World beaters

As Latham’s and Skadden’s $2bn performances show, the future is global. So which firms’ strategies will be the ones to lift them into the hierarchy of the new world order?

Last Monday (11 February) The Lawyer revealed that both Latham & Watkins and Skadden Arps Slate Meagher & Flom had passed the $2bn (£1.03bn) revenue mark for the first time.

This was a significant landmark not only because it points to the rapid evolution of both firms (stunningly, New York newcomer Latham has doubled its global revenues in just four years, while Skadden, for all its iconic status, celebrates only its 60th anniversary this year), but also because of what it says about the future direction of the global legal market.

The key word here is ‘global’. Both Latham and Skadden (very different firms in many ways) are similar in that they have invested heavily in building a major global footprint. Why? Because that is where their clients are heading.

“This is a big deal,” explains Ward Bower of consultants Altman Weil. “It’s evidence both of the continuing consolidation in the legal market and of what a great year the firms at the top have had.”

It is also evidence that the long-heralded group of global elite firms is beginning to emerge. If Latham’s and Skadden’s results are reliable indicators, then for the major firms the future looks global. And increasingly, it appears that the firms shaping this future are those that have already bitten the overseas investment bullet and are now reaping the dividends.

“It could be that the firms that haven’t yet made that international investment have been caught asleep at the switch,” adds Bower. “If they’re not making that investment then they aren’t likely to see the same rewards.”

Strategic vision

In April The Lawyer will mark the continuing evolution of the international transactional legal market with an innovative analysis of the world’s top law firms – The Lawyer Transatlantic Elite.

For the first time this will reveal the firms we believe to be the international elite – those with the top corporate and finance groups active along the strategically critical New York-London axis.

In the context of the deal-making market, there is no more important nexus than that which exists between London and New York.

As Tony Williams, Clifford Chance‘s former managing partner and founder of consultancy Jomati, puts it: “London and New York are global pivots.”

The world’s largest and most financially powerful law firms are, with a handful of exceptions, headquartered either in New York or London. Over the past decade these firms have explored ways of successfully expanding in these cities in an attempt to win more business from the European, Asian and Latin American markets.

Arguably, the most effective route to increasing market share is by having credible operations in both of these cities, alongside the headquarters of most of the world’s top investment banks and the site of two of the key capital markets.

As Linklaters New York partner Larry Vranka says of his firm’s successful pitch to Royal Bank of Scotland last year for the ABN Amro acquisition mandate: “It helped that physically we had lawyers on the ground in both New York and London.”

As its results suggest, Latham is a firm that has benefited greatly from the clarity of its strategic vision. The firm’s London managing partner, Andrew Moyle argues that, although the bedrock of his firm’s growth remains quality practices and diverse practice areas, it is the diversity of the firm’s geographic footprint, and its capability in both London and New York (despite its Los Angeles origins) that have helped it score big in 2007.

“We’ve been unrelenting in our strategic focus, which is to be the number one global law firm,” says Moyle. “We haven’t diverted from that.”

Stiff competition

A year ago the unmatched confidence of the city that likes to think of itself as the world’s greatest (New York, in case you were wondering) took a major blow. And the source was one of its own.

The searing report commissioned by New York Mayor Michael Bloomberg along with US senator Charles Schumer, and produced by McKinsey & Company, pulled no punches. It claimed that New York was in real danger of losing its status as a global financial market unless it took radical action. It was the clearest admission yet that, although New York remains the world’s financial capital, it faces stiff competition from other cities and needs to fight back.

The Lawyer Transatlantic Elite

The Lawyer Transatlantic Elite will analyse strategies of firms that have been most successful in capitalising on this market. Primarily transactional in focus, it will target major cross-border M&A, private equity and leveraged finance as key drivers of the global firms’ international strategies.

It will chart the success of those firms that have invested in both cities as well as those, such as Slaughter and May or Wachtell Lipton Rosen & Katz, that prefer a best friends approach.

And because everybody loves a competition, it will rank the firms. The rankings will focus on a number of criteria, including a firm’s position in last year’s corporate and finance deals tables, its financial performance over the previous 12 months and its core client relationships and success (or otherwise) in maintaining them.

It will also consider the numbers of lawyers a firm has on both sides of the Atlantic and around the globe as evidence of its commitment to the market – although large teams of lawyers in London and New York will not be a key factor in determining a firm’s ranking. Far more important will be the ability to win leading roles on the key deals in both cities, as evidenced by the tables and client feedback.

Bracing for recession

But this was not the only significant piece of evidence that the world is changing. Goldman Sachs had already outlined its vision of the future in a 2003 report that coined the phrase ‘Bric economies’ – Brazil, Russia, India, China.

In essence, this suggested that these emerging markets were developing so rapidly that by 2050 they would eclipse the current market leaders.

Adding considerable weight to these prophecies was last year’s credit crunch. The full effects are still unknown, but the US – and in particular New York, the home of Wall Street and the high-earning bankers who help fuel the economy – is currently bracing itself for recession.

Where this leaves the global legal market and the firms within it is still unclear. In New York major firms, including Cadwalader Wickersham & Taft as well as the world’s largest, Clifford Chance, have been forced to lay off lawyers as previously high-flying areas of work, such as real estate securitisation, dried up.

But the events of the past few months and the warnings of the past couple of years do not detract from the importance of the transatlantic market.

The US and UK remain the biggest foreign investors into each others’ economies, while the growth of cross-border legal work along the New York-London axis over the past 10 years has been dramatic.

In core strategic transactional areas such as big-ticket M&A, leveraged finance (at least up until last summer) and private equity, capitalising on the nexus between New York and London is still critical for most leading international law firms.

Microsoft’s unsolicited $44.6bn (£22.88bn) bid for online search giant Yahoo! electrified the international deals market when it became public on the last day of January. Although a US domestic deal, the international nature of the two companies and the fact that the success of Microsoft’s bid may ultimately rest with the powers that be in Brussels served to highlight the fact that even domestic deals of this size are likely to require cross-border legal advice. It was yet another nod towards the increasingly global nature of the legal market.

Size isn’t everything

According to Alan Hodgart of consultancy H4, the financial results from Latham and Skadden last week are the clearest evidence yet of the emergence of tomorrow’s leading firms.

“There’s absolutely no doubt,” he says. “You can certainly see it paying off for the firms that have made the international investment.”

Likewise for the UK elite: Clifford Chance, Linklaters, Freshfields Bruckhaus Deringer and Allen & Overy.

None of this quartet, even Clifford Chance, has yet succeeded in toppling their US equivalents from their positions as lawyers to corporate America, but all four have invested heavily in building presences in New York, with varying success. And the global footprint of each firm alone confirms their inclusion.

Slaughter and May and Cravath Swaine & Moore lose on their global footprints, as well as weight of numbers in New York and London respectively. But could either firm be left out of the new legal world order?Elite New York firms such as Cleary Gottlieb Steen & Hamilton, Simpson Thacher & Bartlett and Sullivan & Cromwell would be hard to ignore, thanks mainly to their deal-doing capabilities. Although in the case of Simpson in particular, the lack of a wider international network raises questions about its long-term strategy.

Currently the coverage Simpson has internationally, with all three of the world’s key financial centres catered for, mirrors its ‘quality not quantity’ approach to lawyers. For now, particularly in the context of the previous year, which until August was dominated by Simpson’s private equity client base, the firm continues to ride high. At half the revenue of Latham or Skadden, Simpson is proof that size is not everything.

The competition for the remaining places in the new world order is likely to be ferocious. Will DLA Piper‘s global weight get it in? Should last year’s merger of Dewey Ballantine and LeBoeuf Lamb Greene & MacRae or the rapid growth of Reed Smith secure either firm a place?Clearly, not every firm that increases its size via merger or rapid organic growth will have a berth in the emerging group of global leaders. It takes more than just a lot of lawyers.

The revolution in international legal markets is still in its infancy. But for those interested in the form the global elite will take in the coming decade, the future starts here.

the future is global. So which firms’ strategies will be the ones to lift them into the hierarchy of the new world order?