New York-based firm’s financials emblematic of wider market: revenue down, PEP up
With a growing number of US firms now having reported their 2009 financial results, a picture is emerging of a leaner, but arguably fitter, market.
The result, to coin a phrase, is in the results. A clear trend of flat or slightly reduced revenues coupled with a flat or slightly increased average profit per equity partner (PEP) is emerging.
It is hard not to read this as glaring confirmation that, for the majority of the largest US firms, the past 12 months have been primarily about weeding out excess, be that lawyers, support staff or low-producing practice areas.
As US commentator Bruce MacEwen of legal market website Adam Smith, Esq puts it: “Most of corporate America would be delighted to have emerged from 2009, or any difficult period, with revenue decidedly down but profits marginally up. It takes turning the ship quickly. And here’s the good news from our industry – we did just that.”
MacEwen is savvy enough to recognise the human cost incurred in improving the numbers, highlighting the “legions of people who were collateral damage”.
So the general improvement in average PEP set against a reduction in total revenue is unlikely to do much to appease the ranks of lawyers that have been laid off during the recession, or those eased out of firms as a result of much tougher ’performance reviews’.
But in the increasingly harsh world of corporate law, if that is what it takes to ensure your firm survives, then that is what it takes.
Take Shearman & Sterling. Last year the New York-headquartered firm posted a global revenue fall of 8.6 per cent, from $876m (£586.22m) to $801m, but an average PEP increase of 4.2 per cent, from $1.67m to $1.7m.
The firm’s London-based European managing partner Creighton Condon sums up the balance between the top and bottom line, saying: “Yes, revenue was down, but our profits were up by around 5 per cent, so we think that’s the right mix.
“We’ve been very focused on keeping high-quality work and less focused on revenue. You can clearly generate more revenue, but the real question is, what’s the quality?”
Condon repeats the Shearman mantra (initially claimed by senior partner Rohan Weerasinghe) that the firm had made “no layoffs” during 2009, but he admits that there had “certainly been more stringent performance reviews”.
In addition, Condon points to the programme of firmwide deferrals introduced by Shearman, a plan that affected four trainees in its City office.
“Also we’ve traditionally done a lot of lateral hiring of associates, around 70-80 per annum,” continues Condon. “That was put on ice at the start of 2008.”
Is it still on ice?
“We’re laterally hiring strategically, but it’s still very tight,” he admits.
In the City that is likely to mean strengthening corporate, Shearman’s principal focus of recruitment in the UK. Also, arbitration is seen as a big driver of the firm’s business across Europe.
“That’s another area we’re looking to grow,” confirms Condon. “But we’re doing it primarily from internal resources. Otherwise I think we’re pretty well built out [in London].”
As far as thawing Shearman’s salary freeze goes, Condon says it is “too soon to say”, a line that contrasts with Freshfields Bruckhaus Deringer’s decision to introduce a little spring sunshine into associate remuneration (TheLawyer.com, 25 February) but broadly in line with the majority of US firms, Latham & Watkins excepted (TheLawyer. com, 5 January).
As far as legal work is concerned, a string of meaty deals over the last few months helped keep Shearman’s margins in decent fettle.
They include advising Cadbury on its £11.5bn acquisition by Kraft; Dow Chemical on its $1.7bn sale of the Rohm and Haas unit Morton International; Shiseido on its $1.7bn acquisition of US-based cosmetics company Bare Escentuals; and acting for clients related to the motor industry such as Daimler, Ford and the Qatar Investment Authority, which injected e7bn (£6.34bn) into Volkswagen and Porsche.
That solid track record helped Shearman secure the number three spot in Thomson Reuters’ global M&A rankings for 2009 by value (with $267.9bn, 137 deals and
a 12.9 per cent market share), and number four according to Bloomberg.
“We took meaningful market share,” says Condon.
Despite this Shearman’s London office’s revenue fell by around 12 per cent last year to $99.7m from 2008’s $113.8m.
The unfailingly glass-half-full Condon says that, while it was true the figures were down in dollar terms, in sterling they were slightly up thanks to the exchange rate.