Pays and means

The Lawyer’s exclusive examination of Mayer Brown Rowe & Maw’s LLP accounts show that the London partners have been on a premium since the merger. But with the war chest from MBR&M’s global coffers, where’s the growth? Catrin Griffiths reports

One thing not to say to Mayer Brown Rowe & Maw (MBR&M) senior partner Paul Maher: that MBR&M is now a US firm. Maher will insist, in tones unwearied by repetition, that his firm is as English as it ever was, despite Rowe & Maw’s merger with Mayer Brown & Platt in 2002.

To a large extent this is true; in culture and spirit, the London office is essentially unchanged. But MBR&M is part of a bigger transatlantic consolidation. The US and UK partnerships may be separate for regulatory and tax reasons, but are unified in management and brand terms and on the basis of shared profits.

What The Lawyer’s exclusive publication of MBR&M’s limited-liability partnership (LLP) accounts underlines is that Mayer Brown & Platt really did pay a premium for its merger with Rowe & Maw, although you have to burrow deep to discover this.

The premium does not lie in the £3.6m goodwill (see facing page). Nor does it lie in the cheap £4m loan made by the US partnership to the London practice. The premium lies in the flexibility of the UK firm to hike partner remuneration wherever it feels.

MBR&M is currently finalising its global remuneration structure, which insiders guess will be largely merit-based but with something resembling a lockstep for the first three years of equity. The two firms pool profits. As board member Jeremy Clay explains: “Our LLP is a partner in the US LLP. All the money we generate here goes into a pot and is distributed.”

The remuneration structure has taken on a strategic importance that is not necessarily there in other midsize London firms.

According to the accounts, £37.6m was paid out to the 98 equity and fixed-share partners, equating to £372,000 per partner.

“What we pay people is fundamental – it’s the only way you can run a professional services firm,” argues Maher. “We need to anchor partners in London. It’s my philosophy that I want our key partners to be unpoachable, so they have to be paid at a level that they could expect to command at a magic circle firm or a transatlantic firm.
People tend not to move for 10-20 per cent differential unless they’re unhappy, but anyone might be tempted by [another] 50 per cent.”

Maher, the undoubted force behind the firm in London, has certainly seen his profit take grow. Before the merger, he was the highest-paid partner in London, at some £725,000. He is now on annualised drawings of £830,000 (the accounts state £1,175,492 for the 17-month period). Six other partners, or ‘members’ as the LLP terms them, are drawing more than £650,000. Maher and his colleagues are being remunerated on a level appropriate to the global, rather than the local, business – and herein lies the key to the flexibility in pay. “We’re trying to get away from the profit centre mentality,” says Maher.

The last few years have been relatively kind to MBR&M. “We’ve had a three-year buffer to do the engineering,” says Clay candidly. “Now it’s a revenue generation issue.” That, and executing strategic decisions. Two years ago, at the time of the merger, the London partners talked ambitiously of the opportunities in finance to complement Mayer Brown’s established structured finance business in the US. It would have kickstarted a securitisation practice had it managed to hire former Clifford Chance securitisation head John Woodhall last year, but Woodhall opted for Sidley Austin Brown & Wood at the last moment. The fact of the matter is, two years after the merger, and despite its admirably hardheaded grasp of market realities, MBR&M is still nowhere near to building the finance capability it ought to have.

This willingness to pay transatlantic rates is shored up by a financial management culture that verges on red-blooded American.

The LLP accounts clearly show that cash management is strict. Indeed, MBR&M sources say that financial management has become tighter over the last two years. MBR&M partners in London have two pushes on getting bills out in the year, rather than most firms’ single push in April. The global firm operates on a calendar year basis, which means a billing surge in December. The UK LLP also has to submit accounts for tax and regulatory reasons at the end of April, which means another billing surge in that month. This is partly why work in progress (WIP) is relatively low at £11.5m (although WIP is conservatively valued in the accounts at £4.5m).

The pressure is on because no less than 85 per cent of partner drawings are paid out in the same year, with the balance coming by February. That cash-in, cash-out policy – despite the fact that MBR&M prepares its global management accounts on an accruals basis – has motivated partners to get the bills out as fast as possible.

Hawkish cash management and flexible remuneration are two obvious conclusions to be drawn on MBR&M’s accounts. The third (invisible) element is partner performance. The new remuneration structure will not be tied to individual numbers, but there is no doubt that the London equity partnership is being quietly whittled down. “It’s undeniable that some of the people we’ve got and have had in London are not going to make the step up,” admits Maher. MBR&M sources say that the firm wants to reduce the London equity partnership by as much as 20 in the next two years.

Tangible assets: MBR&M depreciates quite aggressively on its fixtures, fittings and IT, over two to four years. “It’s more painful, but more conservative,” says Jeremy Clay.

Intangible assets, or in other words goodwill: Goodwill was created in the old Rowe & Maw partnership and carried forward into the LLP. “It arose because of a particular way that we recognised an element of profit tied up in work in progress before the combination, which then had to be accounted for in the partnership and subsequently the LLP,” says finance director Jon Sedgwick. “The accounting/disclosure rules applying to the LLP are very strict and this was the best way that we could reflect the reality of the situation.”

Notes on MBR&M’s accounting policies state: “The members consider this goodwill to have an indefinite useful life and therefore it is not being amortised.”

Work in progress (WIP), which is valued at the lower of cost or net realisable value, amounts to £4.5m – a conservative valuation. Internal management accounts show that WIP stood at some £11m at the end of April, representing roughly a month and a half of turnover.

The debtors figure, at £20.8m, is a true one. Taken with a relatively small WIP figure, total lock-up amounts to around £31m – a strong performance. All firms will try to get their lock-up (and especially their WIP) down at year-end through the April billing push.

The strong control of billing and cash collection is helped by the fact that MBR&M’s UK partnership has not one, but two billings humps, because it accounts as a global firm on a calendar year-end, and for UK tax purposes at the end of April. This means that the first push on billings is in December and the second comes four months later in April.

Capital: £7m in capitalisation on a turnover of £79m is lower than at many other firms, equating to an average of £70,000 per partner. The legacy Rowe & Maw firm was never highly capitalised, and the merged firm’s highly efficient billing cycle means that it can afford to have relatively low capital. “The average of £70,000 covers both fixed-share partners, who provide a much smaller amount of capital, in line with the variable part of their income, as well as full equity partners,” notes financial director Jon Sedgwick.

The retained tax reserves, amounting to £9m, also serve as capital in the business. This is in contrast to the US LLP, which pays its partners out gross, not net.

The proportion of capitalisation is consistent with the US side of the practice, where the cash position is strong. MBR&M is also funded by a two-year £4m loan from the US end, sourced from dollar cash reserves. The rest of the borrowing is to be found in an overdraft from Royal Bank of Scotland, which runs between zero and £4m.

Transactions with members and former members: £37.6m of net profit equates to an annualised profit per equity partner (PEP) figure of £372,000 for 100 partners (of whom 63 are full equity) over the period. The balance is accounted for by the return of capital to former members, equating to some £350,000. The accounts also state that the share of profits allocated to the member with the largest entitlement to profit – senior partner Paul Maher – over the 17-month period is £1,175,492. That figure equates to annualised drawings of £830,000.

Movement in net debt: The £2.785m figure is a slight oddity. On the face of it, it might seem difficult to reconcile a cash-negative figure at the end of the year with such a rigorous cash collection policy. However, this figure can vary from year to year according to the investment cycle, and this figure is a movement from the end of November 2002 to the end of April 2004, so it does not compare two points at the same time of the year.

Other notes:
The £112m revenue figure covers a 17 month period, annualised at £79m. The revenue is generated from London; the UK LLP includes MBR&M’s two French partners as members for regulatory reasons, but does not include French revenue.