‘s new co-senior partner Guy Morton is man on a mission. He wants to secure a transatlantic merger for the magic circle firm.
“I would like the firm to achieve a US merger before the end of my term and I think there’s a good chance of it. I’d count it as a personal failure if the opportunity arises and we let it slip through our own fault. I think there’s a good chance that a merger opportunity will come along,” says Morton. “The golden prize of a US merger is that international clients will say for the first time, ‘Here’s a firm that gives us a service wherever we want it’. At the moment there’s no firm anywhere that does that.”
The Lawyer revealed in December 2000 that the magic circle firm was holding exploratory talks with New York heavyweight Debevoise & Plimpton with a view to certain practice areas – particularly securities – working in a joint venture-style arrangement. Morton says plans for a US tie-up have never come off the agenda.
“[A merger] is something that’s more difficult to do in bad markets. And the markets haven’t been easy. So it’s not that it’s gone off our agenda, it’s just that the prospects for success have improved,” he says.
Morton refuses to give away any names of who would make the ideal merger partner of course, save to say: “Because the US is such a big market, our ideal merger partner isn’t just one that’s a household name, such as the likes of Sullivan & Cromwell or Davis Polk & Wardwell. There might be another 15 to 20 firms on the list.”
Morton also reveals that he would be prepared to look beyond New York provided quality and culture is not compromised. By culture, Morton means equity share-out. “We’d be looking for a firm that favours a similar lockstep structure,” he confirms.
Chief executive elect Ted Burke, who also favours a US tie-up, argues that too much is being made of the pros and cons of lockstep and whether it may or may not pose a stumbling block to a merger. “I don’t think lockstep is an insurmountable obstacle to a merger. Compensation models can be adapted relatively easily. It’s not so easy to adapt reputation,” he argues.
But since Morton is a staunch supporter of a lockstep model, finding a US suitor that fulfils all these requirements is going to be no mean feat. Size is also going to be an issue. To any merger partner, Freshfields is going to look like a very big animal. According to The Lawyer 100 UK Annual Report 2005, the firm had 2,709 fee earners and 5,240 staff spread across 28 offices.
If Freshfields is serious about a US merger, then it needs to address its sluggish financial performance. Both Morton and Burke concede that profitability is going to be a major obstacle to Freshfields’ US ambitions. “I don’t think we’re profitable enough yet to make a merger possible,” confirms Morton. Indeed, this is a view that is echoed among his fellow partners. “We can’t do anything in the US until we ensure the success and profitability of our home markets,” confides one London-based partner.
Freshfields’ half-year results were far from spectacular, with turnover at the six-month point standing at an unimpressive £390m, which represents a rise of less than 10 per cent.
Meanwhile, during the 2004-05 financial year, magic circle rival Linklaters ousted Freshfields from second place in The Lawyer UK 100. A revision of Linklaters’ financial figures revealed that profit had increased a staggering 25 per cent and turnover by up to 12 per cent. In contrast, Freshfields’ turnover fell for the second year in a row. From an all-time high of £800m in 2003, the firm’s revenue sank to £785m in 2004 and £780m in 2005. That 2003 high point came on the back of Freshfields’ groundbreaking 2001 merger with German firm Bruckhaus Westrick Heller Lober, but since the departure of former chief executive Alan Peck the figures have undergone a steady decline. Indeed, Freshfields’ average profit per equity partner (PEP) reached a high of £750,000 in 2001, but now stands at £700,000 compared with Linklaters’ average PEP of £843,000.
Although Morton and Burke recognise that they cannot rely solely on market conditions to improve the firm’s financial performance, it is unlikely that they will take the axe to partners. Last year, it is understood that nearly 25 partners left Freshfields in a combination of retirements and managed exits in a move that could potentially cost the magic circle firm up to £16m in severance packages (The Lawyer, 24 October 2005).
Burke declines to comment on whether he thinks it is necessary to slash the size of the partnership. Meanwhile, Morton’s response as to whether Freshfields has too many partners was equally bland. “I think if we’re going to achieve our ambitions we need either more work or fewer partners in the medium term. I hope and expect that the former is the one that really counts,” he says.
He adds: “When you look at our demographics, there are lots of retirements coming up and our overall partner growth will continue to be relatively modest.”
Lockstep: alive and well
There is absolutely no doubt that Morton, who has been a partner since 1986, has Freshfields in his blood. “I’ve grown up with this firm. I’ve got Freshfields written down the middle of me. And I really want Freshfields to continue to succeed,” he enthuses.
It therefore comes as no surprise that Morton is a staunch supporter of the pure lockstep model. And any Freshfields partners who are keen to put a lockstep review on the agenda will have a seriously long wait on their hands. As far as Morton is concerned, lockstep is not dead. “Radically changing the principle of lockstep is something I don’t think the partnership is ready for. I’m not saying lockstep is off the agenda, but I do think that changing the lockstep should not be and is not our immediate priority,” he argues.
Morton’s commitment to lockstep is bucking a magic circle trend. Linklaters operates different points systems in different jurisdictions, something Clifford Chance is also about to embrace. Meanwhile, Allen & Overy has reduced partner points in the projects group by reference to economic performance – something that flies in the face of the lockstep principle.
Morton says he will give partners an opportunity to debate lockstep at some stage – but not just yet. “We’re a collection of people who are really interested in questions like that,” he admits. “But it’s not the right focus. The right focus is our clients – making sure we’re refining the services we offer so that clients want to give us their business.”
Freshfields is the only magic circle firm with an all-equity partnership. Morton does not favour the introduction of salaried partners, even for some of the firm’s overseas offices. But he suggests he may consider bringing in salaried partners if it were absolutely necessary in certain key developing jurisdictions.
“The fact that you can make money in a developing market by tweaking the lockstep in my view is not a sufficient reason for doing so. If, on the other hand, you find that to do business in China you need to change the lockstep, then changing the lockstep is something you should do,” he says. “You may find that’s the case where, for example, we might also look at a salaried partner. Not because it’s the only way you can make it work, but because it’s a necessary flexibility to adapt to a difficult and challenging market.”
Morton is unlikely to have the same personal impact as his predecessor. Despite his pleasant manner, Morton lacks Anthony Salz’s charisma. What is more, as a serious deal do-er, Salz simply had the economic clout. Regulatory specialist Morton, therefore, probably knows that he has to win the hearts and minds of his fellow partners by persuasion rather than simply through personality.
The other serious question mark over Morton’s management style is whether he is going to be ruthless on issues such as profitability. As one partner puts it: “The unknown about Guy is the extent to which he’s willing to be rigorous.”
Morton, however, insists that he is not a soft touch. “I hope I’m not a soft touch. It certainly would be true that I would try to gain consensus. And that’s something that has traditionally been strongly embedded in the culture of this firm and is something I’d want to preserve,” he claims. “I think the firm needs leadership that’s very clear and very unwilling to be blown off course. That’s not in my view incompatible with a consensual approach.”
One partner who voted for Morton agrees, saying: “He’s definitely not a soft touch. And anybody who thinks Guy’s going to be soft on crucial issues is seriously mistaken.”
There is a genuine belief that Morton will work well with co-senior partner Konstantin Mettenheimer. As Burke puts it: “I think with Guy and Konstantin the dynamic is very upbeat.”
Morton says: “It isn’t that we’ve had to go into a corner and have a fight about any major strategic issues. I think if you played back to Konstantin everything that I’ve said he’ll say he agrees.”
The first 100 days of office are always crucial. It will take a lot longer than that to pull off a merger. But if Morton is seriously putting Freshfields in play, then he is beginning with a splash.
The Race to the top
GUY Morton’s success in the three-way senior partner race ended months of uncertainty at Freshfields Bruckhaus Deringer. Within months of Anthony Salz’s decision to retire as senior partner, outgoing chief executive Hugh Crisp announced his intention to stand down. The move resulted in Freshfields having an entirely new management team.
Morton swept to victory after knocking out his London-based opponents in the first round of the election. The formidably bright regulatory lawyer beat former Italian managing partner Philip Richards and corporate partner Graham Nicolson to the top job last December.
The elections initially attracted six candidates. In addition to Morton, Konstantin Mettenheimer (the co-senior partner who stood unopposed), Philip Richards, Graham Nicolson, former Paris managing partner Jean-Luc Michaud and corporate partner Barry O’Brien also vied for the position. Michaud, however, pulled out the race in November after partners voted to retain the dual senior partner model, as he was the only contender to run on a single slate.
Meanwhile, O’Brien withdrew his candidacy just days before voting started due to the ongoing Law Society investigation into Freshfields’ conflict of interest during entrepreneur Philip Green’s failed bid for Marks & Spencer. As exclusively revealed on www.thelawyer.com (14 December 2005), the Law Society has widened its investigation to include Crisp, former global head of corporate Gavin Darlington and London corporate head Tim Jones.
Morton’s success was not a huge surprise; according to several Freshfields sources, once Michaud and O’Brien had pulled out, Morton and Richards were the only serious contenders left in the race. It was, however, relatively surprising that Morton, who admits to not having a group of arch-loyalists, secured a majority in the first round. “I think it’s perfectly true that I don’t have a power base in the traditional sense. I’m not primarily a corporate partner – I’m a regulatory lawyer,” he says.