Although the global recession laid many of the world’s leading law firms low for a time, this year’s Global 100 sees a return to form for some storied players. Legal Business discovers which firms have found their powers again.
It has been a rough few years for the supermen and women of the world’s largest law firms. While the disputes and insolvency markets have soared since the 2008 banking crisis, the big name transactional lawyers who had driven their firms’ growth for the preceding two decades faced a prolonged period where their powers and status faded as confidence ebbed from Western markets.
Not so in 2014. While our Global 100 results shows the profession remains a fair distance from its pre-Lehman glory days, in general it has been the first year in which deal lawyers have once again been central to their firms’ narrative.
The combined revenues of the world’s largest 100 law firms hit a new high this year. Gross turnover stood at $88.63bn, up 4% on 2012/13 and matching last year’s growth rate. Aside from the obviously lean years immediately after the banking crisis the increase reflects the consistent revenue growth of the world’s 100 largest law firms – the group generated $71.64bn in the boom year of 2007/08.
On average, it has been a year of steady growth in both revenues and profits, with total net income for the Global 100 growing 5% to $33.95bn, with profit per equity partner (PEP) averaging at $1.5m, up 7% on the previous year.
And while some top-line figures suggest healthy firm financials, in real terms overall Global 100 performance was solid rather than spectacular. Average revenue per lawyer (RPL) was up by 2% to $769,000, while the average profit per lawyer (PPL) rose 3% to $295,000. This modest growth is matched by headcount: total lawyer numbers were up 2% to 115,236.
Meanwhile, the total number of equity partners remained largely static, totalling 22,624 shareholders and contributing to the notable 7% upswing in PEP.
Comeback kings
Dominating the Global 100 with more than 70% market share, it is unsurprising that some of the best and worst performing firms are US-originated. Over the last five years, 20 of the top 100 firms have managed to grow revenues by 20% or more organically, all of which are US-based firms.
What is more startling is that Simpson Thacher & Bartlett was the strongest performer of all in 2013 and a beacon for the renaissance of the M&A powerhouse. Turnover rose 15% to $1.13bn, representing 25% organic growth over the last five years, and this was backed up by double-digit profit increases with PPL up 18% to $701,000 and PEP rising 19% to $3.17m.
Simpson Thacher chairman Bill Dougherty and London managing partner Greg Conway say 2013 was a more active year than before, and market improvements in Asia (the firm is representing China’s largest e-commerce company Alibaba Group on its US initial public offering this year) as well as the uptick in M&A work played a part in its standout performance.
The strongest-performing practice of the last five years, Quinn Emanuel Urquhart & Sullivan, is the next-strongest performer this year in revenue terms, although its remarkable growth has inevitably slowed. Firmwide revenues grew 14% in 2013 compared to 18% in 2012, all adding up to an impressive 120% rise in revenues over the last five years. One reason for its slight fall in pace is a clear drop-off in performance in London: the firm’s City office posted its first-ever decline in revenue and profit since launching in 2008, both down by around 30%. However, its recent performance had to cool a little as previous years’ growth rates were most likely unsustainable.
There are clear signs that this year the traditional legal elite is enjoying a return to form in a more optimistic transactional landscape, while some of the firms that rose to prominence during the years of the global downturn have lost a little of their power. Washington DC-based firm Arnold & Porter, which specialises in regulatory, antitrust and commercial litigation and was widely touted in our report last year, posted its first-ever decline since Legal Business began its analysis of the finances of global law firms in 2004. After hitting its second successive year of double-digit growth in 2012, the firm’s revenues were down 6% in 2013 to $686m.
Similarly, Bingham McCutchen, which prospered during the downturn thanks to a solid inflow of work into its debt restructuring practice, felt the pinch when this work stream slowed in the second half of 2012. Its revenues for the financial year dropped by 13% to $762m from $871.8m in 2013, resulting in Bingham ‘topping’ the ranks as the worst-performing firm of the top 100 in revenue terms. There was an inevitable impact on the bottom line as well. Profit per lawyer (PPL), fell 11% year-on-year to $268,000, while profit per equity partner (PEP) dropped by 13% to $1.47m – falling below the Global 100 average.
Partnership growth
Mirroring a trend that emerged in our recent piece on strategic recruitment last month (see ‘Buyer beware’, LB245), total lateral hires among the Global 100 are down on last year – only 1,021 lateral hires. However, only 58 firms actually reported hires last year, at an average of 18 laterals per reporting firm, roughly the same ratio as last year. Overall partner promotions are also down to 1,038 from 60 firms reporting promotions, at an average of 17.
TOP THREE LATERAL HIRERS, RELATIVE TO SIZE |
|||
Rank |
Firm |
2013/14 laterals |
As % of partnership |
| 1 | Sheppard, Mullin, Richter & Hampton | 131 | 11% |
| 2 | Holland & Knight | 52 | 10% |
| 3 | Simmons & Simmons | 20 | 9% |
TOP THREE PARTNER PROMOTERS, RELATIVE TO SIZE |
|||
Rank |
Firm |
2013/14 promotions |
As % of partnership |
| 1 | Kirkland & Ellis | 80 | 11% |
| 2 | Slaughter and May | 9 | 8% |
| 3 | Baker & McKenzie | 85 | 6% |
But even some of those firms which have strong transactional practices haven’t been immune to indifferent years financially. The most notable example of this is Weil, Gotshal & Manges (see case study), which suffered a 7% fall in revenue to $1.14bn and an 11% decrease in PPL to $311,000. Barry Wolf, executive partner at the firm, nonetheless cited restructuring, M&A and private equity as being busy in Paris, and private equity, finance and restructuring as being active in London. The firm also illustrated its interest in growing its restructuring capability in the City and its ability to pay top dollar with the hire of heavyweight Andrew Wilkinson from Goldman Sachs in April 2014.
Perhaps the most striking change in fortune is Shearman & Sterling (see case study). Although still some way off reliving its past glories (its revenues are down 6% over five years) turnover is up 9% this year to $820m, while PPL was up 24% to $355,000.
Even the UK-based global forces, which have struggled more than most in recent years, and whose performance in the Global 100 has been further hindered by an unfavourable US dollar to sterling exchange rate, have enjoyed better years overall. Clifford Chance (CC) reported a significant hike in profitability (up 16% in its home currency) and solid revenue growth, while Linklaters (see case study) put in a similarly strong showing.
‘We had a very strong year in London, which is connected to the EMEA region,’ says CC senior partner Malcolm Sweeting. ‘The idea that growth is dead in the original key territories is wrong. Performance this year for the firm would suggest that. We prefer to look at a ten to 15-year period rather than one – we aren’t driven by short-term profits. We take a long-term view for the business.’
Allen & Overy (A&O) weathered the last five years better than its Magic Circle peers (actually achieving slight growth in dollar terms between 2008 and 2013 thanks to sustained international growth) and global managing partner Wim Dejonghe says London is returning to form: ‘There was a nice pick-up in London over the last year and we are expecting further growth here. Banking and litigation is also very strong and corporate is recovering. Capital markets was busy up till the end of 2013 and was softer in the first quarter of 2014, but this has now picked up again.’
Of the four international Magic Circle firms, Freshfields Bruckhaus Deringer fared worst, posting flat revenues (in dollar terms) at $1,927.1m and five-year revenue drop of 13%, although PEP (again, in dollar terms) edged up slightly by 2%.
But evidently Europe is also enjoying a renaissance as a significant source of revenue for Global 100 firms, even US firms. Our Global London report in April showed the extent to which US firms are making significant strides in London but Paris, Germany and Brussels are all strong areas of growth for international players. For example, Latham & Watkins increased its European capabilities with the launch of a new Dusseldorf office, and hired 20 lateral partners outside of the US, including Simon Bushell from Herbert Smith Freehills (HSF) and David Walker from CC.
Ropes & Gray managing partner David Chapin says most of the firm’s growth in terms of headcount and revenue has been outside of the US, particularly in Asia and Europe. The firm’s only European office is based in London and uses a network of firms to tackle work across the rest of Europe. ‘We are bullish on the long-term future in Europe. The question is do we continue to use the network of firms, and so far we have chosen the latter,’ says Chapin. Daniela Favoccia, managing partner at leading German independent Hengeler Mueller, which has revenues that put the firm outside the Global 100, says: ‘The mood is more upbeat in Europe. There’s more confidence regarding financial markets. In Germany both public and private M&A deals are up. Investors are very interested in the European market.’
Sidley Austin London tax head Drew Scott says the firm’s white-collar group in London was particularly strong this past year, especially because of the pick-up in disputes from the rise of financial products hitting the market, specifically within high yield and securitisation.
Case study: Weil, Gotshal & Manges
Unsurprisingly New York-bred bankruptcy leader Weil, Gotshal & Manges was one of the more confident performers in the wake of the banking crisis – having scored a lead role on the insolvency of Lehman Brothers amid a string of big-ticket workouts.
However, the firm’s relative resilience faltered during the 2013 financial year, when Weil unveiled a substantial run of job cuts citing a response to a structural shift in the legal market. In total 65 associates and over 100 support roles were cut in June 2013, with the firm’s Houston and Boston offices being heavily impacted. The cuts – which were not followed by Wall Street peers – came in a year in which Weil saw a sharp 7.4% fall in its revenues to $1.14bn, while profit per equity partner (PEP) dropped to $2.07m from $2.22m, one of the worst performances in the Global 100. In the 2012 financial year Weil saw flat revenues and PEP falling 5%.
The headwinds facing Weil illustrate a notable shift in the global and US markets, with crisis-related litigation and insolvency work finally falling off while transactional and capital markets work saw a definite rebound after a five-year lull.
It was notable that another of the worst performers in 2013 was Bingham McCutchen, a firm, like Weil, best known for its restructuring practice (though the broader-based commercial litigation specialist Quinn Emanuel Urquhart & Sullivan bucked that trend to post yet another year of robust growth).
The performance has led to claims among peers that Weil is struggling to position itself in a recovering economy. However, executive partner and management committee chairman Barry Wolf says the one-off costs of downsizing and the ‘generous severance packages’ it offered led to the decline, and adds that while the decision was difficult, the firm has already seen the benefits and expects an increase of 5% in profitability this year.
‘This type of downsizing is more common in the UK and Magic Circle firms. It’s less common for US firms and even less common for US firms to do it in an open and transparent way,’ Wolf told Legal Business. ‘There are distractions and dislocations when you do a reduction in workforce, but the firm is now more productive.’
There has also been much attention focused on how this unsettled period will impact on Weil’s London arm, which has become a strong player in private equity and finance work in recent years and has more recently made strategic investments in restructuring.
The firm last year saw a number of UK partner departures, including Mark Soundy and City tax head Sarah Priestley to Shearman & Sterling in May. However, more significant will be the departure this spring of highly rated leveraged finance partner Stephen Lucas for Kirkland & Ellis, leaving Weil’s UK banking team with six partners – two structured finance specialists and four leveraged finance partners – and a team of around 35 associates.
However, in April 2014, the firm did take a headline-grabbing step to bolster its City workout team with the hire of Goldman Sachs restructuring veteran Andrew Wilkinson. Wolf comments: ‘We do not attract people by offering them compensation that is way off the scales. Andrew had offers for more money but came to Weil because of its strength and reputation in global restructuring and the culture of the firm. Is he getting paid fairly? Yes. Is he getting paid what he could get paid at a number of our competitors who would have attracted him solely on money? No.’
Despite the changes in its senior line-up, Weil says it is committed to European expansion, with London and Paris cited as standout performers last year. Wolf argues a pronounced slowdown in US restructuring work was offset to some degree by a stronger performance in general litigation and corporate. ‘The litigation teams are very small in Europe but big in the US. Corporate is also big while restructuring is currently slow. The private equity practice is always booming, but in terms of previous year highlights, M&A has more.’
Key deals for the firm saw Weil’s London, German and New York banking teams earlier this year advise the lenders on Goldman Sachs and Koch Industries’ acquisition of Flint Group from CVC Capital Partners for over €2.2bn, while in February, the firm secured the lead role on Facebook’s $16bn acquisition of mobile messaging service WhatsApp, led by high-profile 2012 Dewey & LeBoeuf lateral hire Keith Flaum.
Quarterly review
Dividing the Global 100 into quartiles on a revenue basis, the strongest performing group in 2013 was the second quartile – those ranked from positions 26 to 50. This group, which contains leading individual performers, Shearman & Sterling and Quinn Emanuel, as well as elite Wall Street forces such as Paul, Weiss, Rifkind, Wharton & Garrison, which has seen revenues grow 35% over the last five years, fared the best across the key metrics of PEP and RPL. Average PEP was $1.7m and RPL was $841,000. This quartile has consistently been the strongest performing group over the last decade.
This year’s upper quartile has been dominated by the emergence of extended or new Swiss Verein firms. With Norton Rose Fulbright (NRF) moving up several places a year after its merger with Fulbright & Jaworski, a third of the top ten is now made up of Swiss Vereins – DLA Piper, Baker & McKenzie and NRF. In addition, the three-way tie-up between SNR Denton, Salans and Fraser Milner Casgrain to create Dentons a year ago has seen the firm now sit comfortably in the top 20.
Similarly, Asia-headquartered King & Wood Mallesons and UK firm SJ Berwin combined in November last year, resulting in a 2,425-lawyer firm that has moved into the top-30 global firms. Revenues at the combined firm came in at $1bn, while PEP was $862,000.
Joe Andrew, global chair of Dentons, told Legal Business that innate criticism of the Verein model is misplaced. ‘It’s a funny argument for lawyers to make – you’d think they would understand the structure because they are lawyers – there’s no difference from an integration standpoint with a Verein.
‘They [Swiss Vereins] have allowed law firms to get around a series of legal impediments such as taxation in many different markets. All global law firms have multiple profit pools. Many of the markets we operate in require us to keep separate profit pools.’
Andrew adds the firm has had 3,000 new client matters since its combination went into effect early last year. The firm posted $1.26bn in revenues and while the firm has refused to disclose profit figures (see comment) PEP is understood to be around $625,000.
The Ins and Outs
| IN | |||
Rank |
Firm |
Turnover |
Change |
| 92 | Hughes Hubbard & Reed | $396m | +9% |
| 94 | Schulte Roth & Zabel | $389m | +5% |
| 97 | Fragomen, Del Rey, Bernsen & Loewy | $387m | +12% |
| 98 | Cahill Gordon & Reindel | $386.5m | +11% |
OUT |
|||
Rank 2013 |
Firm |
Turnover |
Change |
| 91 | Fish & Richardson | $362.5m | -10% |
| 92 | Kaye Scholer | $380m | -5% |
| 96 | Jenner & Block | $357.5m | -8% |
Battling on
For the majority of law firm managers, fee pressure remains a concern, with some firms trying to find new ways to tackle this issue. With work starting to return, firms will need to maintain business development while trying harder to resist the unremitting tide of clients trying to sweat more out of their advisers.
Mayer Brown, for example, is currently developing its client team programme, which was set up to encourage partners to share work across multiple jurisdictions and practice groups. The firm’s London senior partner Sean Connolly said the firm now receives work from 25 of its largest clients in three offices worldwide. ‘The client team was a focus back in 2009, picked up momentum between 2011 and 2012, and is now performing much better.’
This renaissance of its client team is reflected in recent financial performance. After some lean times recently, which have seen revenues fall by 11% over the last five years, in 2013 Mayer Brown posted 5% year-on-year growth in revenues and double-digit profit growth for both PPL and PEP.
Sidley Austin has also developed its client-facing team to assist lawyers when agreeing rates with individual clients. ‘We have had to get more sophisticated. We have a good team that helps the negotiation on rates. Just as our clients come into these negotiations well-armed, we also need to be prepared,’ says Scott. ‘Lawyers are good at law but not necessarily at the commercial side, so we make sure that when they enter these negotiations about fee rates with the procurement team of the client, they have professionals alongside them. I suspect we are one of many firms that do this.’
But according to John Quinn, founder and managing partner at Quinn Emanuel, clients are able to bring fees down because of the overabundance of premium lawyers. He says his firm responds to this by offering alternative fee structures. ‘We offer caps and success fees. We avoid competing on price by offering a lower hourly rate. It is not a good recipe to be aggressive with clients – we negotiate.’
From the client perspective, many do not see much variation from the status quo in the coming years. Says Chan Lee, the deputy general counsel at Pfizer: ‘I don’t see significant changes in the trend we see today – top-tier firms will continue to try to get the full range of legal services. Clients will push for excellent project management, clear communication and co-ordination. Making sure matters are sufficiently staffed and law firms are being cost-effective.’
It is clear firms will need to continue to offer competitive pricing in an overlawyered market, without sending the client elsewhere, during a time where legal panels are increasingly gaining momentum and companies are globalising. But the signs are encouraging. Transactional work is returning in M&A, banking and real estate, and the firms that cleaned up before the biggest financial crisis in history are back. Well, almost. Steve Immelt, the new chief executive of Hogan Lovells, concludes: ‘People are feeling a bit more optimistic but not relaxed. There’s clearly a higher level of activity in the US and in London but it isn’t true across the board.’
The battle goes on. LB
jaishree.kalia@legalease.co.uk
Legal Business would like to thank The Royal Bank of Scotland for its sponsorship of the Global 100.