Global 100: In the club

As the international legal market stratifies, the gap between executive class and economy is widening in the Global 100. Here we discover which firms have the dream ticket

Arnold & Porter, the Washington DC-based firm that specialises in regulatory, antitrust and commercial litigation, posted a 14% increase in revenue to $731m this year, its second successive year of double-digit growth. In fact, since Legal Business first reported the finances of the leading global law firms in 2004, there has not been a single year when Arnold & Porter hasn’t posted an increase in revenue.

A glance at this year’s Global 100 shows that some of the best-performing firms in revenue terms share a commonality – disputes. At Clyde & Co, which posted 17% revenue growth to $533.6m, while chief executive Peter Hasson concedes that the benefits of the firm’s ambitious merger with UK insurance rival Barlow Lyde & Gilbert in 2011 are starting to show through, disputes (which includes insurance) make up 71% of the firm’s revenues. Only expansive litigation boutique Quinn Emanuel Urquhart & Sullivan has a higher percentage of disputes work in the Global 100. Its revenues were up by 18% to $852.6m, as the firm continues to grow year on year.

In a broadly flat market, with total revenues across the Global 100 up 4% to $84.9bn and total profits up by the same amount to $32.43bn, there is money to be made if firms have a balanced practice. Kenneth Doran, managing partner and chairman of the executive committee at Gibson, Dunn & Crutcher, says that litigation has been critical to the firm’s strength post-recession, with turnover up 11% this year to $1.29bn while profits per equity partner (PEP) has grown by 35% to $2.8m.

Freshfields Bruckhaus Deringer also had a strong year by the standards of the UK-based elite, posting a 6% increase in turnover and a 5% increase in net income. According to managing partner Ted Burke, the firm has invested in its global disputes practice and this has done particularly well in both New York and Washington. While the year-on-year performance of the UK-based firms is affected by the dollar-sterling exchange rate, Freshfields also performed well in sterling terms, with turnover up 7% and net income up 5%.

There has also been some interesting movement further down the Global 100, again driven by litigation. Seattle’s Perkins Coie jumped ten places to 58 with an 11% increase in revenue to $608.2m. The firm is in the top tier of The Legal 500 US for product liability and mass tort defence in the aerospace and aviation sector. Bryan Cave has also made decent inroads in the global rankings, moving up nine places to 55th on the back of a 12% hike in revenues to $624m. It is recognised by The Legal 500 for defending automotive companies, including Mercedes-Benz and Ford, in consumer class actions across the US. Fish & Richardson moved up an impressive six places to 91st after seeing a 6% rise in revenues to $400.9m. The firm is ranked in the second tier in The Legal 500 US for patent litigation, handling a high volume of International Trade Commission cases, with clients including Honda, Samsung and Apple.

‘If you are a one person parade and that person is called M&A or finance, that’s probably not the best position in this market,’ says Peter Kalis, global managing partner of K&L Gates. While his firm posted flat revenues for 2012, a common occurrence among Global 100 firms, it has grown considerably in recent years with turnover up 40% since 2007, one of the better performers among the top 25 firms.

 

 

 

 

Premium economy

Global 100 firms appear to have the formula right for getting the most out of challenging market conditions. The average profit margin of a Global 100 firm is down by one percentage point on last year to 37% and profit per lawyer has stayed static at $287,000, despite the fact that total fee-earner headcount across the 100 firms increased by 4% to 113,112. The same trend can be seen with PEP. While the total number of equity partners remains fairly static, again only up 2% from last year, average PEP is flat at $1,444,000. This is because firms generally continue to favour the appointment of non-equity partners, the numbers of which grew significantly, by 11% to 14,210.

Dividing the Global 100 into quartiles, the strongest performing group was the third quartile – those ranked from positions 51 to 76 in the main table. Across the key metrics of revenue, PEP and revenue per lawyer (RPL) per firm, this group has grown by 3%, 7% and 7% on average. Contrast this with the second quartile, which has been the best performing group over the last decade (see ‘Global 100: The long haul’). This year, while the group achieved the highest average revenue growth, 4%, RPL has fallen by 2% and PEP was down 5% overall. The fourth quartile did not fare much better: turnover and RPL was flat, while average PEP was down 3%.

DLA Piper, which posted 9% turnover growth to $2.44bn during the last financial year, has edged Baker & McKenzie out of first place (see ‘Global 100: DLA Piper’). While there is disquiet among some managing partners of single partnership firms over the growth of Swiss vereins – two of which dominate the top 100 – there is little doubt that the rapid development of verein-backed firms dominated the agenda again in 2012.

Eduardo Leite, chairman of Baker & McKenzie’s executive committee, is well aware of the competition to keep on top. ‘The consolidation and mergers are not going to stop. There is a global legal elite that will be formed over the next three to five years. Our clients are more international. We’re going to see continued competition in this area,’ he says.

Verein-backed deals supported ambitious mergers, the most notable of which was the tie-up between King & Wood and Mallesons Stephen Jaques to create King & Wood Mallesons (KWM) in March 2012, the first firm to combine a leading China practice with a western firm (see ‘Global 100: Scheduled departures’). Using three separate partnerships – one in Australia, one in China and one in Hong Kong – under a verein umbrella, KWM has stormed into the Global 100 in 47th place, with revenues of $713m. Legacy Mallesons was in 71st position last year with $525.8m. At press time KWM was in merger talks with UK top-25 firm SJ Berwin, which has just posted a revenue increase of 3% to £184.6m ($293m). A merger would give the firm combined revenues of around $1bn, placing it close to the 25 largest global firms.

More recently, SNR Denton, Salans and Fraser Milner Casgrain combined using a verein to form Dentons. While this year’s Global 100 only has figures for legacy SNR Denton for 2012, with revenues flat at $710.5m and profit per lawyer down 2% to $142,000, the new firm is also expected to have a turnover in excess of $1bn.

Barbed comments about vereins are commonplace these days. The most significant tie-up of this type is the union of two Global 100 firms Norton Rose and Houston’s Fulbright & Jaworksi, which went live on 1 June (see ‘Global 100: Norton Rose Fulbright’). As both firms posted full financials for 2012, both are listed separately in the main table, with Norton Rose posting a 1% revenue increase to $1.33bn and Fulbright showing a 2% decline in turnover to $585.5m. Combined, the firm will post revenues of around $1.9bn, placing it comfortably among the top ten firms in the world.

The wider global legal market seems particularly interested in this play as it combines two credible firms either side of the Atlantic and is expected to be a big draw to energy clients. However, one managing partner at a US firm seems slightly bemused by Norton Rose’s choice of suitor: ‘Fulbright used to be one of the big three energy firms in Houston but fell out of that group. It’s not clear to me whether synergies will be recognised early enough,’ they said.

 

Top three lateral hirers, relative to size

Rank	Firm	2012/13 laterals	As % of partnership
1	Simmons & Simmons	29	14%
2	Dechert	29	11%
3	DLA Piper	131	10%

 

Top three assistant promoters, relative to size

Rank	Firm	2012/13 promotions	As % of partnership
1	Kirkland & Ellis	84	12%
2	Fish & Richardson	17	10%
3	Mayer Brown	40	7%

Carter Phillips, chair of Sidley Austin’s executive committee, says: ‘Energy is going to be big in all the markets, its not about what market but about what industry to be in. Energy is going to drive the market for the next 12 months.’ Roger Parker, managing partner for Europe, Middle East and Asia at Reed Smith, says that his firm will also be looking for further growth in sectors such as energy.

Elsewhere, there were significant fully integrated mergers. Herbert Smith may have taken a significant step in revitalising its international reputation through its merger with Australia’s Freehills last year, on paper the most impressive of a wave of Anglo-Australian tie-ups since Norton Rose linked up with Deacons’ Australian outfit in 2010. However, the formation of Herbert Smith Freehills, which is bold in its attempts to financially integrate the two firms through a single equity partnership, has not been without its integration problems. A number of legacy Herbert Smith partners have left since the merger went live in October last year, particularly from its top-tier UK-based disputes practice, but senior partner Jonathan Scott seems unfazed by the fallout. ‘Mergers create uncertainty and lawyers don’t like uncertainty,’ he says stoically.

A new entry to the Global 100 this year is national UK firm Pinsent Masons, which saw its revenues swell by 40% to $490.2m, thanks largely to the addition of $100m in revenues from Scottish firm McGrigors in May last year. The increase comes after a year of international expansion during which Pinsents opened new offices in Munich, Paris and Istanbul, for the first time giving it more offices overseas than in the UK.

The 1,500-lawyer firm has also doubled the size of its Shanghai office with the hire of 13 lawyers from Salans, while in Singapore it launched a TMT practice with the hire of the founding partner of local IT boutique Keystone Law Corporation.

 

Revenue – Biggest risers and fallers

Biggest risers in revenue

Firm	% change in revenue	Revenue
Quinn Emanuel Urquhart & Sullivan	18%	$852.6m
Clyde & Co	17%	$533.6m
Baker & Hostetler	16%	$510.5m
Arnold & Porter	14%	$731m
Paul, Weiss, Rifkind, Wharton & Garrison	12%	$877m

 

Biggest fallers in revenue

Firm	% change in revenue	Revenue
Minter Ellison*	-23%	$434.3m
Garrigues	-7%	$434.1m
Hunton & Williams	-6%	$556m
Fried, Frank, Harris, Shriver & Jacobson	-6%	$444m
Clayton Utz	-5%	$450.4m

*Minter Ellison no longer includes financials from its associated offices

 

The Ins and Outs

IN

Rank	Firm	Turnover	Change
76	Pinsent Masons	$490.2m	+40%
82	Faegre Baker Daniels	$443m	+20%
89	Kilpatrick Townsend & Stockton	$406.5m	+12%
99	Venable	$376m	+12%

OUTS

Rank 2012	Firm	Turnover	Change
91	Crowell & Moring	$349.4m	-11%
97	Schulte Roth & Zabel	$370.5m	-2%
99	Steptoe & Johnson	$366m	-3%

US dominance

With over 70% of the firms in the Global 100 being US-based, it is not surprising that American firms continue to outperform those from Asia and Europe, as they have done consistently for the last decade (see ‘Global 100: The long haul’). A year-on-year comparison between the UK Magic Circle and the Wall Street elite shows that, while the London-based firms have increased revenues by 3% on average, their US counterparts have managed 4%; average RPL is more than half a million dollars higher at firms such as Wachtell, Lipton, Rosen & Katz or Davis Polk & Wardwell than Slaughter and May and Clifford Chance; while PEP has grown 5% on average to $2,991,000 compared to $2,087,000 at the UK firms, an increase of 2%.

However, it is the expansive international US firms that are doing particularly well, having strength in their domestic market but also making ground abroad, particularly in London. Latham & Watkins’ growth continues to impress (see ‘Global 100: Latham & Watkins’). The firm continues to perform well, overtaking fellow US leader Skadden, Arps, Slate, Meagher & Flom going into third place with total revenues of $2.226bn – 11% growth since 2007.

Both Skadden and Latham differentiate themselves from fellow Wall Street elite firms such as Davis Polk & Wardwell and Cravath, Swaine & Moore (notwithstanding Latham’s roots on the West Coast) in that they have not relied heavily on one market.

‘While we’re considered a member of the Wall Street elite, the scope of our practices and our broad geographic reach differentiates us from traditional Wall Street leaders,’ says Eric Friedman, executive partner at Skadden.

One major New York firm that has struggled in recent years is Shearman & Sterling. With the recent closure of the firm’s Düsseldorf and Munich offices, some wonder if the firm made the right choice to go global. Revenues are flat this year at $752m, and have shrunk by 18% since 2007. In April, Shearman confirmed that it will consolidate its German operations into Frankfurt. This follows a number of hires made by UK and Wall Street rivals from the German practice in the last year.

‘When I started my career, Shearman & Sterling was similar to Sullivan & Cromwell and Cravath,’ says the managing partner of a rival US-based global firm. ‘But it collapsed in Germany and lost its first mover advantage, retreated into Frankfurt. Now the vultures are circling.’

However, Nick Buckworth, managing partner for Europe, Middle East and Africa at Shearman, says the Germany move allows the firm to focus on the type of work it really specialises in.

‘The structure we have allows us to focus on the high-end, cross-border transactions, which are where we want to focus our business,’ he says.

In contrast, New York’s Paul, Weiss, Rifkind, Wharton & Garrison has been a robust performer in recent years, having grown revenues by 35% since 2007. According to chairman Brad Karp, 2012 was a robust year, with revenues up 12%, bringing the firm’s turnover to $877m.

The inevitable result of this collective strength relative to the UK firms is that US firms continue to have considerably more purchasing power for talent, particularly in London. As revealed in our Global London survey in April (see ‘End games’, LB233), after a few years of conservative City growth, US firms have made great headway in the London market recently and have been adept in tempting over experienced partners from leading City firms. The most recent high-profile examples include banking and restructuring partner Chris Howard, who left Linklaters for Sullivan & Cromwell earlier this year; disputes veteran Ted Greeno, who departed Herbert Smith Freehills for Quinn Emanuel in London; and Clifford Chance’s global head of private equity, David Walker, who went to Latham in April.

As Barry Wolf, executive partner of Weil, Gotshal & Manges explains, it is not just seasoned talent that US firms are targeting. ‘We’re in an environment globally where the profitability of law firms has stagnated or gone down,’ he says. ‘Entrepreneurial partners are looking for a place where they can build something and be financially rewarded for their behaviour.’

Supply and demand

Growth in key markets notwithstanding, the main feedback from in-house counsel and from firms themselves is that there remains an overabundance of premium lawyers for the work available (see ‘Global 100: The client view’). This has led to sustained price pressures around the globe, with Asia cited as one of the hardest regions to make a return on an investment.

‘The supply and demand balance between clients and lawyers has changed and law firms have to adapt and be even more attuned and responsive to clients’ needs,’ says Stuart Fuller, global managing partner of King & Wood Mallesons.

‘Price pressure is continuing rather than easing. This has been happening at least for the last three years and I do not anticipate a change,’ says Parker at Reed Smith, which saw revenues rise 2% year-on-year to $1.01bn and by 15% since 2007.

Kalis is more philosophical. ‘Price pressure is finding its level. Clients are using the panel system more, reducing the number of firms and increasing the leverage over the ones they use,’ he says. He adds that firms would do well not to overpopulate their practices during a down cycle and use intelligent pricing models.

There is little evidence this year of any easing on the pressure for Global 100 firms to perform. Collectively, these 100 firms are doing a fine job of achieving considerable returns in a climate where clients are seeking to cut the number of firms they use and the amount they spend on those firms. This has led to some optimism for 2014, particularly among those firms that have gone through the pain of positioning themselves to take advantage of whatever opportunities arise, largely by ensuring the correct balance in their practice and geographical focus.

However, the gulf between economy and first class is widening in the Global 100. The difference in profit per lawyer between Wachtell ($2,466,000) and Squire Sanders ($85,000) is there for all to see. Expect to see more firms turned away from the executive lounge next year. LB

david.stevenson@legalease.co.uk

Legal Business would like to thank Good Governance Group for its sponsorship of the Global 100.