Global 100 Overview – Heavyweights

A busy US deal market saw rainmakers pack a bigger punch than ever at the world’s largest law firms but the contest remains tough for aspiring firms. Legal Business separates the champs from the contenders.

Linklaters managing partner Simon Davies chooses his words carefully when describing his partnership’s feelings on the City giant’s performance in 2014/15: ‘they appear content’. The Magic Circle collectively went into the financial year with considerable hopes of rekindling their momentum after a long grind through the post-banking crisis wilderness.

But while the world’s top 100 law firms by revenue have had a robust year thanks to solid conditions in the dominant US legal market, with gross revenue rising 5% to hit $92.87bn, London’s top law firms have again struggled to punch their weight.

Global 100 total gross profits and revenues

Global 100 headcounts

Global 100 averages

Across the board

The world’s 100 largest law firms are on track to break through the $100bn revenue barrier by 2017 but the tilt towards the US at the upper reaches of the legal services market is unmistakeable. In Latham & Watkins, the Global 100 has a new champion, with a blistering 2014 seeing the firm add $327m in revenue to leapfrog DLA Piper and Baker & McKenzie to become the world’s largest law firm.

While this year’s Global 100 indicates a steep climb for the Magic Circle, this is largely the result of a rebound in sterling against the dollar.

Further complicating the equation, a substantial weakening in the euro has depressed the home currency results of London’s leading law firms. Clifford Chance (CC) suffered a dip in revenue and profitability in its home currency; Freshfields Bruckhaus Deringer was flat on revenue and down in profitability; and Linklaters made only marginal gains.

But given the revival in business confidence, the relative rebound of the UK economy and the more developed European and Asia practices that London leaders have built compared to US rivals, their results are surprisingly subdued. Indeed, aside from a confident showing from Allen & Overy (A&O), it is mid-tier players in the UK – a handful of which make it into the lower ranks of the Global 100 – that are currently setting the pace for the world’s second-largest legal market.

Still, across the Global 100, average profit generated by the group’s 116,221 lawyers rose 6% to $313,000. It has not been a defining year for expansion across borders, barring Dentons’ frenetic consolidation agenda, but greater profits have been earned and partners and associates alike have benefited from a spike in pay.

If the financial results this year do not clearly demonstrate the pay-off of globalisation – aside from the increasingly lucrative London practices forged by US law firms – it has been another 12 months in which elite American practices have pulled away further from the rest at home and abroad.

The richest 20 firms by profitability saw their average profits per equity partner (PEP) rise 9% from $2.93m to $3.18m last year. Three more US firms – Proskauer Rose, White & Case and Hughes Hubbard & Reed – have crossed the $2m threshold for PEP, taking to 28 the number of firms with PEP at that level. Only three of this band are based in the UK.

Five US firms broke the $1bn barrier as Ropes & Gray, Quinn Emanuel Urquhart & Sullivan, Davis Polk & Wardwell, Paul, Weiss, Rifkind, Wharton & Garrison and Paul Hastings recorded record years. There are now 34 billion-dollar law firms in the world, up from 30 last year.

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Dealmakers came to the fore against last year as bankruptcy and litigation work ebbed on the improved economic backdrop in the US and Europe. While 2013 saw the return of the white-shoe firms following a US-led M&A rebound, this year’s Global 100 experienced a sustained level of cross-border activity.

Latham was strongly placed to benefit from the increasing trend for transatlantic deal-making and financing, with the firm’s M&A, private equity and leveraged finance teams driving it to the highest organic growth inside the top 50. Latham has achieved a 43% rise in revenue during long-time leader Robert Dell’s final five years as global chair, with income up 14% in 2014 alone. Dell’s successor, Bill Voge, comments: ‘Last year was unique in that we were phenomenally strong across the board. Every single practice at Latham had a boost in revenues and was busier than in 2013. We have very diversified practice groups and typically, in years which we’re busy, there’ll still be practices that are down so this is very rare. Even though we had a fabulous 2014 and our lawyers worked very hard, we were not at full capacity. We were busy but there’s still capacity in the system.’

Global 100 historic averages: profit per equity partner ($k)

NB: Prior to 2008, the Global 100 was the Global 50. Data between 2004 and 2008 is only available for the upper two quartiles of the Global 100. Year given is the publication year for the relevant Global 100 report and refers to the previous calendar year, ie 2004 finances for 2005 report.

Global 100 historic averages: TURNOVER ($M)

NB: Prior to 2008, the Global 100 was the Global 50. Data between 2004 and 2008 is only available for the upper two quartiles of the Global 100. Year given is the publication year for the relevant Global 100 report and refers to the previous calendar year, ie 2004 finances for 2005 report.

Global 100 historic averages: revenue per lawyer ($000k)

NB: Prior to 2008, the Global 100 was the Global 50. Data between 2004 and 2008 is only available for the upper two quartiles of the Global 100. Year given is the publication year for the relevant Global 100 report and refers to the previous calendar year, ie 2004 finances for 2005 report.

For a few, such economic shifts boded ill, most notably restructuring giant Bingham McCutchen, which collapsed in the autumn of 2014 as its well-regarded London arm broke off to join Akin Gump Strauss Hauer & Feld with the bulk of its US practice absorbed by Morgan, Lewis & Bockius. Bingham had ranked 45th in our Global 100 last year, with revenues of $762m.

While Akin Gump is also heavy in restructuring, it managed to capture work generated in the energy sector following a devaluation of assets caused by falling oil prices, and had a strong year in intellectual property and funds.

Akin chair Kim Koopersmith says: ‘We’ve been through numerous cycles of restructuring work and we’ve managed to remain strong, but you can’t ignore that it’s been down for many firms. We’re fortunate to be market leaders in restructuring in the US and UK and that position enables us to be the go-to firm.’

Another practice group putting a drag on revenues was commercial litigation, with a host of broad service firms including DLA Piper, Winston & Strawn and Reed Smith reporting a slowdown in contentious work. Many firms heavily weighted in commercial litigation are seeking to rebalance and strengthen their deal teams, a motivation that led Winston & Strawn to tap Pillsbury Winthrop Shaw Pittman for 19 senior corporate, finance and projects partners earlier this year.

Winston & Strawn managing partner Thomas Fitzgerald, who led the firm to a 6% increase in revenue to $785.5m after a series of flat results, observes: ‘The corporate group was up around 10% and led the way in driving profitability. Litigation grew for the eighth year in a row but largely because of additions, with our historic litigation business flat-to-down as the US litigation market is slightly down. We need discipline to not always acquire additional litigation partners since we have the ability to be very competitive but to change the profile of our firm to address the issue.’

O’Melveny & Myers, which posted the weakest overall results in the table and has seen revenues fall two years running, has been badly affected by the falling volume of disputes. Down 9% last year to $665.2m, the firm’s chair Bradley Butwin says O’Melveny experienced ‘fewer big trials in 2014’ and puts its drop down to having ‘some very large matters wind down in late 2013’.

But despite a patchy disputes market a number of elite litigation names continued to power on, such as Quinn Emanuel and Paul Weiss, which both achieved double-digit percentage growth in revenues.

Buoyed by its defeat of Sullivan & Cromwell and Simpson Thacher & Bartlett in the New York courts for the Federal Housing Finance Agency, securing a landmark ruling against Japan’s Nomura and the UK’s The Royal Bank of Scotland that they misled Fannie Mae and Freddie Mac over $2bn worth of mortgage securities, Quinn Emanuel’s PEP soared 10% to take it to the brink of $5m. This came despite its push in antitrust litigation and international arbitration and a swelling group of equity partners, which grew 10% to 147, sharing the spoils.

Less confident was Shearman & Sterling, which should have been well positioned to make gains this year given its sizeable finance group in London and New York, but failed to sustain its pace of 2013, when it was one of the top performers. The firm saw revenues up 3%, falling behind many key New York rivals.

But if general commercial disputes were subdued, there was no let-up in the levels of regulatory work, while law firms continued to invest in white-collar defence and global investigations practices.

One Asia-Pacific general counsel (GC) at a leading international bank, comments: ‘The type of work we’re seeing is gearing towards regulatory change, mainly around derivatives structure and how the markets operate.’

The next five years’ game

While most UK firms cited a strong M&A performance, A&O was the only one of the big four to sustain overall growth. Despite a strong pound inflating its results, an improved cross-border deal flow together with a steady flow of white-collar and government investigations work resulted in an 11% jump in turnover to $2.11bn (or a 4% rise in sterling). Leapfrogging Freshfields and Linklaters this year, A&O’s pace of growth over the past five years has been around double that of those two rivals, making it the best performing of the Magic Circle over a five-year period.

Wim Dejonghe, A&O’s managing partner, concedes the key goal for the firm remains building up its US law capability across the network. ‘You need a US law capability everywhere, not just in New York. US law is becoming more important in Asia and continental Europe. Since 2008, our offering includes everything from high yield to bond issues, and building this US law capability is the game for the next five years.’

Nick Shilton, chief executive at Shilton Sharpe Quarry, highlights the scale of the strategic challenge the US market presents to the Magic Circle as a select band of American law firms make inroads in London. ‘The US remains an enormous problem for all the Magic Circle firms and they’re not any closer to solving it than they were ten years ago. US firms benefit from being in the largest and most lucrative legal market, which the Magic Circle has got a toehold in at best.’

The total number of equity partners employed by the Magic Circle fell last year while the white-shoe firms expanded their ranks, an indication of how far behind the UK firms remain from pre-Lehman growth mode.

And while the UK economy was a relatively strong performer in 2014, renewed concerns in the eurozone provided a further drag on growth on the continent. Hengeler Mueller co-managing partner Georg Seyfarth says ‘price pressure is still a big issue for our traditional German corporate clients’ despite ‘more international mandates’, and the Magic Circle suffered further from a weakened euro against the pound.

In its home currency, Linklaters managed a 1% climb in revenue to £1.27bn. The firm’s PEP edged up 2% to £1.37m. Davies comments: ‘The scale of our euro business affected us and will affect a number of firms this year. Despite the euro headwinds we’re up 1% in sterling, but if we’d had a constant exchange rate we’d be up 5%. We feel as though that’s a strong result as we can’t do anything about foreign exchange.’

The upside for Linklaters, which benefited ‘from the spring back in M&A and from being involved in juggernaut deals going through the market’, is the firm’s improved performance in Asia. Boosted by its advisory role on the $26bn merger between Chinese rolling-stock giants CSR Corporation and China CNR Corporation, Davies says that: ‘Of all the regions, Asia had the steepest revenue growth, with particularly strong showings in China and India.’

Most firms cited a sharp uptick in activity in London, with Slaughter and May’s practice partner David Wittmann noting ‘it has been a strong 12 months in all parts of the firm’.

At CC revenue was down 1% in sterling and PEP fell 2%. Managing partner Matthew Layton says: ‘Our Asia-Pacific practice had another strong year and London put in a particularly strong performance. Europe is not without its challenges – and with more perhaps in the coming months – but there is also a great deal of potential with inbound investment interest from Asia-Pac and the US.’

In contrast, smaller UK practices have posted emphatically better results this year. Berwin Leighton Paisner was the biggest climber in the year’s Global 100, up 13 places, with an 11% rise in turnover to $427m after nearly losing its place among the world’s 100 largest firms last year. Clyde & Co and Bird & Bird, which have heavily built up their Asia practices in the past five years, both achieved strong growth while Taylor Wessing re-entered the Global 100 with a strong domestic performance.

The best and the rest

Just four firms headquartered outside of the UK and the US made the Global 100 this year, four fewer than last year, with a number of European and Australian firms tumbling out after challenges in their domestic markets and the weakening of the euro and the Australian dollar. The Netherlands’ Loyens & Loeff, along with Australian duo Minter Ellison and Clayton Utz, can no longer claim to be one of the world’s 100 biggest law firms.

Dividing the Global 100 into quartiles on a revenue basis, the second quartile of firms – those ranked between 26 and 50 – were again the best performing as the elite firms pull away from the rest of the pack. This group, which contains Davis Polk & Wardwell, Milbank, Tweed, Hadley & McCloy and King & Spalding, took average revenue up 6% to $930.2m and fared best across most key metrics due to their nimbleness over the bulky verein and Magic Circle firms in the top quartile and their focus on high-margin work. Consistently the best performing quartile over the past decade, average revenue per lawyer (RPL) among this group rose 10% to $921,000 as average PEP rose a striking 15% to reach $1.96m.

Although known for their conservatism, leading Wall Street firms sitting in this second quartile have become slowly more amenable to expanding in a few key foreign hubs, particularly London and Hong Kong. Scott Edelman, chair of Milbank, says: ‘What we’ve got going on here is a very exciting, innovative and entrepreneurial firm in all kinds of cutting-edge industries, like aircraft and satellites and infrastructure projects. While we’ve still got a bit of overhang as an old white-shoe firm, my job is to make sure the word gets out about what we are today as opposed to what we were 20 years ago.’

A fair number of pacesetters in the Global 100 are US firms that hail from Chicago and the West Coast, the country’s most vibrant tech and manufacturing spaces. A four-strong group, with Latham and Gibson, Dunn & Crutcher hailing from the West Coast and Chicago-bred Sidley Austin and Kirkland & Ellis, have all tackled New York and London in a more committed manner than is typical for Wall Street law firms.

Gibson Dunn, which last year hired former Ashurst senior partner Charlie Geffen, is building a credible City practice and has the firepower to support its investments, having grown 47% over the last five years to add nearly $500m to its top-line. Kirkland has grown by 51% since 2010 and Sidley Austin by 29%.

In contrast, it has generally been another understated year for the band of verein-backed global law firms, including Baker & McKenzie, Norton Rose Fulbright, Hogan Lovells, DLA Piper and Dentons, which are struggling to keep pace with top-tier integrated firms.

In relative terms, Bakers put in a respectable performance with revenues up 5%, while the closely watched King & Wood Mallesons achieved underlying growth of around 10% (in dollar terms revenue was more sedate at 4%). But forged in part to provide a challenge to the elite firms in the market, the vereins have so far failed to make meaningful gains.

With interest rate rises around the corner in the US and the UK, and the ongoing wrangling over Greece’s membership of the eurozone, the outlook looks comparable to the previous year: considerable areas of commercial activity marred by volatility and continued pressure on fee rates for the still widening areas of commercial practice now deemed business-as-usual by GCs.

Reed Smith head of EMEA Roger Parker says: ‘Management don’t want to set expectations too high for this year given the feedback they are getting about the economy from clients’. He describes there being ‘a real cautious sentiment in 2015 with growth being revised down in the US, the UK and China.’

The good news for advisers – as bluechips continue to narrow the size of their global panels – is that there are still very significant levels of work to be won… for the firms that can position themselves correctly.

The banking GC concludes: ‘We’ve received way more external legal advice in the last 12 months than we have in the years before. That’s due to the amount of change the market is going through, not just us, [which] requires us to get that external legal touch.’

The bad news is that, globally speaking, fewer firms will be stepping into that particular ring. LB

tom.moore@legalease.co.uk
jaishree.kalia@legalease.co.uk (additional reporting)

Legal Business would like to thank Shilton Sharpe Quarry for its sponsorship of the Global 100.

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