Introducing the Sweet Sixteen

When The Lawyer published the Global 100 in 2006, ranking the world’s largest law firms in order of revenue, a total of 17 UK-headquartered firms made the grade. The 2007-08 financial results for UK firms will emerge, piecemeal, over the summer, ultimately revealing the latest global rankings. But already the indications are that the figures for the largest and most prestigious UK firms will serve to emphasise their positions as world forces.

Research by The Lawyer suggests this year will see a very significant increase in average profit across the magic circle. If confirmed, the results would underline the fact that over the past four years the top UK firms have begun to outstrip all but the top four or five of their US rivals.

Like it or not, the key measure of an elite firm remains its average profit per equity partner (PEP). Law firms are nothing more than pools of talent, collections of (usually) highly skilled professionals. The more skilled, the more money they demand.

For any firm looking to fill in key areas, be they in the US or UK, the ability to offer the most competitive packages is what counts.

But finding a way to reach the point where a firm can offer the most attractive remuneration is where its strategy, global platform, vision and verve come in.

Get this right and you build an international brand. And that international brand is the subject of The Lawyer Transatlantic Elite.

For bragging rights at least, the most pertinent question is: who is in? The Lawyer‘s first-ever analysis of a market that is still at the early stages of evolution. We explain who has made it and why. And which firms are set to ascend.

The information contained is a distillation of hard statistical data, such as law firm finances (including the critically important revenue per lawyer measure); lawyer numbers in London, New York and beyond; and key positions in deals tables.

The findings also take account of scores of interviews with partners, consultants and legal market watchers of all kinds. We believe it is an accurate and comprehensive description of both where the market is now and where it is heading.

Our inaugural ‘Sweet Sixteen’ reveals the group of firms we believe are currently leading the transatlantic market for the provision of top-end transactional legal services.

Each deserves its place on the basis of a stellar client base, regular roles on top deals, market-leading finances and the cream of the legal market talent.

Dig deeper into this guide, to the ‘Contenders’ section, and you will find our (perhaps controversial) take on where we believe the market is heading and why.

And while it is always interesting to examine in detail the strategies and trajectories of the top firms in the world, what is arguably more fun is to take a punt on those firms battling to take the place of Slaughter and May, Cravath Swaine & Moore or Sullivan & Cromwell.

Call it crystal ball gazing if you like, but nothing will be as certain as change over the next 10 years. The Legal Services Act in the UK, the increased (and increasingly harmonised) sphere of banking regulation and the Asian uprising guarantees the destruction of long-held legal traditions.

Strategic thinking

The current Sweet Sixteen is a mixed bag. It contains magic circle firms, Wall Street titans and one particularly unusual corporate boutique.

Essentially it reflects the three core strategies that are shaping the world’s legal market. There is the Slaughters/Cravath (and arguably Wachtell Lipton Rosen & Katz) approach, which is to remain primarily domestically based with an international deal-flow.

Then come the firms that have gone, or are going, truly global (the UK magic circle, Skadden Arps Slate Meagher & Flom, Latham & Watkins). And third are the firms with selected international coverage but global client bases (Simpson Thacher & Bartlett, Davis Polk & Wardwell).

The strategies that got these firms into this superior bracket may differ, but the product is essentially the same: the highest-quality lawyers advising the world’s most demanding clients on their most complex (and highest-margin) deals. The end result? High revenues, highly productive lawyers and high profits.

This book is largely about looking forward. But looking back can be equally illuminating. Each year, in The Lawyer UK 200 Annual Report, we examine the five-year trends for growth in revenue and profit for peer group firms.

In the Transatlantic Elite we have looked at the Sweet Sixteen’s financial performances over the past five years. And what a story the figures tell.

Since 2003 the investment made in building overseas networks has paid off hugely for the UK magic circle (Allen & Overy (A&O), Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters).

Between 2003 and 2007, the average increase in PEP among the 11 elite US firms in the Sweet Sixteen was 25.3 per cent. The average for the group of five UK firms was a mammoth 66.3 per cent.

We’re seeing a great contribution from all of our offices this year,” says Freshfields chief executive Ted Burke.

“The international spread of our firm is the result of a considerable investment over many years, which is now clearly proving its value. The past year has certainly demonstrated that more than any other.”

Partners in US firms will claim that the strength of the magic circle is largely down to the weakness of the dollar.

Clearly, the tumbling dollar is not helping US firms that are primarily paid in greenbacks, but it does not get them off the hook. A separate analysis seen by The Lawyer over the same five-year period segregating dollar and sterling revenues among a wider group of US firms – measuring unconverted dollar fees for US firms against sterling for the magic circle – shows a similar trajectory of significant profit growth for the UK firms.

When the 2007-08 financial results are added into the mix later this year, the likelihood is that the magic circle’s PEP will have almost doubled over the past five years.

Magic circle firms, with their extensive networks throughout Europe, are also benefiting from the strength of the euro.

Earning revenues across a more diversified basket of currencies looks increasingly like good sense, with a touch of luck thrown in.

And a rising PEP means an increased ability to recruit top talent, creating a virtuous circle. As one top UK partner puts it: “There’s no question that significantly enhances our ability to recruit, as well as increasing the perception of our success internally.”

As ever, among the group of five UK firms in the Sweet Sixteen, Slaughter and May is the exception.

It has eschewed global investment in favour of a rock-solid network of best friends. For now, the figures prove that this approach is working in spades.

Slaughters’ PEP grew by an astonishing 98 per cent between 2003 and 2007, the most significant rise of any of the Sweet Sixteen firms’.

Surprisingly for a firm that has not built an international network, its revenue, up a weighty 64 per cent, was also the highest among the entire group.

Among the UK firms, Slaughters beat Linklaters‘ 55.7 per cent, Allen & Overy‘s 37 per cent and Clifford Chance‘s and Freshfields‘ (both just in excess of 20 per cent) growth over the five years.

The only US firm to come close to Slaughters was Latham & Watkins, which saw its revenue rise by 58 per cent (in sterling terms) over the
five years.

Yet Slaughters is vastly outnumbered among the world’s elite by those firms that have taken the step of international expansion.

Only Cravath Swaine & Moore and Wachtell Lipton Rosen & Katz of the elite US firms have set their faces against global expansion in a similar fashion.

Even one of Slaughters’ best friends, Davis Polk & Wardwell is showing signs of itchy feet, with recent investments in China and elsewhere outside its New York base.

Slaughters’ outstanding results reflect two key facts: it is and has been for years one of the finest firms in the world, and it has rock-solid referral relationships with the leading firms in key jurisdictions: Bredin Prat in France, Hengeler Mueller in Germany, Bonelli Erede Pappalardo in Italy and Uría Menéndez in Spain.

Arguably there are two more factors in Slaughters’ favour. The five-year period is bookmarked by 2003, when the market was still recovering from the dotcom collapse and revenues across the board were depresssed, and 2007, the height of the M&A-fuelled peak.

A fourth factor to explain the big jump is that the firm’s profits were adversely affected around 2003 by the costs of its move to One Bunhill Row.

In the intervening years Slaughters’ core area, M&A, enjoyed the biggest boom in history. New senior partner Chris Saul certainly inherited a strong legacy when he took over from Tim Clark this year.

There is only one Slaughters, however. And the exploding globalisation of legal services continues to diminish its once legendary ubiquity. Other firms are creating wider pools of wealth, and faster. Whatever the reasons, Slaughters remains an oddity, out of step with the prevailing trend for the provision of legal services, but that will not worry its current top-earning partners too much.

“We’ve been hearing the arguments about global coverage for years,” says Frances Murphy, who was appointed head of corporate at Slaughters in April this year.

“It’s one approach. Ours allows us to find the best lawyers in each jurisdiction. Clients are most sophisticated, they understand how it works. I think it’s borne out by the results.”

In contrast, Slaughters’ US best friend Davis Polk might think otherwise if its five-year results are anything to judge by.

The firm recorded the lowest revenue growth among the Sweet Sixteen, with total turnover growing by just 7 per cent between 2003 and 2007, from £359m to £384m.

The firm’s PEP fared even worse, up by just 2.3 per cent over the five years, from £1.17m to £1.2m.

Once again the firm will point to the exchange rate, but the comparative financial basis for all 11 US firms in the group is the same. Exchange rates aside, Davis Polk clearly shows the lowest growth by some way.

For years in New York it was an open secret that the elite group of firms, such as Davis Polk along with Sullivan & Cromwell and Simpson Thacher, began each financial year with a head-start in the profit pot of around $100m (£50m), thanks to the relationship between them and the top investment banks (in the case of these three it was Morgan Stanley, Goldman Sachs and JPMorgan respectively).

The growth of London as a serious rival to the title ‘world’s number one financial centre’, the ever-increasing
movement of the banks’ top executives to the City and emerging markets such as the Middle East and China have helped erode these once rock-solid ties.

(As an aside, the move by Dow Jones to print and sell the US edition of The Wall Street Journal in London, announced this April, merely underlined the move towards a single, transatlantic market.)

In addition, the entry of firms such as Latham & Watkins into New York and their success in building leading finance practices has also eaten into these core relationships with the investment banks, biting into the profits of the incumbent elite.

In leveraged finance (or what is left of it these days), Latham is now near or at the top in the New York market and is the law firm of choice for the majority of Goldman Sachs’ leveraged finance work.

Sullivan is still tight with Goldman Sachs, but as one Latham partner puts it: “Any firm would give their right arm for the work we’re winning.”

Davis Polk has been looking to give itself a shot in the arm recently, with overseas lateral hires and efforts (primarily through managing partner John Ettinger) to inject some much-needed energy and transparency into its famously buttoned-down culture. The five-year figures suggests it needs to.

Client relationships

Underpinning much of the selection of this year’s Sweet Sixteen is each firm’s corporate and finance capabilities and their relationships with the world’s top clients.

In our ‘Corporate’ and ‘Banking and finance’ sections, we review the past year in both areas and highlight some of the key deals and relationships that elevated these firms into the elite.

Any of the Sweet Sixteen firms can point to their success in translating those longstanding relationships into deals.

Take Sullivan. Last year one of its top deals was the $26.7bn (£13.3bn) sale of its client Hilton Hotels Corporation (HHC) to Blackstone (advised inevitably by Simpson Thacher). Los Angeles partner Alison Ressler, who led on the deal for Sullivan, had already advised on a previous Hilton acquisition, that of UK company Hilton Group.

As Ressler recalls: “The general counsel of HCC Madeleine Kleiner had been general counsel of the savings and loan business HF Ahmanson. I acted for them on the deal when they were sold to WaMu in 1998. She moved to Hilton and this was their first major deal.”

ABN Amro had been a Davis Polk client for at least 10 years, thanks to former associate (now a senior Paris partner) Meg Tahyar, before it snuck in to advise it on one of last year’s biggest deals, the bank’s £50.5bn sale to Royal Bank of Scotland.

For Simpson Thacher, the firm’s lock on the KKR and Blackstone relationships has kept it as a fixture at the top end of the international deals tables.

Elsewhere in the private equity universe there are clearly opportunities to advise European houses, such as Apax and CVC Capital Partners, which are looking to play on both sides of the Atlantic. Top-tier capabilities in both London and New York are critical to that ambition.

Kirkland & Ellis, along with Weil Gotshal & Manges and the ubiquitous Simpson Thacher, is part of a triumvirate of firms that are leading this cross-Atlantic private equity push.

While Clifford Chance may rule the London roost, with some heel-snapping from Ashurst and Freshfields, none has the on-the-ground capabilities or profile in New York to mirror this trio’s City strength.

Kirkland New York partner Kim Taylor’s advice to Apax last year on its acquisition of Alabama-based Qualitest and Vintage Pharmaceuticals for around $900m (£450m) is as good an illustration as any of the firm’s ability to cross-sell its expertise in this area.

The deal was the first major instruction from a reborn Apax in New York. That the client was introduced by Kirkland’s now former partner Raymond McKeeve (who joined longstanding client Robert Tchenguiz in April) is unlikely to be fatal to the relationship.

Old meets new
While this collection of reports is primarily focused on the London-New York axis, we also look at two of the key legal markets that are shaping firms’ strategies: the Middle East and Asia.

Once again, it is the relationships here that count. Take Latham. The firm that is arguably the most recent arrival into the world’s elite stunned the market earlier this year when it announced it was to open three offices simultaneously in Abu Dhabi, Dubai and Qatar.

Latham’s close ties to Qatar’s sovereign wealth fund, Qatar Investment Authority (QIA), was a driving force behind the launch.

In Asia Mayer Brown‘s December 2007 merger with Johnson Stokes & Master (JSM) was driven by the smaller firm’s need to service key clients such as HSBC and Cathay Pacific globally.

Mayer Brown remains too mid-market and has too many internal issues to be a candidate for this year’s Sweet Sixteen. But the JSM deal, coupled with the firm’s European and US capabilities, potentially make it a future contender.

Linklaters, most certainly a member of the elite gang, also highlighted the importance of the Asian market when it acquired Mitsui Yasuda Wani & Maeda in 2005. Current Asia boss Giles White says: “Asian corporates and Asian wealth funds are increasingly looking to invest in the rest of the world. And that’s good for us.”

What both of these deals and scores of others highlight is that the majority of firms believe that significant international investment in overseas jurisdictions is where their futures lie.

Firms such as Cravath, Slaughters or Wachtell may survive on the brands and relationships they have already built, but they are in the minority.

For the rest, the critical strategic issue is to build capacity in the world’s financial centres. And for the global legal market, the pivot remains the New York-London axis, home of the financing and the majority of the principals. Strength in both cities will only increase in importance over the coming years.

As one New York partner puts it: “Nobody’s got the perfect barbell yet.” Give it time.


Allen & Overy

Cleary Gottlieb

Clifford Chance


Davis Polk

Debevoise & Plimpton

Freshfields Bruckhaus Deringer

Kirkland & Ellis

Latham & Watkins


Simpson Thacher

Skadden Arps

Slaughter and May

Sullivan & Cromwell

Wachtell Lipton

Weil Gotshal & Manges