Change always creates opportunities,’ says Nick Scott, the new managing partner at Brodies, when asked about this year’s departure of predecessor Bill Drummond. But he then quickly adopts a more cautious tone: ‘There will be no radical change to the way we will run our business.’
Scott’s reticence to herald a new era with a major pivot reflects the predicament of a leader inheriting a 20-year legacy of success. Drummond presided over a striking 122% revenue growth between 2007 and 2017, ending with a slow (by Brodies’ standards) 2% increase for the financial year 2016/17, with turnover up to £66.7m, while profit per equity partner (PEP) dropped 2% from £597,000 to £585,000.
Hardly a disaster, but the slowdown will be something Scott will be eager to reverse as inheriting a tradition of success brings its own pressures. However, with a fundamentally sound structure behind him, Scott may have inherited just the right amount of wrong to put right and he need not look far for similar challenges facing competitors.
Fellow Scottish independent Burness Paull also finds itself in a period of transition, with chair-elect Peter Lawson and managing partner-elect Tamar Tammes assuming leadership positions this August. They replace well-regarded figureheads Philip Rodney and Ian Wattie, who had led the firm successfully for more than 12 years, including the transformative merger between legacy Burness and Aberdeen’s Paull & Williamsons in 2012.
However, growth fell flat at the firm, with turnover up 1% to £53.8m from £53.3m for the year 2016/17, and overall profit down 2% from £22.5m to £22m. But succession is more about personalities than numbers, and despite Rodney and Wattie’s success, they are seldom spoke of with the same reverence as Drummond, who over two decades became the leading personality in the Scottish legal market.
‘There will be no radical change to the way we will run our business.’
Nick Scott, Brodies
Says Kenneth Shand, senior partner at Dentons in Scotland: ‘Obviously Bill has been such a dominating figure at that firm with a particular style of operating, I guess there is likely to be an impact from that change. Burness will probably be a less radical transition – it seems to be more of a continuation of style.’
‘Bill Drummond is a force of nature,’ says another partner in Scotland. ‘He had complete control of almost everything at the firm, and at a modern law firm you can’t have one person controlling everything.’
Drummond’s approach is touted to contrast with former real estate head Scott’s ‘competent but quieter’ style, but Scott is eager to dismiss these perceptions: ‘I don’t agree; Bill created an incredible team of people.’
Nonetheless, externally the feeling is that Burness will have an easier time transitioning, with a tradition of a more team-orientated approach. Despite Drummond’s undoubted success, Scott’s leadership could be a tonic to his more dictatorial tendencies. The end of the Drummond/Rodney era does not just signal change for both firms but is also indicative of wider change in the legal market, according to David Tait, managing partner in Scotland at Clyde & Co, who draws an analogy with famous football mangers.
‘I am not convinced you will have a Sir Alex Ferguson or Arsène Wenger again, with a manager at a club for over 20 years,’ he says. ‘Similarly, you won’t see a new leader stay at a Scottish firm for 20 years. They will want to continue the success but also put their own stamp on things to freshen it up.’
But the metrics by which a ‘fresh’ approach could be measured prove elusive. Burness expects a strong financial year for 2018, citing an extensive deal list as the primary driver. However, some argue that the much-cited £42.8bn worth of deals in the year up to March 2018, published in Scottish Business Insider, is a deceptive benchmark, with the value of the Scottish end of these deals not being disclosed. ‘Some of these numbers can be quite misleading,’ says one partner.
‘Bill Drummond is a force of nature. He had complete control of almost everything at the firm, and at a modern law firm you can’t have one person controlling everything.’
Despite nebulous statistics, Burness had a busy year, including The Weir Group’s £89m acquisition of KOP Surface Products, as well as acting on Sterling Resources’ $163m sale of its UK operating subsidiary to Oranje-Nassau Energie.
‘Last year was Brexit-impacted,’ says Lawson, regarding the firm’s slowing financials. ‘This year has been a very successful 12 months and we’ve been looking forward to good growth. We see a lot of confidence in our clients, the overall economic climate is a lot less uncertain and our clients don’t want to put off their investments.’
At face value, Brodies appears to lag behind its domestic rivals in the deal list, having acted on a series of mandates to the tune of £6.75bn over the same period. However, key advisory roles, such as acting for Craig Group in one of the largest M&A deals of 2017 on the sale of North Star Shipping to Ardmair Bay Holdings, the vehicle used by Basalt Infrastructure Partners, is expected to contribute to a year of growth.
New order?
All change – in name at least – at the top for two of the leading independents then. More widely, the obstacles remain the same, with the spectres of Brexit, a second independence referendum and economic turbulence looming for firms north of the border. However, there is a feeling that the profession has acclimatised to the persistent uncertainty. Aberdeen in particular has recovered after a difficult spell when oil prices slumped to $50 per barrel, with prices rising to $70 in January of this year. There have been moves in the market that demonstrate an increased confidence, with Aberdeen Asset Management and Standard Life completing an £11bn merger in August 2017, which saw Maclay Murray & Spens join Freshfields Bruckhaus Deringer advising Aberdeen (with Slaughter and May and Burness for Standard Life) in a transaction that could provide pickup for firms with strong employment practices. Other deals include New York private equity firm Platinum Equity launching a $2.1bn takeover of Johnson & Johnson Services’ Inverness-based LifeScan in June, with the dip in sterling fuelling transactional activity in the region.
‘Last year was Brexit-impacted. This year the economic climate is a lot less uncertain and clients don’t want to put off investments.’
Peter Lawson, Burness Paull
This growing indifference towards uncertainty, combined with management change at the top for Burness and Brodies, could provide real opportunities for Shepherd and Wedderburn, which says revenues have grown following a 5% drop last year to £50.5m, with PEP falling 7% to £349,000. However, in the three years running up to the dip, Shepherd had seen consecutive growth, which saw revenue and profits peaking at £53m and £21.5m respectively.
Traditionally the firm has been less successful in pursuing double-digit growth than its independent competitors, a culture that may need to change if the firm is to outstrip Burness and Brodies as a market leader. The disappearance of another local rival – Maclay Murray & Spens – following its absorption by Dentons in October last year (see box, ‘No penetration’, below), gives further weight to the claim that Shepherd has the most potential to assert itself as a dynamic independent.
Chief executive Stephen Gibb is expecting a lucrative 2018. ‘We’ve had a very good year. It’s been positive in terms of revenue and profitability,’ he says, citing the firm’s work advising FanDuel on its acquisition by online betting and gaming group Paddy Power Betfair for $158m in May as a recent highlight. The firm is also seeing increased disputes activity following a litigation finance deal with Burford Capital in 2017 that saw the firm develop a significant eight-figure litigation fund. Meanwhile, the firm is expected to make a strategic addition in the coming weeks in the Central Belt.
Yet despite an apparent need to plot now and take advantage of market disruption, Gibb averts showing any vaulting ambition to displace the two most successful independents in recent years, preferring to focus on a commitment to growth in a resurgent Aberdeen and a desire to keep close proximity with the firm’s clients as dominating its strategy for the next 12 months. It would appear – at this stage – that Shepherd’s nature is too full of the milk of human kindness to catch the nearest way.
‘We’ve had a very good year. It’s been positive in revenue and profitability.’
Stephen Gibb, Shepherd and Wedderburn
As clients and firms alike stiffen sinews in the face of uncertainty, old threats are re-emerging from south of the border.
‘There has been a trend of consolidation for a while now and it may well continue,’ says Scott. ‘I’m sure they will be working on mandates, but they won’t necessarily be interested in what their legacy firms were interested in and that creates opportunities for us.’
Under pressure from a wave of consolidation that has seen once-dominant independents such as Dundas & Wilson, McGrigors and Maclays disappear, do those remaining need to reinvent themselves after outgrowing their local market? The Scottish legal scene has stayed flat with an overall value of £1.16bn, according to market reports and the push of what was then the big four Scottish independents to open offices in London was curtailed when the financial crash hit in 2008, with the firms struggling to pay high rents.
Brodies has been explicit in its commitment not to open in the City. Indeed, Scott makes it clear there are no such plans in the firm’s current three-year business strategy. Meanwhile, Shepherd – the only member of the trio of indys to have a London branch – remains part of the World Services Group and the Energy Law Group. Burness Paull joined Lex Mundi as the network’s Scottish representative after Maclays left the group by merging with Dentons, a move Lawson considers strategically and culturally significant.
‘That entire independent firm culture is what defines us,’ he says. ‘There is a great culture globally of independents leading in their local jurisdiction that clients like – joining Lex Mundi has given us greater access to that community.’
For now, independents that can sustain their brands and client activity should continue to enjoy their autonomy. But while a new generation of leaders inherit both the successes and the perennial roadblocks that dogged their predecessors, these are interesting times for the Scottish legal market. LB
No penetration: Auld enemy shows up again as Dentons and Addleshaw close in on a year in Scotland
There can be no doubt the major trend in the Scottish legal market over the last ten years has been English players entering the region and absorbing local players – the most recent examples being Dentons’ tie-up with Maclay Murray & Spens and Addleshaw Goddard’s merger with HBJ Gateley, both taking place last year.
But independent Scottish firms are slow to recognise the threat from their newly-merged counterparts. ‘We haven’t seen them with increased mandates or us losing mandates,’ says Burness Paull’s chair-elect Peter Lawson. ‘We just haven’t seen that level of penetration.’
Unsurprisingly, Dentons’ Scottish senior partner (and former chief executive of Maclays) Kenneth Shand disagrees, pointing towards the firm’s representation of C&C Group on its acquisition of Matthew Clark and Bibendum PLB Group from Conviviality Brands. ‘Would we have had the opportunity to represent C&C as a southern-based operation? I don’t think we would have. They might have gone to a London firm.’
Shand cites realism as much as aspiration being a key motivation for merging Maclays with Dentons: ‘The rationale for merging was partly defensive and partly offensive. You’re looking at staying close to clients who drift away if you don’t have UK and global-wide services.’
Addleshaws Scottish senior partner (and former HBJ senior partner) Malcolm McPherson echoes Shand’s sentiments, citing clients’ reduced panel sizes and Addleshaws’ deeper pockets as push-pull factors for the merger: ‘In Addleshaws we have found a business that fits culturally. I know everyone says that but we went into the merger with a fairly ambitious budget and we’ve exceeded that.’
Client panels remain key to mergers, with many companies – particularly in insurance – looking to reduce panels. ‘That’s been happening for a long time,’ says McPherson. ‘If you go back, all firms had one or two big clients, now the major client work is taken up by a small number of firms.’
‘The rationale for merging was partly defensive and partly offensive. You’re looking at staying close to clients who drift away if you don’t have UK and global-wide services.’
Kenneth Shand, Dentons
The Dentons merger was the larger of the two, and since then the firm in the UK and Middle East has seen a 22% increase in revenues and a 36% increase in PEP, with Maclays in Scotland featuring for six months of that growth and taking part in over 1,000 shared client matters with Dentons’ UKME operation.
However, Martin Darroch, chief executive at Harper Macleod, is eager to play down the impact of the merger, arguing desperation rather than aspiration motivated the move.
‘Has it had any impact on that market? Not at all. Instead you’re seeing exits from Maclays from practices that are not core to Dentons. Maclays saw an absolute catastrophic decline in its businesses. It had become as a brand less relevant than other firms; the business model wasn’t aligned to the market.’
A brief look at Maclays’ financial record prior to the merger supports Darroch’s take: revenues fell by 6% between 2012 and 2017 – one of the worst performances in the Legal Business 100. Ripe for picking.
Independents outside the top three have also proved resilient. Harper Macleod has seen a 100% increase in fee-earners between 2007 and 2017, while English competitors in Scotland such as DWF have seen a decline of 47% over the same period, with DLA Piper suffering a decrease of almost 60%, according to research of fee-earners in Scotland by Harper Macleod.
Of course, there were mergers that preceded that of Addleshaws and Dentons, notably McGrigors with Pinsent Masons and Dundas & Wilson with CMS. Clyde & Co’s David Tait insists the decision behind its play for insurance-focused Simpson & Marwick in 2015 was driven by client demand to become a truly national firm and cites double-digit growth in the firm’s casualty insurance practice, which makes up half of its Scotland turnover, as indicative of the merger’s success.
And, despite scepticism among its competitors, Pinsents remains eager to prove its interest in the Scottish market since its 2012 merger with McGrigors, with the firm advising on the $646m acquisition of Ithaca Energy by Delek Group and Shell’s $3.8bn sale of North Sea assets to Chrysaor, in what was one of the largest corporate transactions of the year. ‘If I look at the merger, for me it’s been a resounding success, and the business has really flown since then,’ says Richard Masters, Pinsents chair of Scotland and Northern Ireland.
It is unlikely a coincidence that the older mergers involving CMS and Pinsents are considered by many as the more successful tie-ups in Scotland, given the pedigree of the legacy firms and with them having more time to make their mark in the market. However, all agree the trend of mergers north of the border is unlikely to wane, and with their Scottish deals not even a year old, there is plenty more time for Dentons and Addleshaws to make inroads.