As team GB law firms bulk up for the global challenge, mergers have transformed this year’s rankings – with some surprising results
There’s no doubt that mergers – and a revised methodology – have been the main contributors to the 18.4 per cent increase grossed by the top 100 UK-heritage firms. Last year the top 100 firms turned over £14.2bn. This year it’s £16.88bn.
These include Verein or equivalents, meaning that Norton Rose – through its deals in Canada, South Africa and Australia – has a group revenue of £822.3m compared to the estimated £355m in its UK LLP. Similarly, the revenue of Cameron McKenna, the British element of CMS, stands at £227.6m, while its combined turnover is £692m.
While some will argue that a Verein structure is not pure turnover, it is good enough for Baker & McKenzie and a host of non-legal professional services firms. Counting group revenues as a single figure changes the pecking order drastically.
Big and clever
There is a bigger story behind the various techniques of revenue attribution. The biggest risers in the chart are the products of mergers, and the recalibration of The Lawyer’s UK200 shows how transformative some of those deals have been. Prior to its transatlantic combination with Hogan & Hartson, Lovells was beginning to trail the magic circle badly in revenue terms, but Hogan Lovells is now one of six firms whose turnover is over £1bn. The chasing pack includes Norton Rose, CMS, Herbert Smith, Slaughter and May, and Ashurst. Projecting forward, however, an interesting dynamic may emerge. Herbert Smith’s and Ashurst’s Australasian mergers are expected to propel those firms to turnovers of £861m and £590m respectively on a like-for-like basis. This means that Slaughters loses ground; if £600m-plus will be the figure that confers global heft, the City’s elite transactional practice is beginning to look almost niche.
“We believe that eventually the top-tier global law firms will have to be equally strong in UK and New York law, and that is unlikely to be achieved without a merger,” states Ashurst senior partner Charlie Geffen. “No doubt there will also be a small number of firms that are exclusively New York or English law, but outside of that group firms will have to be capable of both.”
Eversheds, which has performed steadily in recent times and whose revenues inched up by just over 1 per cent to £358.5m this year, also suddenly looks underweight in global terms, but not as much as Simmons & Simmons. In this context, Simmons’ 2010 merger talks with Mayer Brown looks like a missed opportunity; conversely, if SJ Berwin’s flirtation with the £715m-turnover transatlantic firm is consummated it will rank only just behind Hogan Lovells in revenue terms.
For Simmons and SJ Berwin, organic growth has stalled. Both were early adopters of international expansion – Simmons a little over-enthusiastically – but their City practices have not proved to be the engines they might have hoped. SJ Berwin pretty much flatlined this year, managing growth of just 0.61 per cent, to £180.1m. Simmons at least managed growth of 3.6 per cent, to £251.7m, but prior to 2012 its revenues fell for two years running. The Lawyer’s recalibration of the revenue table demonstrates the scope of the challenge both firms face to stay in the global running.
What of the firms that have already grown through merger? Clyde & Co put on 36 per cent following its takeover of BLG. Its recent foray into Australia demonstrates that its global footprint is getting larger, but that is primarily through an associate office network that includes Zimbabwe, through a tie-up with Scanlen and Holderness, and Mongolia, through an association with Khan Lex Advocates. Consolidation among insurance-heavy firms has contributed strongly to shaping a rather different revenue table from last year.
While the orthodoxy is that you need international offices in order to grow – a logic that even Nabarro has embraced recently – it was domestic work that made the difference for that small band of UK-focused firms that managed double-digit increases without acquisitions. Mishcon de Reya may have opened in New York, but it is essentially a London firm that has reaped the benefits of a varied client base with a strong streak of domestic litigation; it pulled off a turnover rise of nearly 20 per cent, taking revenues to £73.1m. Ditto litigation boutique Stewarts Law, whose turnover shot up by 22.5 per cent to £34.9m. A strong London performance underpinned Holman Fenwick’s performance – a 10 per cent uplift in revenues to £123.8m. Last year London generated £56.2m; this year it was £67.1m. For Watson Farley & Williams managing partner Michael Greville, investment in overseas expansion (particularly a new Hong Kong office) diluted profit to the extent that profit per equity partner dipped from £458,000 to £446,00 despite a 12 per cent revenue hike. The top line, meanwhile, was driven by more bums on seats.
“Our fee-earner numbers went up and we had 15 lateral hire partners in the course of the year,” says Greville. “The figures are in line with that.”
Watson Farley’s core businesses of shipping and energy, which represent well over half the firm, held up well despite pricing pressures; recent investment in more sophisticated business development may yield more.
Investment in business intelligence was also a feature of Olswang’s good showing, says its chief executive David Stewart. The firm saw a 17 per cent rise in turnover, breaking through the £100m barrier for the first time to post revenues of £108m.
“There have been higher levels of productivity across the network,” Stewart reports. “The RPL [revenue per lawyer] increase is something we’re really pleased with.”
While Olswang has expanded abroad, only 17 per cent of its turnover comes from outside London.
Clearly, it is still possible for a firm to thrive if it is a substantially domestic practice, but the key is differentiation. If you want one example in 2011-12 of a London firm reaping the benefits of domestic work, look no further than Travers Smith. Its figures were nothing short of stellar; it pulled in an 18 per cent increase to £83.8m (note: the figure £72m provided to The Lawyer’s UK200 by the firm last year included rental income, so the percentage uplift is calculated from the previous year’s adjusted figure of £71m). Managing partner Andrew Lilley disclaims any particular magic about the increase, saying that certain transactions simply came good.
“We were quite simply busier in every practice area across the firm for almost all the year,” he says. “It was a question of doing more work in areas that already do well. One or two big-ticket deals come in and it makes a big difference. I think you need a bit of luck.”
Luck, and a bit of execution.
The silver circle
Most of the firms with strong turnover performance this year could plausibly claim to be part of the silver circle. And here semantics are tricky. The silver circle has always been a less settled grouping than its magical equivalent. It has also proved to be a slippery concept to nail down but at its core, silver circle firms are those that rank below the magic circle in turnover but have an average profit per equity partner (PEP) high above the national average. But silver circle firms are also London-centric – although they may have international offices – with a corporate bent. Even so, there are anomalies, such as Dickson Minto, which appear to meet all the criteria yet do not quite fit the mould. A bit too niche, in this instance.
Rather, the stalwarts of the silver circle have always been Ashurst, Berwin Leighton Paisner (BLP), Herbert Smith, Macfarlanes, SJ Berwin and Travers Smith. But that is all about to change. So what are the current dynamics of this grouping? How might they benchmark themselves against each other?
The 2011-12 financial year will be the last time Ashurst and Herbert Smith can be counted as silver circle members. The pair have disqualified themselves by agreeing to merge with Australian firms. Ashurst’s tie-up with Blake Dawson went live on 1 March this year, creating a £590m firm. Although full financial integration will not be considered until 2014, the move still means Ashurst is no longer London-centric. Similarly, when Herbert Smith merges with Freehills on 1 October it will relinquish its silver circle membership. Freehills’ turnover is AU$565 (£381.1m) – not that far off Herbert Smith’s £480m.
Still, the point of the silver circle is that it is the City’s chasing pack of firms and change is to be expected. But how has the group fared in the past financial year? Mostly quite well, particularly if you take the crude metric of PEP as an indicator.
On average, turnover among the group rose by 7.1 per cent – take out the top and bottom performers and you still get 6.5 per cent – which is more than double the magic circle’s average of 3.5 per cent and was achieved without a comparable international presence. Indeed, the outlier among the silver circle in the past financial year was Travers, which posted a 16 per cent rise in turnover, from £72m in 2010-11 to £83.8m, without any international footprint.
Travers’ turnover increase was accompanied by a 25.4 per cent rise in net profit (from £28m in 2010-11 to £35.1m) and 23.7 per cent hike
in PEP (from £650,000 to £804,000). According to Lilley, all practice areas contributed to the turnover rise and the upturn in profit was down to increased workflow rather than – cost-cutting.
Macfarlanes’ turnover was up by 8 per cent in 2011-12, from £94.7m to £102.2m. Average PEP was up by 28.6 per cent in the same period, from £702,000 to £903,000. But the profit rise was mostly down to the firm shedding 11 per cent of its equity partners. Also, it is worth bearing in mind that the small size of Macfarlanes and Travers means their turnover increases could be down to a couple of good deals rather than a thriving business model.
BLP’s turnover rose by 8 per cent, from £228m in 2010-11 to £246m, helped by a strong performance from its contentious practices and burgeoning international outposts. Average PEP at the firm may have fallen by 7 per cent, from £712,000 to £660,000, but this follows a 56 per cent rise in PEP in 2010-11.
At SJ Berwin, turnover nudged up by around 0.6 per cent, from £179m to £189.1m. Net profit was down by 5.4 per cent, from £52m to £49.7m. As with BLP, SJ Berwin’s drop in partner profit comes after a 40 per cent rise in average PEP in 2010-11.
Ashurst’s turnover was up by 7 per cent, from £303m in 2010-11 to £322m. Herbert Smith’s was up by 3 per cent, rising to £480m. Again, far more than any other of the silver circle, Ashurst and Herbert Smith were aided by their international networks. Around 47 per cent of Ashurst’s partners are based overseas.
The term silver circle was coined by The Lawyer in 2005. Since then the legal world has changed immeasurably. As a result, this is a good time to ask if the grouping is still relevant – particularly as the number of core members falls to four with no obvious replacements, and the survival of the silver circle’s business model in the long term is questionable.
Diverging fortunes and strategies also mean it is increasingly difficult to view the silver circle as a homogeneous group. But as Macfarlanes’ managing partner Charles Martin says, the point of the silver circle remains. It is, “a distinctive group of firms that offer a real alternative to the magic circle for many but not all of the things magic circle firms do”, says Martin, who adds that is the case even if, as a group, “they are very diverse”. He can say that again.