After a series of shocks to the global economy, followed by Dewey & LeBoeuf’s downfall, there’s plenty of concern for US firms
American managing partners have become accustomed to false dawns and 2011 had a depressingly familiar feel to it. The start of the year was promising, with counter-cyclical workflows in litigation and bankruptcy joined by an uptick in corporate deal activity, but this came to a familiar halt over the summer. The continuing crisis in the eurozone and uncertainty over America’s debt ceiling undermined any hope that the activity through the first half of the year would continue for the second six months.
‘The year started strongly but the rest of 2011 was like playing (American) football with a sprained ankle – we kept waiting for things to bounce back but they never really did,’ says Peter Kalis, chairman of K&L Gates, as he comments on the firm’s 1% revenue increase to $1,062m and a 6% fall in PEP to $891,000. ‘Nothing fell precipitously; it’s not attributable to any one practice area,’ says Kalis.
There’s no doubt that business conditions remain depressed. ‘For the typical top 100 firm there’s a significant lack of confidence in the market and people are making decisions on the assumption that it’s going to be a weak market going forward,’ Peter Zeughauser, head of the Zeughauser Group, summarises.
It’s a view shared by Weil, Gotshal & Manges’ executive partner Barry Wolf. ‘Clearly we’re in a huge period of uncertainty – that means fewer deals, fewer offerings and less in general on the commercial side,’ says Wolf. ‘We don’t see demand for premier legal services growing in the next three to five years.’ Even in a market fuelled by litigation and bankruptcy work, that makes for a market where any growth in revenues and profits has to be eked out.
A shifting market
The strongest indication of just how tough the market is came through the first half of 2012 with the collapse of Dewey & LeBoeuf (for more, see Dewey & LeBoeuf – lessons from a downfall). Several of the factors that led to its downfall – high debt levels and unsustainable guaranteed pay-outs to many of its partners – were specific to Dewey but the decline in its revenues, down almost $250m from a post-merger high of $1bn, speaks volumes for the condition of the market.
Dewey’s demise led to a flood of laterals hitting the US market as the firm’s former 300-strong partnership looked for new homes. Among the biggest recruiters of Dewey talent were Winston & Strawn, which picked up a team of 23 litigation partners led by former litigation head Jeffrey Kessler; Willkie Farr & Gallagher which picked up a 12-strong corporate insurance group in March, a move which confirmed just how bad Dewey’s situation was; Weil Gotshal which picked up a five-partner corporate team in Silicon Valley led by Richard Climan; DLA Piper which hired partners across the US, Europe and Asia, including dealmaker Berge Setrakian and insurance specialist William Marcoux; and Morgan, Lewis & Bockius, which took 20 partners from Dewey.
For Winston & Strawn, its hiring of the Kessler-led group followed its acquisition last year of 45 attorneys from an unravelling Howrey, including the now-defunct firm’s former chairman Robert Ruyak. ‘We’re always looking for new opportunities,’ Winston & Strawn managing partner Tom Fitzgerald comments. ‘You can’t anticipate a Howrey or a Dewey but the fact we could move on them shows the strength of our firm.’
To Fitzgerald and several other US law firm leaders, Dewey’s demise is one indication of the far greater fluidity in the market brought on by tougher economic conditions, and the resulting pressure on fee levels, and by longer-term trends such as the growth of in-house legal departments.
‘I think partners are better educated on the different platforms available to them and about what firms do well,’ Fitzgerald points out. ‘But it’s a very competitive industry and if you can’t show them opportunities then it’s hard to make hires.’
‘We’re seeing extraordinary numbers of laterals at the moment as people have concerns over their firm’s management and the strategic direction their firm is taking,’ concurs Mel Immergut, chairman of Milbank, Tweed, Hadley & McCloy. Of course it helps if you can also show growth, which Winston managed in 2011 with a 6% increase in revenues to $754.2m and a small 1% jump in PEP to $1.4m. Milbank grew its top line by 5% to reach $652m while PEP hit $2.57m, up 3%.
But it’s not just in their domestic market that US firms see greater fluidity. In the last couple of years, for instance, Hong Kong has become one of the most competitive markets as US firms have looked to add Hong Kong-law practices to their local operations. Last year Simpson Thacher & Bartlett and Kirkland & Ellis both hired local law partners, joining the likes of Davis Polk & Wardwell and Cleary Gottlieb Steen & Hamilton which both made notable hires in 2010.
For one predominantly domestic US practice, the uncertainty in international markets presents a rare opportunity for global growth. Cooley, which has spent the past decade growing beyond its Californian roots to open offices across the US, launched its first overseas office at the end of 2011 in Shanghai and is clearly looking at opportunities in Europe. After an attempt to forge closer ties with Olswang came to an end last year, the tech specialist has focused its attention on new opportunities in the City and on the continent. ‘My thinking has been influenced by the sense that London and Europe are in a period of instability which provides opportunities to pick up people and work,’ Cooley chief executive Joe Conroy explains. ‘I don’t know how long that will last but it’s a pretty unique period.’
Again, it helps that Cooley saw strong growth in 2011 as a surge in technology company IPOs and offerings – the firm was involved in the LinkedIn and Zynga IPOs – helped revenues increase 9% to $564.5m and PEP grow by 4% to $1.4m.
‘We’ve engineered a solid growth story in two really bad economies – 2000 was apocalyptic for our client base and we’ve made it through that and through this,’ Conroy comments on the firm’s performance. ‘It’s hard to be optimistic about the US economy overall but we’re bullish about the sectors we’re in.’
Cooley’s growth was impressive but it couldn’t match the biggest US risers. Alston & Bird (PEP up 29%), Arnold & Porter (up 23%), Wilson Sonsini Goodrich & Rosati (up 23%) and Quinn Emanuel Urquhart & Sullivan (up 17%) saw the biggest jumps in profits while the biggest growths in revenues came from Quinn Emanuel (up 31%), Arnold & Porter (up 15%) DLA Piper (up 15%, thanks in large part to its merger with Australia’s Phillips Fox), Perkins Coie (up 15%) and Latham & Watkins (up 12%).
‘We would not have predicted our performance to be so strong at the start of the year,’ says Latham chairman Robert Dell. ‘Our transactional practices in M&A and finance were very strong, which was perhaps one of the biggest surprises of the year, plus we saw a lot of activity in the energy sector, in litigation, particularly in global cartel work and in IP and government investigations.’
Latham’s spread of activity is a familiar picture for most full-service practices but could the US giant have a repeat performance in 2012? ‘It’s a spotty economy so you see patches of slowness which makes you less confident that we’re trending up as an economy,’ says Dell. ‘We saw a slow first few months of 2012 but then it picked up.’
Others share his trepidation. ‘We’re guardedly optimistic about 2012,’ says Conroy. ‘We’ve budgeted for an aggressive number of hours – there’s no empirical reason why we’ll hit that total but so far we’re on plan, in fact we’re a little ahead of it.’
‘It’s going to be another very tough year in the US market and it puts a premium on playing your hand more efficiently,’ insists John Soroko, the chairman and chief executive of Duane Morris, which saw revenue of $415.6m, marking a 1% change on last year. ‘There’s no question that the number of hours across the top 100 firms is down and at some point you need to see an increase in absolute demand.’
With the ongoing crisis in the eurozone, particularly the risk of a Greek exit from the euro, that increased demand may not materialise any time soon. ‘The events that no institution, be it a law firm or financial institution, are well positioned to deal with are ones that cause true economic paralysis,’ reflects Dell on a Lehman-magnitude economic shock. The kind of gains seen by the likes of Quinn Emanuel, Latham and Arnold & Porter show that there are bright spots in the US market but no one is heralding a new dawn.