Global 100 – Global Elite – Hollow victory

The Global Elite continues to dominate the international legal market. But with ailing global markets and little to no M&A, not every firm has much to celebrate

Europe is in crisis, the UK has hit a double dip recession and US markets continue to fluctuate. Likewise the debt markets are closed, M&A sits on ice and big-ticket litigation is few and far between. But the Global Elite retains its dominant position. The world’s behemoths remain relatively unscathed by the knock-on effect of ailing global economic and financial markets.

But not all the news is good. Within this exclusive group of firms, results vary. Two out of the 15 Global Elite firms posted a fall in fee income for the 2011 financial year, while five firms decreased equity partner headcount.
And almost half of these firms didn’t factor into the top ten M&A advisers by value list for the 2011 year.

While the Global Elite dominates in terms of profitability, average revenue increase across the group was 4%, compared to 7% for the entire Global 100.

‘From July last year, it has been challenging as the European financial crisis spilled over into the global markets,’ says Pete Ruegger, chairman of US-based Simpson Thacher & Bartlett. ‘The global capital markets have been volatile. M&A volume has also been impacted. 2011 was a good year; just not as robust as we had hoped.’

And to reflect the ever-shifting landscape of the global legal market, the make up of the group has changed. Herbert Smith, after another turbulent year, is out and taking its place is New York firm Paul, Weiss, Rifkind, Wharton & Garrison, which has had a stellar year in a number of markets.

The haves

While Global Elite debutant Paul Weiss posted a modest increase in revenue for the year – turnover at the Manhattan-based firm is up 4% to $780m – the firm has seen a slight rise in PEP to $3.1m despite the addition of five partners to its equity and the launch of a new office in Toronto. Despite its fairly moderate financial performance, it is the firm’s impressive mandate list which has earned Paul Weiss its place among the Global Elite.

Top ranked for its impressive disputes practice in The Legal 500 US, Paul Weiss was instructed in May by the Federal Trade Commission (FTC) to conduct its investigation into Google and whether the internet giant abused its power in the internet search market. The firm is also lead counsel on all of Citigroup’s residential mortgage-backed securitisations (RMBS) litigation and last year defended the bank against a $4bn arbitration claim brought by Abu Dhabi Investment Authority.

On the transactional side, London-based co-head of the securities and capital markets group Mark Bergman acted for Sihuan Pharmaceutical Holdings Group on its $741m Hong Kong IPO, while a New York-based team acted for RSC Holdings in its $1.9bn sale to United Rentals.

The firm has also successfully attracted a number of impressive lateral hires during the course of 2011, including corporate partner Gregory Ezring from O’Melveny & Myers.

‘Markets were challenging in 2011 and we were very fortunate,’ says chairman Brad Karp. ‘We had the highest revenues and profits in our history; on the transactional side we had more multibillion-dollar deals than ever in our history and we handled more multibillion-dollar litigations than ever before.’

Paul Weiss joins the majority of Global Elite firms to have posted a rise in revenue for the 2011 calendar year. The firm with the biggest revenue growth is Latham & Watkins, which again continued to perform at the top of the Global Elite and pushed through the $2bn barrier after fee income rose by 12% to $2.15bn from $1.93bn. The firm’s corporate practice has had another successful year, advising on 295 global deals worth $257.6bn, according to mergermarket data, placing it fifth in the top ten global M&A advisers by value. 

Sitting just above it is rival Skadden, Arps, Slate, Meagher & Flom, which advised on 202 deals worth $276.7bn during the year.

‘We had a very good year because of the strength of our global platform and the diversification of our practices,’ says Eric Friedman, executive partner at Skadden.

Friedman’s firm has celebrated a number of successes this year, particularly during the last few months. The firm won roles acting for Japan’s Marubeni Corporation in its $3.6bn acquisition of Gavilon, BlackRock in its $13.5bn purchase of Barclays Global Investors from Barclays out of the UK office, and for Yahoo! in the $7bn sale of its stake in Alibaba. The last deal involved three other Global Elite firms: Freshfields Bruckhaus Deringer; Wachtell, Lipton, Rosen & Katz; and Weil, Gotshal & Manges.

Cleary Gottlieb Steen & Hamilton also celebrated a successful year after posting a 7% rise in fee income to $1.125bn from $1.05bn. The firm’s five-year compound annual growth rate for revenue is 5%, making it one of the top performers globally.

All other Global Elite firms posted a rise in revenue for the year with the exception of Cravath, Swaine & Moore (-4%) and Wachtell (-5%).

‘The first half of the year was good and in line with our expectations but the second half was challenging,’ says Ruegger.

Tougher times

Global M&A activity continues to face depression and most senior management figures at Global Elite firms admit that the ailing M&A markets have heavily affected their business.

‘Generally it has been a robust year for us. M&A has been patchy but other practice areas have been busy,’ says Chris Saul, senior partner at Magic Circle firm Slaughter and May.

Slaughters’ business is weighted towards its heavy hitting corporate practice, and the firm has posted marginal increases in revenue during the last two years. Fee income rose to $718.1m this year, up just 5% or 2% in sterling terms from the $687m it posted in 2011.

Slaughters made up for the shortfall in M&A by landing roles on a number of high profile and impressive disputes.

‘Our dispute resolution team has been winning some good mandates,’ says Saul. ‘They have been very stretched, with investigations work a particular focus.’

Slaughters is shielded somewhat from the turmoil of the global markets by its conservative approach to global expansion. With just four offices – London, Brussels, Hong Kong and Beijing – the firm relies on a network of best friend relationships. Saul says the firm has been well served by its relationship firms in recent years.

Much like Slaughters, Wachtell and Cravath are two firms with little geographic coverage but highly impressive corporate practices. Both factor into the top ten global M&A advisers by value in 2011 but both firms saw fee income fall during 2011.

Wachtell, which acted on 68 deals worth $282.1bn in 2011, saw fee income fall by 5% to $552m from the $580m it posted last year. The firm has also decreased its lawyer headcount by 3% from 253 to 245, while equity partner numbers are down by almost 7% from 84 to 78.

Similarly, Cravath saw fee income fall by 4% to $568m from $591m, while partner numbers fell from 87 to 83. The firm ranks tenth in global M&A advisers by value for the year, after acting on 59 deals worth $215bn.

‘Clearly we’re in a huge period of uncertainty – that means fewer deals, fewer offerings and less in general on the commercial side,’ says Barry Wolf, executive partner at Weil Gotshal. ‘I don’t see anything to suggest we’re going to see a big change on the transactional side, it will be another bumpy six months.’

One firm to significantly suffer from the fall off in M&A activity is the only casualty of the Global Elite this year: Herbert Smith. The firm has had a tough year, not only experiencing a spate of high-profile partner departures and falling corporate mandates, but seeing its European alliance partners, Gleiss Lutz and Stibbe, walk away from their lengthy relationship.

‘For Herbert Smith, the profitability just isn’t there,’ comments a rival. ‘The firm has lost a lot of ground globally and someone like Norton Rose deserves to be in the Global Elite more than Herbert Smith.’

While it still boasts an impressive disputes business, Herbert Smith’s corporate practice has shrunk significantly in the last few years (see Breaking the Circle). Ten years ago revenue generated by the firm’s corporate practice was about 50% of the firm’s £209m turnover. These days it brings in around a third of the firm’s revenues and the firm no longer factors into the mergermarket’s top ten deal tables for European, UK or global M&A. 

Additionally, losing handfuls of corporate and capital markets partners across a number of global offices over the last 12 months means that the firm’s capabilities are dwindling. And while its litigation practice still reigns supreme in the UK market, in the US it doesn’t hold the same standing, although when the firm eventually launches its New York disputes practice, things could change.

The devilish details

‘What you have to ask is are these the best firms on the globe or the best global firms?’ asks William Cock, recruitment specialist at First Counsel. ‘The devil is in the detail.’

The likes of Baker & McKenzie, Norton Rose and DLA Piper, which all have extensive office networks and continue to expand their businesses by merging with competitors or adding large teams of lawyers, are not Global Elite firms because their rapid global expansion has not necessarily secured the best talent in key practice areas and profitability is way behind most of the Elite firms.

It is unlikely that the criteria to make it into the Global Elite will change any time soon, with the emphasis remaining on operating at the top of the market. What could change as the years press on, is the list of firms that make up this group.

‘As there is more uncertainty, so clients will increasingly turn to the top lawyers,’ says Cock. The Global Elite will continue to dominate the global legal market as they continue to serve the most prestigious clients with the best lawyers. But as the markets continue to prove challenging and clients search for value, casualties are inevitable.

‘You’ve got to be cautious for 2012. You have to be as flexible as you can be and stick close to clients in challenging times. The euro crisis is dampening people’s willingness to be brave,’ comments Slaughters’ Saul.

Saul is not alone in seeing the need to be very focused on the firm’s business in order to remain successful. It is fitting that the last word goes to Karp at new entrant Paul Weiss, who urges all firms to be realistic about how they position themselves.

He says: ‘Law firms need to take an objective and realistic view of what they are and what they are not in mapping out their strategy. They need to focus on their strengths and avoid trying to be all things to all clients. We have seen too many firms in recent years chase fad practices or open offices in curious markets in the hopes of luring business that never materialised.’ 

emma.sadowski@legalease.co.uk