Global 100: Hitting the wall

While 2015’s Global 100 showed signs of regained momentum, the intervening year saw some contenders come to a shuddering halt. Legal Business looks at the few setting the pace and those faltering in the global race.

In the early hours of 24 June, the unthinkable happened. The UK had voted to leave the European Union by the narrowest of margins, sending stocks plummeting when the London Stock Exchange began trading. Sterling fell to its lowest level against the dollar since 1985. And while the panic had dissipated after several chaotic days, around the world shockwaves were being keenly felt.

Fiona Adams, London co-managing shareholder of Greenberg Traurig Maher, said: ‘For the UK and Europe more generally the Brexit referendum has dampened activity for the first half of this year.’ One London head of a US firm spoke of the concern felt over Brexit every time he went to visit colleagues at his firm’s headquarters. ‘I have assured them it won’t happen.’ If only such faith had been rewarded.

Nick Shilton, chief executive of Shilton Sharpe Quarry, says: ‘Doing a big US merger was already unattainable for top UK firms and the Brexit vote has made it even more challenging. The UK firms will be harder hit than American firms by the vote. New York has just become a lot more expensive but the Magic Circle are so heavily invested there that they can’t retrench. They also have armies of associates in London and an awful lot of them are transactional. Any upswing in restructuring, litigation and regulatory work will not cover the slack in M&A. The intriguing thing is that only a number of weeks ago UK firms sharply increased associate compensation. Unless they wave goodbye to people they are going to need again in a few years’ time, partners are going to have to take the financial pain themselves.’

Only a year ago the signs were so positive. A robust deal market, particularly in the US, had pushed the collective performance of the Global 100 up 5% in revenue. Average profit per equity partner (PEP) was up 7% to $1.6m. The world’s 100 largest firms had steadily moved through the gears since the global financial crisis and were picking up the pace. We predicted that the group looked set to break through the $100bn collective revenue barrier by 2017.

That line looks further away now. Gross revenue for the Global 100 now stands at $95.99bn, an increase of just 3% on the 2015 report, but this tells only half the story. Collective averages are particularly misleading, as the top line of the Global 100 this year has been swelled by mergers and acquisitions. Dentons moved from a $1.28bn firm to a $2.12bn business by virtue of its incredibly expansive 2015; Morgan, Lewis & Bockius pushed its top line up from $1.32bn to $1.84bn by taking on a large chunk of the failed Bingham McCutchen; while Dallas-based Locke Lord saw its gross fees increase from $426.5m to $597.2m after acquiring Edwards Wildman Palmer at the start of 2015. That equates to a $1.5bn uplift to total revenues across the Global 100. Set against a 6% increase in total lawyer numbers from 116,221 to 122,945 (again, Dentons’ addition of around 4,000 lawyers after combining with Chinese firm Dacheng distorts the picture), average revenue per lawyer (RPL) is $781,000 – a fall of 2%.

Individually, the results are underwhelming. Of the top 100, 32 firms experienced negative or no revenue growth in 2015/16, although this does include a number of firms that did post positive growth in home currencies but lose out in our table when revenues are converted into a strong US dollar. This year the firm ranked in 100th place in the table, FIDAL, had revenues of $384m. Last year, Cahill Gordon & Reindel was ranked 100th with $380m. The dial has barely moved. Latham & Watkins has held its position as the world’s largest firm by revenue but only saw its top line increase 2% from $2.61bn to $2.65bn.

‘We’ve built our network in the innovation space and we will continue. We’ve got a clear direction.’
Wim Dejonghe, Allen & Overy

 

 

Profit-wise, the picture is likewise muted. Gross profits for the Global 100 this year stand at $37.84bn, which is up 4%, but average PEP is flat at $1.6m and average profit per lawyer (PPL) is down 2% to $308,000. This is despite 31 firms in the Global 100 this year reducing their lawyer headcount.

While Brexit has had an unmistakable effect on global markets for the last six to eight months, and will be an inevitable factor in the finances of global law firms in 2016 and beyond, for the majority of the Global 100 the financial performance analysed in these pages is based on 2015 accounts (or, in Baker & McKenzie’s case, June 2014 to June 2015 numbers). There have been other factors at play that have had a noticeable effect on momentum among the Global 100. Philip Sanderson, who joined Ropes & Gray (see case study) from London firm Travers Smith at the start of 2015, says: ‘From an M&A perspective, the softness of the market is not all about Brexit. It’s been soft for a while.’

Meanwhile, Richard Foley, senior partner at Pinsent Masons – Legal Business’ Law Firm of the Year and one of the top-performing firms in last year’s Global 100 – cites persistent challenges: ‘If you look at the headwinds last year – the UK general election, oil prices, the eurozone crisis, Brexit looming, the US presidential election – there have been more headwinds in the past 12 months than in previous years. That has had an effect on business.’

North Sea bubble

Pinsents – after posting a 12% increase in revenues for 2014/15 – put in an above-average performance last year, with home currency revenues up 5% to £382.3m. Foley says this is despite significant investment back into the business in the last 12 months: ‘I don’t think we’ve ever had a year where we have invested as much as we did this last year. Three new offices, 23 new laterals, investment in IT [including the acquisition of a majority stake in Cerico, the online regulatory compliance solutions business], investment in AI [artificial intelligence].’

UK-based firms generally had subdued 2015/16 financial years but the strength of the US dollar against sterling, the euro and the Australian dollar all conspired to create a bleaker picture in our table (see box, ‘The currency effect’). While the Magic Circle generally had a reasonable year in sterling terms, all four UK-based firms in the top ten saw negative growth in our dollar-denominated table this year. Freshfields Bruckhaus Deringer, by virtue of a 7% uplift in gross fees in sterling, from £1,245m to £1,327m, saw revenue dip 1% in dollars. Others fared worse. Of the dozen UK-based firms in the Global 100 (not counting vereins), only Clyde & Co showed positive turnover growth in US dollars – this is because it posted 13% growth in its home currency from £395m to £447m.

On a five-year track, Freshfields and Allen & Overy (A&O) have been the strongest UK performers among the Global Elite. While Clifford Chance is still the largest of the UK ‘big four’ by turnover, these two firms have grown 14% and 15% in dollar terms over the last five years, moving them ahead of the pack. Both have used innovation to reduce overhead and to provide legal services as efficiently as possible to clients: A&O through its Belfast legal services hub as well as much-touted initiatives such as Peerpoint and aosphere, while Freshfields’ launch in Manchester in 2015 was one of the most significant stories of the UK legal market last year (see ‘Global 100 – the stories of the year’) and recognition – by one of the UK’s most consistent performers – of the disaggregation of legal services.

Andrew Ballheimer, who succeeded Wim Dejonghe as managing partner of A&O following a contested election process at the end of 2015, comments: ‘Our offering is equally focused across finance, corporate and litigation, and innovation.’

Dejonghe, who moved to senior partner following a contested election, adds: ‘We’ve had a good run in the last seven or eight years, we’ve really taken market share. We’ve built our network in the innovation space and we will continue to do that.’

Linklaters, which has also been through key management changes following a prolonged election campaign, has also posted a solid performance. Revenue is up 3% to a record £1.31bn after a five-year spell of flat performance (see ‘Case study: Linklaters’).

Elsewhere in the UK the picture is mixed. Ashurst’s Australian merger is yet to pay off. Ashurst turned in the worst performance of any firm in the Global 100, and this was the result of a significant reverse in home currency, with revenues down 10% to £505m while PEP fell 19% from £747,000 to £603,000. It would appear full financial integration between an Australian firm and a UK firm has failed. However, the independent law firms in Australia are also not faring well. For the first time since our coverage of the Global law firm market was extended to 100 firms in 2008, there are no Australian independents in the table – by virtue of the fact that the Australian dollar fell to an average of 0.7522 against the US dollar in 2015.

Says managing partner Paul Jenkins: ‘Our results are not what I’d like them to be. There’s been a slowdown in some of the resources sectors that we have a heavy focus on – such as the oil and gas and the mining sectors. The slowdown in China also had an impact, together with the strengthening of the pound against some of the key currencies that are a significant part of our business. It has also been another year of significant change within the business as we continue to implement our strategy. We have been heavily investing over the last two years to best position our business in the next five to ten years. Ultimately our clients will see the benefit of that investment through increased efficiency and innovation and that’s what we’ve been trying to focus on over the last year.’

In contrast, another Anglo-Australian combination, Herbert Smith Freehills, had a relatively strong year, with one major caveat – the firm provided financials adjusted to take into account currency fluctuations, refusing to provide actual turnover and profit. The reluctance would suggest that actual growth was lower than the 7% growth income posted by the firm.

Says joint chief executive Sonya Leydecker: ‘We are seeing an increase in cross-border mandates. We’ve been appointed to an additional 21 panels, we’re on 161 in total at the moment and our top-30 clients now instruct us in more than nine offices. We’ve opened in Africa, Düsseldorf, Riyadh and established a formal alliance with Prolegis in Singapore and added capability there.’

‘The strapline for our strategy is to become a world-class professional services business and that means becoming more efficient and effective in the way we run our own business,’ she adds. ‘That hasn’t meant any cost-cutting but we’re looking at processes and how we do it better. Clients want better pricing and more efficiency and that’s not going to change.’

One firm that has been forced to look hard at efficiency in recent years under chief executive Bryan Hughes has been Eversheds. But Hughes, who is due to step down in 2017, feels that he will be handing over a firm more capable of withstanding fiscal turbulence. ‘I’m reasonably optimistic on the basis we finished the year with quite a bit of momentum, despite the uncertainty. Word on the street is quite a lot of firms slowed down. Despite the dark clouds of uncertainty we have a good client base, we are doing good work and we’re busy.’

One key development that Hughes has so far been unable to deliver for Eversheds has been a US merger. Talks between the UK national firm and Milwaukee-based Foley & Lardner ended in November, with Foley effectively telling Eversheds that it had ‘no interest’ in pursuing a merger. Foley ranks above Eversheds in the Global 100 despite having less than half the number of lawyers and has about the same PEP.

It was a similar story for Greenberg Traurig, which abandoned merger talks earlier this year with Berwin Leighton Paisner (BLP).

American sprint

Given the strength of the dollar and the individual performances of firms, the Global 100 this year has taken on a much more American hue. UK-based firms have been pushed down the rankings while Australian and European players have been pushed out (Iberian giant Garrigues, despite 1% revenue growth in euro terms, is now outside the Global 100).

Aside from the obvious strength of the New York firms – the 18 Manhattan-based firms average 20% growth between them over the last five years and only Weil, Gotshal & Manges has posted negative growth during that period – there are pockets of strong performance throughout the country, with West Coast (see ‘Case study: Cooley’) and national practices doing well. Standout firms include Atlanta’s King & Spalding, with 42% top-line growth over five years; Boston’s Goodwin Procter, which saw double-digit growth in revenue, PPL and PEP in 2015; and the world’s most profitable firm, Wachtell, Lipton, Rosen & Katz, which seems impervious to any slowdown in the global deals market with phenomenal growth to its top and bottom line both on a year-on-year basis and a five-year track.

All three firms sit in the second quartile of firms ranked 26-50 of the Global 100, which has once again outperformed larger global outfits and verein firms in the top quartile (see ‘Core stats’). While the average revenue of those in the top 25 is almost double that of those in the second quartile, the firms ranked 26-50 have higher average RPL ($875,000, 12% higher), PPL ($351,000, 6% higher) and PEP ($1.88m, 8% higher).

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IP UK
Ahmed Shahin, Cogence Search

Kim Koopersmith, chair of Akin Gump Strauss Hauer & Feld, which was a solid performer in the second quartile with revenues up 7% in 2015 to $930.1m – helped to a certain extent by picking up the London arm of Bingham McCutchen at the end of 2014 – urges caution. ‘We’ve enjoyed a lot of positive growth in recent years but getting growth is challenging. Small growth is good growth – there will be down years. Law firms will not do this endlessly without ever investing. Expectations of the kind of growth law firms enjoyed not so long ago are not coming back.’

Nonetheless, there ultimately are few concerns about the business model of leading Manhattan firms. ‘I don’t detect any anxiety whatsoever from the leading Wall Street firms about their place in the world or the sustainability of their model,’ says Sean Connolly, London senior partner of Mayer Brown. This point is echoed by Robert Hays, chair of King & Spalding, who comments: ‘The picture painted from the various financial reports about the legal market as a whole is of slowing growth and uncertainty for the sector. If this is the case, we will see a growing gap between the elite firms and all of the others. It will be firms with a focus on smart growth and meaningful global scale that will find themselves better positioned.’

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Harnessing business talent for global growth
Deborah Gray, Totum

Cooley chief executive Joe Conroy, despite a strong showing from his own firm in 2015, is less optimistic about the year ahead. ‘You’re seeing a much more nervous set of firms in the States – the business side is much choppier – equity capital markets in particular. Firms that traditionally derived their work from that are not as busy. Big-ticket litigation, in the first two quarters at least, hasn’t been as busy for firms – it hasn’t been there to counteract other dips in the business. Most of the firms planned for an environment that would be flat or slightly up – that would be a good result – not many are planning double-digit growth.’

The message coming from this year’s Global 100 is that firms have to work harder and smarter amid an increasingly challenging global race. Elbows out and a large intake of breath is needed for yet another push to stay ahead. One incoming management partner of a high-performing global law firm, Dechert chief executive-elect Henry Nassau, sums up the situation: ‘Every firm I know finds the market both changing and challenging. There are big challenges coming from alternative providers; particularly outside the US there is enormous pressure from low-cost providers and accounting firms. You have to pay serious attention to the threat.

‘The law firm business is not dying but you cannot assume it will be as it was.’ LB

mark.mcateer@legalease.co.uk

 

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

Note: Prior to 2008, the Global 100 was the Global 50. Data between 2006 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 2007 finances for 2008 report.