Global 100 – To the ends of the Earth

In the rush to conquer new markets, the leading British and American firms are changing the landscape of the global legal sector. Time to check your international strategy

Costs cut. Headcount down. Profits preserved. Now is the time to grow.

For the world’s law firms, some good has come out of the global financial crisis. As pricing becomes tighter and the world flatter, the move away from the traditional, more mature European and US financial centres, has meant that a number of large firms have accelerated their expansion out of their own backyards.

With global growth back on the agenda for the largest UK firms, while some US firms have looked at it seriously for the first time, the last two years have been marked by the growing footprint of the international law firm.

For the past decade it has been the US firms that have most dramatically shifted their horizons. Dewey & LeBoeuf boasts that 40% of its lawyers work outside of the States. In 2001 the legacy firm LeBoeuf, Lamb, Greene & MacRae had 15% of its workforce overseas, while its merger partner Dewey Ballantine had 11%. Latham & Watkins’ growth has been even more spectacular, seeing its proportion grow to 31% up from a paltry 4% ten years ago.

Of course the UK firms have been at this game much longer. Most of the UK firms in the Global 100 generate more than 50% of revenue from outside of London. Allen & Overy, the most recent of the Magic Circle to break through the 50% threshold in 2009, now derives 60% of its income from overseas operations.

Firms’ single-minded approach to boosting capabilities outside of home jurisdictions isn’t driven purely by opportunities but also a lack of them on home turf. Struggling mature economies, particularly in Europe, have forced some managing partners to change their outlook and the competition for work and clients has reached the global market.

The 12 UK firms in the Global 100 opened six new offices in 2010/11. Similarly the US firms that traditionally have taken a more circumspect approach to international expansion are on the move, most notably in Asia. The last calendar year has seen numerous US firms launch in the major Asian centres of Hong Kong, Shanghai, Singapore and Beijing.

For some it’s time to stir a few of the market norms. ‘We were having lunch with the leaders of a global law firm, and they asked us what we were trying to do with our business and we said agitate,’ says DLA Piper chairman Frank Burch. ‘We want to destabilise the legal market because that is what creates opportunities for us.’

Asia major

The global recession has added fuel to the eastward drift of many in the Global 100. Although building a credible presence in Asia has been on the agenda for the largest firms for decades, the past 18 months have seen particularly notable moves by some of the traditionally more conservative firms.

Nothing illustrates the US firms’ growing investment in Asia than the proliferation of Hong Kong-law practices among the New York elite. Cleary Gottlieb Steen & Hamilton, Davis Polk & Wardwell, Shearman & Sterling, Milbank Tweed Hadley & McCloy, Sullivan & Cromwell and Simpson Thacher & Bartlett have all launched Hong Kong law practices to sit alongside their US law capabilities in the last 18 months. Their numbers are still relatively small – none of the elite New York firms feature in the 20 largest Asia practices – but the commitment is clear.

The interest from the US firms has been piqued, partly by a still difficult domestic market, but also by the desire to obtain a larger slice of the global energy industry and a booming capital market. The numbers coming out of the Hong Kong Stock Exchange are startling. In 2010 the total capitalisation of the market was HK$21trn, which represents an 18% year on year increase from 2009. Last year, there were 592 listed ‘mainland enterprises’ making up 57.5% of the market. Plus there’s now a clear trend of international companies – begun by Russian metals giant RUSAL in 2010 and continued by the likes of Glencore International and Prada – raising finance on the Hong Kong bourse.

‘Every five years or so the US firms tend to get interested in Asia,’ explains Linklaters managing partner Simon Davies. ‘However, their current interest looks like it’s going to be permanent. The war for talent will become intense.’

The UK firms are not exactly sitting on their hands either. In fact the likes of Freshfields Bruckhaus Deringer, Herbert Smith and Linklaters still have a very good grip on the most high-profile capital markets mandates. This year, for instance, Freshfields advised the underwriters on the $1.5bn MGM China IPO, with Herbert Smith advising the company. Freshfields also advised Hutchison Port Holdings on its $5.45bn IPO, the largest South-East Asian listing in 2011.

For the leading US and UK firms, Asia has become about money pouring into its capital markets and M&A coming out of China. Data from Thomson Reuters shows that China was by far the busiest emerging market for M&A in the first quarter of 2011 with 827 deals worth $30.5bn.

The largest deal of the quarter saw Encana Corporation, Canada’s biggest natural-gas producer, agree to sell a 50% stake in shale-gas assets to China’s PetroChina International Corporation for $5.4bn. Clifford Chance was the most active firm during the first quarter of the year, advising on five deals worth $3.4bn, according to Thomson Reuters.

But making the financials add up can still be challenging. Somewhat surprisingly during the 2009/10 financial year, Linklaters saw a 14% drop in its Asian turnover, which Davies attributes to a drop off in financial institution work following the financial crisis. Its total lawyer headcount in Asia has dropped since 2008 – 335 compared with 305 today – but the Asian practice accounts for a slightly higher proportion of overall headcount – 12% compared with 11.5% three years ago.

However, with the relocation of three partners to Shanghai and Beijing, plus three new partner promotions in China, the Magic Circle firm is clearly committed to growth. Plus with 52 partners now in the region, like many of the largest UK practices, Linklaters has far more scale in Asia than most of its US rivals. ‘Growth will come mostly from our good pipeline of senior associates who are coming up to partner, but also through moving more international resources into Asia and from lateral opportunities,’ Davies predicts.

At the moment though few can match CC’s focus on the region. The largest UK practice now has 12% of its global lawyer headcount in Asia. Despite being 500 lawyers slimmer since management started to aggressively reduce headcount in 2009, the proportion of lawyers in Asia has increased by 3% since 2008. CC now has 340 of its 2,912 lawyers on the continent compared to 287 out of 3,582 in 2008. In this year’s partner promotions round it also made its intentions clear with 12 making the grade in Asia, including ten across China and Hong Kong.

Although Greater China remains the key strategic focus for most international firms, Singapore has recovered from a brief period in the wilderness to return as a major force. (For more information, see ‘On the rebound’, page 92.) Attracted by Singapore’s position as a hub for work going into Indonesia and increasing popularity as an international arbitration centre for India, several firms are in growth mode in the city. Local law licences, which have been granted to half a dozen firms – A&O, CC, Herbert Smith, Latham & Watkins, Norton Rose and White & Case – have also helped fuel growth. Norton Rose, for instance, has doubled its headcount in the city state over the past five years. The rapidly expanding UK firm has also added an Indonesia alliance to its South-East Asian network and group chief executive Peter Martyr has ambitious plans for the firm’s Singapore and Hong Kong outposts. ‘I’d like to turn those two offices [Singapore and Hong Kong] into full-service London replicas and that way, they’ll fit better with Australia,’ he says.

‘It makes no sense to me that the US economic power will diminish.’
Ted Burke, Freshfields Bruckhaus Deringer

Even the more esoteric corners of Asia are on the agenda for global law firms. In Mongolia, Hogan Lovells shares an alliance with Ulaanbaatar firm GTs Advocates. The Central Asian country is rich in natural resources work and has also been targeted by DLA Piper, which formed an alliance with C&G Partners in March this year.

Covington & Burling, whose approach to international expansion has always erred on the cautious side, opened in Beijing in 2008. The firm only has 19 lawyers in the office but firm chair Tim Hester sees it as an exceptional platform. ‘Our clients increasingly see China, and Asia more broadly, as essential areas of opportunity and growth in their markets. At the same time, operating in China is demanding and raises many complex legal and cultural challenges for our client base. Our capabilities in operating at the intersection of law, public policy and regulation are seen by many clients as particularly important to their matters in China. Hester says that the firm sees an evolving trend where its China expertise is relevant to clients outside the US and Europe. ‘For example,’ he continues. ‘We now have clients in India, the Middle East and Latin America asking if we can help them address issues in China. These interconnections between Asia and other markets outside the US and Europe reflect the new world order, and law firms have to adapt accordingly.’

Baker & McKenzie is still, by some margin, the largest international firm in Asia, with offices in Taipei, Kuala Lumpur and Hanoi. The firm’s chair, Eduardo Leite, cautions that international firms in Asia may begin to find increasing levels of competition from local firms. ‘Other international firms are adding lawyers, narrowing our size advantage in the region,’ he says. ‘But the domestic firms, including some from China and India, may be the ones to watch, as they have leverage and ambition.’

But the next big thing for European firms could well be South Korea. CC has already signalled its intent to open there and the majority of firms spoken to for this piece admit they are looking at their options.

For now at least, Asia looks to be the sort of popular hunting ground for international firms that Western Europe was 15 years ago. As long as China continues to invest overseas into places likes Australia, Brazil, Africa and India, and the remainder of Asia continues to stabilise, work will flow and firms will leverage significant growth from the region.

Australia’s advance

Arguably, one of the defining trends in the global legal market of the past three years has been the growing interest of foreign firms in Australia. For years, overseas representation on the ground was limited to Baker & McKenzie and small outposts for the likes of Sullivan & Cromwell and Skadden, Arps, Slate, Meagher & Flom.

Last year Norton Rose and A&O made their plays, followed this year by CC and DLA Piper. Australia’s huge wealth of natural resources and investment links with China continue to turn the heads of many managing partners.

The news in February that CC was to launch in Australia hardly sent a shockwave through the global legal market. The Magic Circle practice had long been linked to a merger with Mallesons Stephen Jaques, but finally moved in earlier this year through mergers with Sydney-based Chang, Pistilli & Simmons and Cochrane Lishman Carson Luscombe in Perth. The deal, which went live in May, added 14 partners to CC’s global headcount.

Also in May this year, DLA Piper fully integrated with its Australian ally, Phillips Fox. The deal went live on 1 May. The firm’s joint chief executive and managing partner Sir Nigel Knowles has identified the region as an area for ‘enormous potential’ for growth.

A&O muscled its way into Australia one year before CC did. The firm made its move after acquiring a team of 17 partners from local giants Clayton Utz and Freehills. ‘Australia has already contributed to the top line and has had a bigger impact on our Asia practice as a whole,’ notes the firm’s managing partner Wim Dejonghe, who declines to provide precise numbers for the firm’s financial performance in the region.

For Norton Rose, the firm that kick-started this foreign influx, its move in Australia is already paying dividends. The firm has landed a number of roles on key Chinese-Australian cross-border deals, including acting for the Industrial and Commercial Bank of China (ICBC) on the provision of an $8bn financing to an Australian iron ore producer. It also acted for the Bank of China as lead arranger on the financing for the AUS$3.3bn takeover of Felix Resources by Yanzhou Coal Mining Company. ‘I am confident that we’ve outperformed the market in Australia,’ says Martyr.

In the face of this foreign onslaught, the locals are typically defensive. ‘The new entrants haven’t brought new capability into the market but have soaked up the existing talent. They’ve basically just brought their credible brands across,’ comments Minter Ellison chief executive John Weber. ‘We will see more foreign firms coming to Australia,’ he predicts.

Home fires

With all the brouhaha over emerging markets it’s easy to ignore just what a lucrative market the US is. It is still, by far, the most profitable legal market in the world. Of the 20 largest US firms in the Global 100 by revenue, 12 firms increased their top line in 2010 compared to just four the year before.

Kirkland & Ellis outperformed its peers with a revenue increase of 14% to $1.6bn, while Cleary grew income by 9% and Gibson, Dunn & Crutcher boosted its fee income by 7%. Baker & McKenzie, Skadden and Dewey & LeBoeuf stayed flat. ‘It makes no sense to me that the US economic power will diminish,’ says Freshfields managing partner Ted Burke.

For several US firms, therefore, expansion in their domestic market is back on the agenda. Over the past two years, 16 new offices opened. In line with global deal trends the Texas energy market has attracted a number of firms, including Cadwalader, Wickersham & Taft, Latham, Simpson Thacher and Winston & Strawn all making a play in Houston in the past 18 months.

The sorts of deals coming to market include BHP Billiton’s $4.75bn acquisition of Chesapeake Energy Corporation’s Fayetteville shale business in February this year. The deal saw Morgan, Lewis & Bockius advise BHP, while Wachtell, Lipton, Rosen & Katz and Wilmer Cutler Pickering Hale and Dorr advised Chesapeake.

‘Over the last 30 years the [Texas] market has run in cycles with firms coming in and then most of them leaving because they don’t understand the Houston market or how energy works,’ reckons Rick Burdick, head of the international corporate transactions practice at Akin Gump Strauss Hauer & Feld. ‘Weil, Gotshal & Manges, Skadden and Dewey have all gone on in at various points but their offices are not large and they’re not significant players in the market. They overestimate the number of clients willing to pay New York rates.’

‘The current US interest in Asia looks like it’s going to be permanent. The war for talent will become intense.’
Simon Davies, Linklaters

Energy aside, a wave of technology deals has seen a renewed interest in the Silicon Valley. Sidley Austin and Vinson & Elkins both opened their doors in Palo Alto in the course of 2010. Moves like that are set against a tech community that is in consolidation mode. Deals like the $8.5bn sale of Skype to Microsoft, which handed key roles to the likes of Covington & Burling, Simpson Thacher, Cadwalader and Sullivan & Cromwell, have sparked fears that another tech bubble could be on the way.

However, the UK firms’ wavering attempts to break America go on. CC’s New York and Washington DC offices continue to struggle; fee-earner numbers have fallen from 399 in 2008 to 242 this year.

Freshfields deserves plaudits for its litigation and arbitration practice that is now 12 partners strong in New York and Washington DC. Despite these hires, however, total fee-earner numbers now stand at 126, modestly up from 100 in 2008.

While the Magic Circle tries to grow organically, one firm not ruling out a US merger is Bakers. The firm has been in the lateral market recruiting Washington and Chicago tax and IP lawyers this year. ‘It’s not easy, but our prospects are improving as some firms in the US and other regions struggle with international expansion,’ says Leite. ‘We are open to a merger in the US, but the cultural and practice fit, along with the age-old issue of client conflicts, makes a large-scale merger a highly complex proposition.’

Untapped resources

With their home market continuing to drive growth, the US firms also have a natural advantage in Latin America. The influx of US firms into Brazil in recent years has included Gibson Dunn, Milbank and Simpson Thacher. Cleary has also announced its plan to launch later this year.

With the exception of Linklaters, which has been in Brazil since its 2001 alliance agreement with Lefosse Advogados, and Clifford Chance, which has been in the country since 1998 but does not have a local alliance, the Brazilian market is becoming dominated by US firms.

Of those not on the ground, Dewey & LeBoeuf’s chairman Steven Davis says the firm is looking at its strategy in the Brazilian market. Of the expansionist UK firms Norton Rose’s Martyr insists the firm has no current plans to open there but adds: ‘We are seeing reasonable amounts of work, in fact, just enough to justify us being there. We haven’t worked out how we’re going to do it but we know that we have to be in South America.’

For Milbank’s Mel Immergut his firm’s strategy is predicated on a world where in 25 years China, the US, India, Brazil and Mexico are the world’s leading economies. ‘We want to be established in the world’s money centres,’ he says. Many would echo his expectations for the world’s emerging markets. The difference being how firms try to carve up the world. LB