Legal Business took a tour of New York for our Global 100 special and found Wall Street’s elite in a confident mood amid robust deal markets and the ongoing regulatory push.
New York, June 2015. Once the summer arrives in Manhattan, everyone wants to leave – to head upstate or to the Atlantic Coast. Anything to escape the oppressive heat. But among the city’s top-performing law firms, the mood is hot but not bothered. The nine months since Legal Business last visited the Big Apple have brought favourable conditions.
In 2014, the 20 firms in the LB100 that are predominately New York-based amassed $17.03bn at an average revenue per lawyer of $1.2m – well ahead of the Global 100 average and those of the first and second quartiles.
Cheap interest rates are supporting the boom in corporate work, particularly in M&A and leveraged finance transactions, which continue to be fruitful for many Manhattan-based practices. Firms have benefited from peaks in deals involving the financial services industry, while life sciences and technology were singled out as growth areas for many in the next six to 12 months, giving rise to lucrative patent litigation as well as premium corporate deals.
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However, it is clear that financial crisis-related litigation is slowing and its replacement is largely government enforcement work – mainly sanctions, corruption and investigations related. Although not a New York firm, at Mayer Brown’s local office, just around the corner from the Rockefeller Center on Sixth Avenue, head Richard Spehr captures the upbeat sentiment: ‘New York firms are doing well. As the financial crisis litigation begins to drift down, corporate and finance work is coming up.’
Davis Polk & Wardwell managing partner Thomas Reid strikes a similar chord. ‘Financial crisis litigation is now winding down, but enforcement work is high and this is unlikely to slow,’ he says. ‘Two to three years ago our New York activity levels were driven by litigation, which is our single largest practice in New York and represents 25% of our worldwide headcount.’
The remainder of Davis Polk’s Midtown office comprises a large finance group that includes capital markets, lending and derivatives teams; corporate; a financial industries group that largely covers banking regulation; and investment management. With revenues of over $1bn – up 10% from the previous year – and profits per equity partner of nearly $3.3m, 80% of revenues are generated domestically. The disciplined leadership of Scots-born Reid is widely credited with bringing a sustained revival at the leading Wall Street firm after a period in the 2000s when Davis Polk had drifted.
‘Davis Polk will maintain its New York concentration, which provides not just high volumes of work but also our highest margin work,’ Reid adds.
A domestic focus remains a priority for many firms, and despite the more global outlook of White & Case or Shearman & Sterling, many still rely on revenues generated out of New York. ‘People have been saying for years that Wall Street firms will need to hedge outside of New York but yet they well survived the financial crisis and remained very strong over the last couple of years,’ adds Spehr.
But it is the healthcare and life sciences clients, many of which are based the other side of the Hudson River in New Jersey, which are driving a significant amount of growth. Spehr says: ‘Intellectual property work is growing in the pharmaceuticals, life sciences and technology sector. There is enormous consolidation in the pharmaceutical life cycle as the generics and brandeds continue to merge.’
Recent deals in this sector have involved Davis Polk, which advised New Jersey-based Bio-Reference Laboratories on its $1.47bn acquisition by OPKO Health, while in June, Sullivan & Cromwell stepped in to represent Teva Pharmaceutical Industries in its $40bn unsolicited bid for Mylan, following a judge’s ruling that Kirkland & Ellis could not move forward in representing Teva because of a conflict.
Keeping active
Another key trend keeping Manhattan’s corporate practices busy is the growing pace of aggressive activist investors targeting distressed assets for takeover or pushing drifting corporates to sell divisions, which has significantly bumped up M&A activity across the region. ‘Activists have really made a name for themselves,’ says one chair of a New York firm. ‘Corporate America is trying to figure out how to deal with them before they turn up on their doorstep.’
Cravath, Swaine & Moore corporate partner Andrew Thompson picks up the theme: ‘There has continued to be a high level of activity by activist investors in the US through the second quarter of 2015. Activism is continuing to influence deal activity both in terms of spurring deals and influencing how companies approach deals where there is a possibility of post-announcement activist activity. We are also seeing a continuation of a relatively new trend of activist investors targeting large-cap companies in a way they haven’t traditionally.’
This activism is taking hold on a global level too, which plays into the hands of more outward-looking firms like Skadden, Arps, Slate, Meagher & Flom. ‘Global regulatory and enforcement activity continues to gain momentum, along with increased co-operation among investigators around the world,’ says executive partner Eric Friedman. ‘Shareholder activism also has been on the rise globally, and we expect it will increasingly be a factor encouraging companies in Europe and parts of Asia to proactively review their business strategies.’
But while shareholder activism continues to scupper some deal activity, there have also been other challenges in the market. According to Thompson, the private equity market has not been especially active of late. ‘The effort by US federal banking regulators to cap leverage through lending guidelines has presented an additional financing challenge for some private equity transactions,’ he says. ‘My sense is that the lending guidelines are driving more of this business to other parts of the market which are not being constrained. An alternative for private equity funds is to reduce leverage by putting more equity into transactions but that risks hurting their returns.’
Another key concern for New Yorkers is the uncertainty around the Greek debt crisis and the UK’s potential Brexit. ‘I believe the continuing uncertainty around the situation in Greece has negatively impacted European confidence. And the decline of the euro is also not helpful to cross-border deal activity, particularly for European acquirors looking at in-bound US transactions,’ Thompson adds. ‘Adding to the uncertainty is the prospect of a referendum on Britain’s EU membership. While that should not have a direct monetary impact on the euro, in the long run, I’m not sure it’s a good thing for deal activity.’
Client concern
While Manhattan-based firms seem well placed for the year ahead, there are growing concerns over cyber risk. In March, Sullivan, Debevoise & Plimpton and Paul, Weiss, Rifkind, Wharton & Garrison joined forces with Linklaters and Allen & Overy, among others, to form a cyber security alliance to share intelligence and best practice, as well as exchange information with some of Wall Street’s largest banks, including Bank of America, Morgan Stanley, Goldman Sachs and JPMorgan Chase, to protect sensitive information against an increasingly sophisticated array of cyber threats.
But one managing partner of an elite Wall Street firm says that law firm security remains under threat. ‘A firm has around a four-minute window to respond to a security breach and many firms are still taking around 40 minutes to take action. This is not going to work, especially as cyber threats become more sophisticated.’
And the elite corporate firms are not immune to the drive from clients for better service. Lawyers Legal Business interviewed in New York reported an increase in client demand, especially from those operating in the banking sector, for firms to partner-up with in-house legal teams and operate as one.
‘Clients want outside firms to be their virtual legal department – like an extension of their own legal department,’ comments Spehr. ‘They want firms that can work together as a team and not compete with each other. They don’t want their outside firms to duplicate work but add value.’
Nonetheless, institutional relationships between firms and their clients are still favouring Wall Street’s elite, while international firms such as Mayer Brown remain focused on deepening their existing relationships with their top 30 clients. However, one partner at a Wall Street firm insists that its peer group never takes these institutional relationships for granted and that the market remains fierce.
‘The idea that we just service our long-term clients is a myth,’ he says. ‘We always try to renew and expand our client base.’
Immediate peers remain a real threat – and that’s not counting Latham & Watkins, Kirkland or Sidley Austin. In New York, the heat is permeating the air-conditioned office blocks of Midtown and keeping everyone on their toes. LB
jaishree.kalia@legalease.co.uk