Asia continues to dominate when it comes to new offices opened by Global 100 firms. But despite the attraction of exciting Eastern destinations, there are growing questions as to whether the travel is paying off.
‘People have the view that Asia is a rice bowl and they are waiting to gorge themselves,’ says a partner at a US law firm based in Singapore. Given the trends in recent office openings by the Global 100, it would appear there are still plenty of firms queuing up to have their fill. Over half of the 41 Global 100 firms that opened new offices in the last 12 months chose to open them in Asia, adding up to 28 new offices in the region in total, with Seoul and Singapore by far the most popular destinations. This contrasts significantly with last year when just ten Global 100 firms launched ten new offices across Asia.
Overall, the Global 100 opened 72 offices worldwide this year, slightly more than last year’s 69 launches. In addition to Asia, 14 Global 100 firms opened offices in Europe, 11 in the US and seven in the Middle East and Africa.
While the sovereign debt crisis hangs over southern Europe, Global 100 firms continue to open new practices in the continent, fuelled by the uptick in disputes and regulatory work. There were 21 new office launches in Europe, including two offices each in Brussels, Istanbul, Frankfurt, Munich, London and Almaty.
Pinsent Masons opened three offices over the last 12 months, all of which were in mainland Europe: Istanbul, Paris and Munich. Simmons & Simmons made two openings, one in Munich and a low-cost centre in Bristol, while one of Magic Circle firm Allen & Overy’s new offices was in Istanbul and Morgan, Lewis & Bockius launched in Moscow.
With low interest rates, high equity prices and available capital from non-EU banks, Eric Friedman, executive partner at Skadden, Arps, Slate, Meagher & Flom, says he is surprised there is not more M&A activity across Europe. Meanwhile, Andrew Moyle, a partner in Latham & Watkins’ London office and a member of the firm’s executive committee, says its London and Paris offices have particularly benefited from European clients seeking cheap sources of debt in the US.
The Latin American market shows signs of cooling after record levels of inward investment and a run of big-ticket deals in 2010 and 2011. The International Monetary Fund (IMF) recently reduced its 2013 forecast for Latin America to 3.6% growth in GDP against a previous forecast of 3.9%. This slowdown was particularly pronounced in Brazil – the region’s largest economy – where GDP growth dipped below 1% in 2012.
Just three Global 100 firms opened in Latin America in 2012, one fewer than the previous year. DLA Piper opened in Mexico, Holland & Knight set up in Bogotá and Baker & McKenzie – which has had its foothold in Brazil since 1959 – launched in Lima after it merged with leading Peruvian firm Estudio Echecopar. It is interesting to note that the Brazilian market has been left well alone following skirmishes between the Rio de Janeiro and São Paulo Bars and international firms. Rather, it appears that there are other routes into Latin America, particularly Mexico and the Andean three – Colombia, Chile and Peru.
By contrast, the heat is undoubtedly returning to the Middle East, with the UAE enjoying a renaissance as a go-to destination. The biggest legal market in the Gulf continues to attract top law firms despite familiar claims that Dubai, and to a lesser extent, Abu Dhabi, are overlawyered. Cleary Gottlieb Steen & Hamilton unveiled its first office in Abu Dhabi in September last year, while Baker & McKenzie sealed a pioneering deal to merge with local leader Habib Al Mulla in April this year.
But all this activity has been a sideshow to events in Asia. Inevitably, as the influx into the region surges, many are questioning the wisdom of moving into a market they believe is reaching saturation point. ‘Every Tom, Dick and Harry has shown up here, so I think there is going to be a cleansing period sooner or later,’ says one Asia-based managing partner at a top 20 Global 100 firm.
Asia bound
South Korea was without a doubt the focal point for much of Global 100 expansion in the past year, with 12 firms launching new offices in Seoul in 2012/13, including Baker & McKenzie, Clifford Chance, Cleary Gottlieb, Herbert Smith Freehills, K&L Gates and Simpson Thacher & Bartlett, with considerably more applying for licences or expressing interest.
The good news for global firms is Korean companies have rapidly expanded their global footprint over the last five years and have become embroiled in complex issues, often involving international cross-border litigation; such as Samsung’s high-stakes court battle with Apple, which crossed 30 jurisdictions and provided a bonanza of fees for the law firms involved. US government court records show that Samsung’s lawyers, Quinn Emanuel Urquhart & Sullivan, averaged $592 per hour, with partners notching up $821 per hour.
International firms in Seoul cannot practise local law, diffusing tension between domestic and global firms. However, this means there is a finite amount of space for international outbound practices.
Elsewhere five Global 100 firms opened one office each in Singapore – Akin Gump Strauss Hauer & Feld, Morrison & Foerster, Reed Smith, Squire Sanders and a return to the market for Freshfields Bruckhaus Deringer.
According to the Singapore Ministry of Law (MinLaw), the legal services industry has grown 23% in the past five years, jumping from $1.2bn in 2008 to around $1.5bn in 2012.
Six outfits were awarded Qualifying Foreign Law Practice (QFLP) licences in 2009: Allen & Overy, Clifford Chance, Herbert Smith, Latham & Watkins, Norton Rose and White & Case, while a host of others practising only UK or US law continued to enter the market.
Last year, news of a second round of local licences emerged and the hype surrounding the island city state was reignited, drawing QFLP applications from a further 23 practices. This February, the government granted four more licences, adding Magic Circle firm Linklaters to the mix, alongside three US outfits: Gibson, Dunn & Crutcher, Jones Day and Sidley Austin.
But the recent bull run of firms into Singapore over the last two years provides little evidence that firms have learned the lessons of previous feeding frenzies into South-East Asia. A managing partner for Asia at a US firm says: ‘If you talk to the Singaporean law firms they will say: “What the hell are these people going to do? There isn’t enough demand. It’s not a mature enough market for all of the foreign firms to show up and start practising Singaporean law.”’
Widespread belief is mounting that some international firms are suffering financially in the Asia region. A handful of firms have reported they are relatively busy in Hong Kong or mainland China, but not much more than that, while capital market activity in Hong Kong has been poor for the last two years.
Weil’s executive partner and chair of its management committee Barry Wolf says: ‘There is an imbalance between supply and demand for premium legal services. Given this new normal, there will likely be excess capacity at many firms.’
Weil’s Asia practice is focused on private equity and M&A. Other firms have also invested in capital markets. He notes that clients in Asia expect far heavier discounts compared to those in Europe and the US, and some firms evidently don’t account for this.
But according to David Tang, Asia managing partner at K&L Gates, even if Asia’s economy cools substantially, it is still well ahead of the long-term growth trend in Asia. The firm’s headcount in Asia remained broadly flat while its revenues in the region grew by 25% in 2012. This will change next year, taking into account the firm’s merger with 300-lawyer Australian firm Middletons on 1 January 2013.
Other firms have recognised the opportunities in Asia. Five Global 100 firms opened in either Beijing or Shanghai over the last 12 months: Ashurst, Covington & Burling, Eversheds, Troutman Sanders and Wilson Sonsini Goodrich & Rosati.
The most recent developments involve the fastest growing firm organically in the Global 100: Quinn Emanuel. It already has one office running in Tokyo but plans to open in Hong Kong to boost its international arbitration platform later this year. The firm also recruited two senior Herbert Smith Freehills partners, Michael Mills and Michelle Fox, to lead its new office in Sydney, which opened in June.
Managing partner John Quinn says: ‘From a disputes perspective, there aren’t many firms doing profitable disputes business out of China. We are planning to open in Hong Kong – it’s the best place to be for our arbitration practice.’ He adds the firm has no intention to open in Seoul because it’s becoming oversaturated with lawyers. ‘There are too many foreign firms chasing the same limited number of large clients,’ says Quinn.
Others are warier. Chris Saul, senior partner at Slaughter and May, which has offices in Hong Kong and Beijing, says: ‘We are keen on Asia but it is still a long-term proposition for international firms investing in the region. Market activity remains volatile (although there is nothing new in this) and Asian firms are gaining in strength. Fee rates, moreover, are under pressure in the region and the lawyers’ value-add proposition is not always readily accepted. So, you have to think that there remain challenges for those that have put big chips down in Asia.’
New routes
On the subject of local firms getting stronger in Asia, King & Wood Mallesons (KWM) represents a notable change to the new world order, with the March 2012 combination of a Western and Chinese law firm becoming the first non-US or UK-based firm to enter the top 50. The firm has the most manpower in Asia with 2,089 lawyers on the ground, of which 377 are partners. The firm generated $713m in turnover, all of which came from Asia.
Eduardo Leite, chairman of Baker & McKenzie’s executive committee, says tie ups between leading domestic firms in high growth markets with international players is a model that we are likely to see repeated. The market is not going to get any less challenging, and if local firms want to expand internationally, they will need partners.
Fifteen months in, KWM is fully aware of the needs and challenges of integrating client, market and operational platforms and the apparent failure of its merger talks with Singapore’s Wong & Partners reflects this.
However, global managing partner Stuart Fuller is unsurprisingly bullish on KWM’s prospects. ‘On one level, our model cannot be copied because each is the leading firm in each jurisdiction,’ he says. ‘Our competitors may follow over time, but they won’t get a match at that brand or quality level.’
In terms of China’s domestic talent, Fuller says the international stage will reshape where local firms are positioned. ‘Some firms will seek to be the boutique firms of China providing a premium domestic service with international best friend connections; some will seek formal tie-ups and become part of global brands and some, like King & Wood Mallesons, will seek to create new international brands,’ he says. ‘The next generation of leading global law firms must have an exposure to the fastest growing economies in Asia, and more specifically, China.’
But while the Asia-Pacific’s powerhouse merger looks compelling on paper there has been much speculation about KWM’s prospects.
One top 20 Global 100 firm managing partner says: ‘There is a real question about where the firm is headed. It may be a spark of genius – Mallesons is a strong historic name but there are some internal challenges as the firm lost its Australian managing partner. Either way, I’m very curious.’
One senior management figure finds the firm fascinating. ‘I would say the jury is still out. If you look at it from a People’s Republic of China (PRC) client’s perspective, you would say that it looks quite interesting because it represents another approach to the international question. If you look at it from a non-PRC client perspective you may have questions about how what is necessarily a big integration process will go. It’s too early to say.’
Future destinations
DLA Piper’s global co-chief executive Sir Nigel Knowles has consistently argued that in order to be a leading global business law firm, it is necessary to be present in the G20 countries as well as the major emerging and developing economies. ‘We have new offices, or strategic alliances, with other firms in most of the geographies we want to be in but there’s always work to do. We’re not in India, but then nobody is because local regulation doesn’t allow it; we still haven’t found the right firm in Canada and we don’t want to compromise,’ he says.
Canada will undoubtedly be a focus of Global 100 firms going forward, particularly given the global energy play that is driving many firms’ practice focus. And despite the two deals that Norton Rose did with Canadian firms, Montréal’s Ogilvy Renault in 2011 and later with Calgary-based Macleod Dixon at the start of 2012, and the addition of Fraser Milner Casgrain to the three-way merger that formed Dentons in March this year, there are quality options available, not least the only Canada-based Global 100 firm, McCarthy Tétrault.
Global 100 top performer Paul, Weiss, Rifkind, Wharton & Garrison opened in Toronto in 2011 through the hire of two partners from Wall Street rival Shearman & Sterling and chair Brad Karp says its cross-border Canadian practice is busier than it has ever been. Contrast this with Bingham McCutchen chairman Jay Zimmerman, who says the Canadian market is simply not big enough to consider.
India, however, remains off the agenda for international firms as local firms maintain their stranglehold on the domestic market through prohibitive Bar regulations. One managing partner at a Global 100 firm says: ‘You hear stories that Magic Circle firms were training up Indian lawyers ready to pounce on the Bar there and in the end three more years just became longer and longer and it never happened.’
But with rumbles about a lack of return on investment beginning to surface in Asia, while Knowles, for example, says that DLA Piper will struggle to maintain the same level of breathless expansion it has demonstrated the last five years, some argue that the recent pace of international expansion will now slow.
Weil’s Wolf says: ‘I don’t see us opening up in any new markets soon. Given where profitability of the top tier firms is, you’re going to see significantly less expansion among such firms. Given the current situation in Asia, it appears that none of the firms are doing that great there.’
This suggests firms may look to consolidate their positions going into 2014 rather than seek out new markets and risk getting their fingers burned. Time to leave the passport at home. LB
jaishree.kalia@legalease.co.uk