weerasinghe is trying to do.
Shearman’s recent key mandates
- Advising Cadbury on Kraft’s £10.2bn bid
- Underwriter on HSBC’s £12.5bn SEC-registered rights offering
- Underwriter on Ford Motor Credit Company’s $1.75bn notes offering
- Emirate of Qatar on investment in Volkswagen and Porsche
- Abu Dhabi National Oil Company on $10bn gas deal
- VisaNet on IPO
- Société Générale in connection with its e4.8bn rights offering
- Metallurgical Corp on $2.35bn Hong Kong IPO
- Danone on e3bn rights issue
- Novartis on its $1.2bn acquisition of the generic cancer drug business of EBEWE Pharma
- Underwriter on Santander’s $8bn IPO
- Abu Dhabi’s Atic on its $5.6bn investment in Singapore’s Chartered Semiconductor Manufacturing