In the last boom year in 2008 before the global financial crisis took its toll, the picture was rosy for UK-bred law firms. Riding high on an exchange rate that was more than two dollars to the pound, Clifford Chance (CC) topped the table with revenues of nearly $2.7bn, heading a list of seven $2bn+ firms, of which four were Magic Circle and another, DLA Piper, the result of a headline-grabbing UK/US tie-up.
Buoyed by their own success, the messages from the City elite were naturally upbeat. Not least because those firms felt that with the globalisation of legal services in full swing and the focus of clients shifting away from New York and towards markets like China and India, their attractiveness to US suitors had never been greater. ‘We want to be the number one global law firm and, without a strong US component, we won’t achieve that,’ said Linklaters’ then firm-wide managing partner Simon Davies. Freshfields Bruckhaus Deringer’s chief executive at the time, Ted Burke, echoed the point: ‘We’ve never seen so much interest in us from New York firms.’
However, in ten years that position has dramatically changed. While the currency effect has had a material effect on UK firms’ revenues in US dollars, Freshfields and Linklaters are the slowest-growing law firms in revenue terms in the Global 100 over the last decade. Even in home currency, turnover is up just 19% and 18% respectively – very poor by the standards of many leading US firms. Even if the average annual exchange rate for 2007 were applied to Freshfields’ £1.4bn revenue today, it would still only be up by 18%. In contrast, there are six US law firms that we have data for reaching back a decade that at least doubled their revenues (and more than tripled in one case).
One of the main reasons the Magic Circle felt they had the momentum was that US peers had failed to break London convincingly while the UK elite had branched out successfully over Europe and Asia. As it turned out, US firms’ assault on the City took a decidedly more tactical and fruitful turn in the wake of Lehman Brothers’ collapse. Three of the most successful Global 100 firms (see box below) – Quinn Emanuel Urquhart & Sullivan, Kirkland & Ellis and Ropes & Gray – have all made huge inroads in the City in recent years. While ten years ago progress in the lateral hiring market was sporadic in terms of notable transfers, in the last five years the pace and calibre of US acquisitions has been striking, culminating in Kirkland paying $10m a year to secure the services of Freshfields private equity heavyweight David Higgins at the end of 2017.
You can reverse those dynamics for the Magic Circle in New York. And the warning signs were evident back in 2008. Instead of closing, the profitability gap between top-tier US and UK firms has substantially widened – the average between those four dropping from $2.5m to $2.1m in ten years – meaning all have been forced to dispense with rigid locksteps to come up with more flexible remuneration packages to reward star individuals. Yet they simply cannot compete with packages at elite US firms, which have continued to hurtle skywards. Ten years ago, five firms had profit per equity partner in excess of $3m – Sullivan & Cromwell; Slaughter and May; Cravath, Swaine & Moore; Quinn Emmanuel; and Wachtell, Lipton, Rosen & Katz. This year there are 17, and Wachtell; Kirkland; Paul, Weiss, Rifkind, Wharton & Garrison; Quinn Emanuel; Sullivan; and Cravath all break $4m. All the while, more aggressive packages for star M&A and disputes partners mean that the biggest names now command annual packages in excess of $10m.
But while New York firms still feature prominently in many of the major metrics – particularly profitability – a ten-year view clearly illustrates some relative loss of dominance for the Wall Street elite. The top ten US performers in organic growth includes only one New York-bred outfit, Paul Weiss. The list is instead dominated by institutions bred out of Chicago, Los Angeles, Boston and Washington DC, including Illinois juggernaut Kirkland.
Quinn Emanuel’s ascent has been particularly startling. Entering the Global 100 for the first time in 2008 with revenues of $384.5m, the LA-born litigation leader has taken full advantage of the global bull market in high-end disputes to expand its business throughout Europe and Asia, growing revenue 220% to $1.2bn. Meanwhile, having a canny ability to excel in both disputes/regulatory work in the US, as well as having muscular transactional practices, has served Kirkland, Paul Weiss and Gibson, Dunn & Crutcher well. And Cooley stands out as a rare West Coast tech success story of the past ten years, although some of its growth came from large team hires (from Morrison & Foerster and Edwards Wildman Palmer in London, for example).
But while the sluggish performance and currency woes of the UK elite are clear, some US firms have seemingly managed to achieve the impossible; a backwards move over a ten-year stretch. Most notable laggards are Cadwalader, Wickersham & Taft, O’Melveny & Myers and Shearman & Sterling. Cadwalader’s loss of status is capped by this year falling out of the Global 100 having been ranked at number 58 a decade back with $587m in turnover. This year, revenue was down 10% year-on-year to $408.1m – a drop of 30% since 1998, a near halving of income once inflation is accounted for. Lawyer headcount at the firm is down 44% over the same period. Cadwalader’s problems began when its structured finance team was decimated by the credit crisis and the collapse of core clients Lehman and Bear Stearns.
O’Melveny, once considered West Coast royalty and among the top 25 Global 100 firms in 2008, has also shed headcount significantly in ten years – from over 1,000 lawyers to 660 on average in 2017. Revenue followed suit, taking the firm from 24th in 2008 to 58th – despite a slight lift in turnover in 2017. The irony is that the faded LA glamour of this institution appears to have made it open to a tie-up with a far larger UK player – crunch talks with Allen & Overy (A&O) were taking place this summer as Legal Business went to press. Yet while partner profitability is broadly comparable even such a tie-up is regarded as a formidable cultural and logistical challenge to win partnership backing.
As to once-strong brands losing their lustre, debate regarding the long-term decline of Shearman dates as far back as the early 2000s. The New York firm pioneered global expansion in the 1990s but within a decade had lost momentum. It slipped from tenth place to 25th by 2008 and now holds on to its spot in the top 50 by a mere three places. Revenue is up just 1% on last year to $917.5m. Ten years ago, revenue was $921m and then senior partner Rohan Weerasinghe admitted: ‘We overgrew in the late 90s.’ One consultant went further than that, commenting: ‘If Shearman was a corporate and I was an activist shareholder looking at the market, then a merger with a Magic Circle firm would be top of my list in a letter to the board.’
In 2008, A&O and Shearman were touted as potential merger partners. Nothing happened.
The awkward reality for London leaders facing what has been in relative terms a lost decade in global law’s top echelons is that while upwardly mobile US institutions are impossible to entice into a merger, it is hardly any easier with the players sliding just as quickly down the pecking order. LB
Global 100 top organic growth 2008-18
| Firm | 2008 | 2018 | Growth % |
|---|---|---|---|
| Quinn Emanuel Urquhart & Sullivan | $384.5m | $1,229.8m | 220% |
| Kirkland & Ellis | $1,282m | $3,165m | 147% |
| Cooley | $485m | $1,072.1m | 121% |
| Ropes & Gray | $730m | $1,597.1m | 119% |
| Covington & Burling | $467m | $945.5m | 102% |
| Paul, Weiss, Rifkind, Wharton & Garrison | $651m | $1,301.8m | 100% |
| Perkins Coie | $394.5m | $786m | 99% |
| Morgan, Lewis & Bockius | $1,032.8m | $2,001m | 94% |
| King & Spalding | $615m | $1,138.5m | 85% |
| Gibson, Dunn & Crutcher | $907.7m | $1,642.6m | 81% |
Global 100 slowest growth rates 2008-18
| Firm | 2008 | 2018 | Growth % |
|---|---|---|---|
| Linklaters | $2,589.8m | $1,963.8m | -24% |
| Freshfields Bruckhaus Deringer | $2,365m | $1,808.5m | -24% |
| Clifford Chance | $2,668.1m | $2,092m | -22% |
| O’Melveny & Myers | $930m | $738m | -21% |
| Simmons & Simmons | $578.2m | $456.4m | -21% |
| Foley & Lardner | $720.5m | $686.2m | -5% |
| McDermott Will & Emery | $978m | $925.5m | -5% |
| Shearman & Sterling | $921m | $917.5m | 0% |
| Pillsbury Winthrop Shaw Pittman | $590m | $589.5m | 0% |
| Schulte Roth & Zabel | $419.5m | $424.1m | 1% |