Mid-market firms bullish on results as credit crunch bites…

Record first-quarter deal activity helps firms maintain healthy financial positions; magic circle also confident

The credit crunch has caused City managing partners to eye the markets nervously ahead of half-year figures next month, but mid-market firms have been given renewed confidence, research by The Lawyer can reveal.

With just six weeks to go until most UK-headquartered firms release their half-year results, there is cautious optimism that the credit crunch will not cause a severe dent in the figures, thanks to a standout first quarter.

Allen & Overy (A&O), CMS Cameron McKenna, Freshfields Bruckhaus Deringer and Linklaters all reported that the first quarter of the 2007-08 financial year was a record period for them. Clifford Chance’s turnover was also up by 20 per cent across most practice areas, aside from litigation, which is now expected to pick up (see below).
This tallies with data provided by Thomson Financial, which shows that, from April to June this year, UK deal activity was on average up by 361 per cent on the same period in 2006.

Camerons managing partner Dick Tyler said: “The level of activity in the first four months of the financial year has been such that I don’t expect the credit crunch to have any significant impact on our half-year figures. That said, there’s everything to play for in the second half of the year.”

Many of the headline deals announced, such as the play for ABN Amro or Akzo Nobel’s takeover of ICI, are yet to be completed and therefore translated into fee income. There are also question marks over whether a lack of liquidity will make announced deals come to fruition at all.

Camerons, which expects to be around 8 per cent above budget at the half-year stage, is one firm that is benefiting from activity in Eastern Europe. The Continent generally still has plenty of work, report managing partners, while the Middle East and Asia are also busy.

This bodes well for magic circle firms. Despite having large practices such as private equity and leveraged finance that are slowing, the big four can hedge against wobbles in London and New York with work in Asia and the Middle East – providing the credit crunch remains a blip in the financial markets rather than a broader downturn.

A&O managing partner David Morley said: “We have a very broad, diversified business and a strong franchise.
“We expect to continue to do well whether conditions worsen or improve because of our strength in restructuring and litigation alongside finance and corporate.”

A&O also boasts key clients that are not highly leveraged, such as General Electric (GE). The company’s chief M&A counsel in Europe Ben O’Halloran said: “We’re an AAA-rated company that relatively speaking doesn’t have a lot of debt. If anything, the current situation puts us in a better situation when bidding.”

Other firms that expect to meet their half-year targets include Lovells, Macfarlanes Simmons & Simmons and Slaughter and May.

Slaughters practice partner David Frank said: “We’re seeing growth in restructuring but a drop-off in private equity, and I’d imagine that’s the same across the board. We’re currently in line with expectations.”

Firms that have disproportionately heavy private equity and leveraged finance practices are unsurprisingly less optimistic. Although the firm does not have concrete half-year targets, it is understood that at Travers Smith activity in September is 10 per cent down on this time last year.

Ashurst’s business model, in which private equity and leveraged and structured finance dominate, is also one that might suffer from a prolonged credit crunch. One partner said: “Ashurst will be hit as hard as anyone. My feeling is that, if we manage to do reasonably well by the end of the year, we’ll actually have done very well indeed.”

These are, of course, firms that have done particularly well over the past two years, fuelled by private equity’s
frenetic activity.

Mid-market firms have had steady rather than stellar performances in the past couple of years, but are predicting consistency rather than a drop-off, despite the credit crunch.

Eversheds’ corporate team is confident of a 20 per cent rise on last year’s turnover, while Nabarro expects revenue to grow by 15 per cent on this time last year.

Additional reporting by Julia Berris, Ben Moshinsky and Margaret Taylor