Sean Farrell investigates whether the closure of Sonnenschein Nath & Rosenthal's London office marks the start of a migration back to the US and assesses the impact on firms looking to recruit top-ranking partners in the UK.
The news that US firm Sonnenscheins is pulling the plug on its London office on 1 December (The Lawyer, 27 September) will reawaken old fears about the wisdom of leaving a UK firm for the promise of life on the frontier.
For years City firms have put around what some sources call “black propaganda” about the perils of joining a US firm. “The lifestyle is barbaric and they will be back on the plane at the first sign of trouble” has been the message.
Adrian Fox, of recruitment consultants QD Legal, says: “Some lawyers, particularly at UK firms, will be saying 'Told you so'.”
The potential dangers of moving to a US firm were demonstrated last year when the London operation of Chadbourne & Parke degenerated into chaos leaving only the shell of an office. Chadbournes is seen as a textbook example of how a US firm's grand ambitions in London can go wrong.
But memories fade quickly, and this year has seen US firms expanding furiously in London, taking partners from UK practices, particularly the band of firms immediately below the magic circle.
Sonnenscheins arrived in 1994 as one of the first in the new wave of US firms. These differed from the outfits that had been here for many years and were evolving from serving US clients into English practices.
The Chicago-based firm made a splash early on, reportedly offering up to £750,000 for City lawyers to join the practice. As well as money, The Lawyer understands the new recruits were promised exciting work from the firm's US clients and, importantly, the unswerving commitment of partners in Chicago.
This heady brew attracted high-profile figures, including the office's first managing partner, Lord Hacking, who joined from Richards Butler. Hacking refuses to comment other than to say: “I opened the office, and the closure has been very distressing.”
Hacking recruited Allen & Overy partner Peter Borrowdale to take over as managing partner in 1997 and remained as of counsel.
Borrowdale was followed by another A&O partner, property specialist Rupert Jones. The office's other partners were DJ Freeman property partner Antoinette Tucker, insurance and reinsurance rainmaker Peter Schwartz, and former senior Linklaters associate Jonathan Griffiths.
One observer says: “They sold an excellent story to the people they recruited. Most of these people were recruited by Sonnenscheins with promises of greatness.”
But it seems these dreams did not bear fruit.
Sonnenscheins' major US client is McDonald's, but the London office did not mop up the legal work for the burger giant, which has been in the UK for more than 25 years.
The restaurant chain's UK head of legal, Julian Hilton-Johnson, says he found the London operation “a first-rate firm” and points out that Sonnenscheins acted on the company's only recent major acquisition – this year's purchase of the Aroma chain of coffee houses.
But McDonald's main requirement is for commercial property work. Hilton-Johnson says: “We spread our commercial property acquisitions work between our in-house team, Forsters and Sonnenschein. Slightly more was handled by Forsters and the in-house team, but it was still significant.”
Some argue that the promised work from the US did not appear. “There was no throughput of referral work coming in from the States because the States weren't interested,” says one source.
Furthermore, it is also understood that a year-long hiring freeze was imposed by Chicago from April 1998.
“[The London partners] put a lot of effort into marketing the firm, but what's the point of that when you haven't got the people?” one analyst says.
Last autumn Sonnenscheins decided there were three options for its UK operation – for the London office to submit a business plan for approval by the firm's partners, to merge with a UK firm, or to close the office.
Partners in Chicago voted unanimously to back a version of the London office's business plan in a full partnership meeting in February.
But later this year Sonnenscheins' US management began merger talks with City firm Warner Cranston.
It is not known when these discussions began, but the impetus may have come from the departure of high-billing insurance and reinsurance partner Peter Schwartz for Baker & McKenzie in June. (The Lawyer, 7 June)
“Peter Schwartz left and that was a shock because he was a big rainmaker. He left because he hadn't been having any support from the States. There was no money to recruit,” says a source.
Others say that Schwartz's exit was as much a symptom of the office's problems as a cause.
Schwartz was confident enough of his clients' loyalty to tell The Lawyer he would be taking them with him to his new firm. His departure therefore left an immediate gap in the office's bottom line.
Following The Lawyer's original story revealing the demise of the London office, reports appeared saying Sonnenscheins was in merger talks with Warner Cranston. But this was not the case.
As a US London managing partner puts it, it would be “bizarre” to shut down a four-partner London operation if a merger was on the cards.
Instead it is understood the talks with Warner Cranston were called off the day before the decision to axe London was announced to partners on 20 September.
The decision was taken without consulting Borrowdale, outside sources allege.
Sonnenscheins chairman Duane Quaini confirms the date of the announcement of the closure, but says: “I would not want to comment in connection with any talks that may or may not have taken place with Warner Cranston.”
How could a firm that entered the UK with such grand ambitions be driven to turn around and leave after just five years?
One answer may lie in the quirks of partnerships, which are notoriously difficult to manage.
US firms with international ambitions are frequently split between internationalist partners on the corporate side and partners focusing on domestic practices like litigation (which makes up the lion's share of many top US firms' work) who see little benefit in supporting a costly City office.
Sonnenscheins' London office had not begun to show a profit, and sources say US partners had become impatient with the long-term commitment needed in London.
This is a familiar story. Joel Henning, head of legal consultants Hildebrandt International's Chicago office, says: “A corporation can establish a strategic plan and as long as the chief executive, along with the board, supports the plan you can invest until the plan succeeds.
“But with a law firm you are being held to very short-term account by your partners and that makes it very tough to manage.
“In many US law firms there is a large contingent of powerful partners who I consider to be card-carrying members of the Flat Earth Society, who don't understand what is happening in the global markets.”
Ian Coles, managing partner of Mayer Brown & Platt's London office, says US firms are more tightly managed and geared to short-term profits than UK firms. “American firms are immensely more profitable, but if they come over here with expectations of continuing that, the commitment required can be too large,” he says.
Quaini insists there was no split within the partnership. “That was not a factor here,” he says. “The firm was united behind the decision to open this office and the decision to close it was a broad-based decision of the firm.”
One observer says Sonnenscheins' motivation for opening in London proved a fundamental flaw. “Sonnenschein didn't open in London to follow clients. They did it as an American thing to attract corporate partners to the firm in the US and to say they had a window on the world.”
But a Chicago source says that the firm has a strong international client base that was suited to launching in London.
Quaini says: “We have a strong international presence and are well placed to compete internationally.” He adds that the firm is looking for other ways to service these clients.
Henning says Sonnenscheins' exit from London does not indicate a wider malaise within the firm. “It's a very strong firm in a number of markets.
“It isn't a fundamental problem with the health of the firm.
“They have been successful in places people would not have imagined, like Kansas City and St Louis, and they have been very successful in the west.”
Sonnenscheins' decision to quit the UK is “not a big story” in Chicago, says Henning. But it will reverberate around the London market.
A source at a US firm in the City reports recruitment consultants admitting that the news is “a pain” for them in persuading partners to join US firms and encouraging more firms to make the trans- atlantic leap.
Stephen Fiamma, managing partner of Jones Day Reavis & Pogue in London, says: “Any time a US firm closes like that, putting all the people they have hired out in the street, it doesn't do any US-based firm any good in recruiting, for obvious reasons.”
At QD Legal, however, Fox plays down the significance of Sonnenscheins' decision. “It's an isolated incident and it won't have an affect on interest in US law firms.”
Yvonne Smyth, a consultant at ZMB recruitment consultants, says: “This will be held up as an example of how things can go drastically wrong. But those US firms with a sensible strategy that can add value on cross-border deals shouldn't have a problem.
“Most of the firms are doing it more sensibly and are not looking at insurance, property and low-key corporate work.”
Smyth says prospective partners would be wise to visit the US to sound out partners there on their commitment. “At the moment it's more the firm suggesting they do it. Now it may be the recruit will say 'I'd like to meet your partners in America' to give them comfort on the value of London to the firm.”
Quaini says: “London has changed over the last five years. It has become a more competitive, higher cost market. Our conclusion was that investing additional capital in this market was not wise as opposed to using it for other purposes for the firm.”
Sonnenscheins will either merge or set up an affiliation with a UK firm to serve its international clients, he says.
Sonnenscheins clearly has a strategy and has taken a bold step in closing its office. One Chicago source describes Quaini as “a very astute guy [with] a good strategic mind.
“I don't know what their reasoning is, but I'm sure he knows what he's doing.”
London has become a tougher market for US firms, with clients increasingly demanding full-service capability. Mayer Brown's Coles believes this harsh environment will claim more victims.
“I am sure Sonnenscheins won't be the last,” he says. “I don't believe there is enough work of the right type around in the City for 50 US firms to have a successful practice.”