London. A bitingly cold day at the end of January and Legal Business ventures out on a novel expedition to Liverpool Street. An enforced pandemic-induced break from office-dwelling has made deciphering which of Exchange House’s two entrances will gain us access to the Herbert Smith Freehills (HSF) offices a little more challenging than it should have been.
Luckily it’s not just us. Ironically, Justin D’Agostino, HSF’s chief executive, encounters the same quandary. This is his first in-person meeting since taking the top job in May 2020. It is also his first day in London for nigh on two years.
After settling into our confab, D’Agostino explains: ‘I’ve been based out in Hong Kong ever since the outset of the pandemic, and I’ve only just been able to travel. I’ve enjoyed it from a timezone point of view – running a global firm I’ve felt pretty central in Hong Kong. It works nicely with what people sometimes call “the barbell” – our strength in the UK and Australia.’
D’Agostino’s account neatly summarises a prevailing market perception of HSF. Ten years on from the eventful tie-up of conservative City outfit Herbert Smith and enterprising Australian leader Freehills, HSF is, understandably, most frequently viewed in Anglo-Australian terms. More scathingly, commentators damn with faint praise. ‘It’s a nice firm, quite big, but if you asked me what they are leading at, nothing particularly springs to mind,’ a senior deal lawyer at a US firm shrugs. Other critiques are perhaps easier to define, including an unambitious US strategy, infighting between the firm’s corporate lawyers and heavyweight disputes team in London, as well as an inadequate private equity proposition.
‘Pre-merger, Freehills was doing well in Australia but we could see the world was changing and becoming more global. We knew it was important to have the international platform.’ Rebecca Maslen-Stannage, Herbert Smith Freehills
Accepting that many of these concerns continue to ring true for pundits at peer firms, closer scrutiny of what legacies Herbert Smith and Freehills have made of themselves must pay dividends.
D’Agostino answers questions over the firm’s international credentials head on: ‘We put together the leading practice in Australia with probably the leading platform of the international firms in Asia. The Australia business is in the leading pack in everything it does, and we’ve brought that deep sector expertise to the Asia platform. The merger, the new firm, has set us up incredibly well for that. And that was one of the merger’s objectives, to cement this position as a powerhouse in Asia-Pacific.’
Out with the old
Indeed, those few partners with lingering merger memories (HSF claims that over two thirds of its global partnership has only ever experienced life as a combined firm) recall both firms eyeing the international prize when tabling the deal.
‘I don’t perceive a new school/old school divide. If you managed to get eight of our old partners who weren’t quite on board with the merger down the pub and fill them with lager then you might find different opinions, but not here.’
Ian Cox, Herbert Smith Freehills
For its part, Herbert Smith had a trailblazing presence in Asia-Pacific that dates back nearly 40 years, as well as a considerable European platform. Ian Cox, HSF’s executive partner for practices, confirms that Asia has always been part of the plan: ‘It was slightly opportunistic with Freehills, but with our own strength in Asia-Pacific it started to make absolute strategic sense. We also had to enforce a step change in our own ambition, as we were historically a very conservative firm.’
Freehills had long basked in a premier reputation in its domestic market – one former HSF partner – rather grandiosely perhaps – goes as far as to describe it as ‘the Slaughter and May of Australia’. But for senior partner Rebecca Maslen-Stannage, a legacy Freehills M&A practitioner, that reputation would always have a shelf life if the firm did not expand: ‘Pre-merger, Freehills was doing well in Australia but we could see the world was changing and becoming more and more global. Looking to the future we knew it was important to have the international platform, which is what Herbert Smith brought.’
The decision to go for a full financially integrated merger from the outset proved to be something of a double-edged sword. Maslen-Stannage takes a predictably optimistic view of the rationale: ‘By doing so, both firms were obligated to make the merger a success.’
A former Herbert Smith staffer present at the time of the merger offers a counterpoint: ‘Freehills had lots of people and a different model so there were questions like: “How do we keep the profitability when the leverage is so different?” The work in Australia is done at lower margins, so it would have been harder to do that top-end work. There would have been an ambitious cost involved in the merger in that sense.’
Another well-worn argument is that Freehills represented a chance for Herbert Smith to break into the modern business world: the stuffy City institution was about as far removed as can be from Freehills’ slick management style inspired by Australian conglomerate Wesfarmers. According to another former Herbert Smith partner, the deal was seen less as a combination than as ‘an acquisition of a culture’.
Market standards would dictate that a decade might scarcely be long enough to resolve the problems posed by such a sizeable and complicated transaction. However, by all accounts, the HSF integration project is over. Cox emphatically states: ‘I don’t perceive a new school/old school divide. If you managed to get eight of our old partners who weren’t quite on board with the merger down the pub and fill them with eight pints of lager then you might find different opinions, but not here.’
Powerhouse
If the UK and Australia represent HSF’s barbell, or ‘twin engines’ as D’Agostino terms it, then what of its position in Asia-Pacific? One City corporate partner offers a particularly sceptical view: ‘With their merger they thought this Asia connectivity was all going to unlock but I haven’t really seen that. China has become a bit toxic and many international firms’ strategies around it haven’t worked out.’
In pure numerical terms, HSF’s Asia-Pacific revenue footprint has grown by 46% in the last eight years. This pales in comparison to EMEA’s 76% growth and the 120% surge in US turnover for the same period.
‘Clients in Asia do not have these generation-spanning relationships with firms like they do in the US or Europe, so we have strong ties with many sovereign wealth funds in Asia. We are one of the go-to firms.’
May Tai, Herbert Smith Freehills
Despite that, D’Agostino’s vision for the ‘Asia corridor’ as a major part of HSF’s global network is undaunted. He has set the Asia-Pacific leadership team an ambitious target of doubling its revenues in the next five years. Indeed, a key part of D’Agostino’s new ‘Ambition 2025’ strategy for the firm as a whole involves a significant focus on ‘capitalising on the firm’s position in Asia-Pacific.’ He insists: ‘Because we’re so well-positioned in Asia-Pacific with real depth, we’re sitting on all those major growth economies. If in five years’ time you are not capitalising on this area, I think it’s very difficult to describe yourself as a leading international law firm.’
The firm’s presence across China, Hong Kong, India, Indonesia, Japan, Malaysia, Thailand, Singapore and South Korea is augmented by an ambitious and strong-willed regional managing partner in May Tai. She is in no mood to underplay her hand.
‘I would describe Asia as the powerhouse of the firm,’ she declares. ‘Pre-merger we had London as the engine room and everywhere else was supporting that base. Post-merger, having these two very big centres in Australia and the UK where we are already dominant, we thought where else should we be investing? Asia has been the beneficiary of that thinking.’
According to Tai, the Asia-Pacific region has consistently increased its share of the firm’s turnover by 1% year-on-year in the last decade, with a target to contribute 20% of firm-wide revenue by 2025. With Asia-Pacific constituting 12% of the firm’s revenue now, growth is clearly expected to be rapid.
Tai says that the firm’s Singapore, Tokyo and Hong Kong offices are the three main ‘hubs’ around which the rest of the Asia network operates and are also the biggest revenue generators.
In disputes, the Asia-Pacific practice boasts the pre-eminent reputation that HSF trades on in the London market. HSF is the only firm to be ranked Tier 1 in The Legal 500’s ‘dispute resolution: litigation’ category for both Hong Kong and China. In China, HSF won a mandate to represent UBS in a dispute over the liabilities of over HK$4bn related to the liquidation of China Metal Recycling. In Hong Kong, the firm successfully defended DBS Bank in a substantial High Court action brought by Cosimo Borrelli and G. Jacqueline Fangonil Walsh, the liquidators of Galleria (Hong Kong) Ltd.
Flying in the face of scathing market perceptions of the firm’s corporate and private equity capabilities, HSF also points to a number of decent transactional mandates. Five years post-merger in 2017, the firm’s Hong Kong office advised I Squared Capital Advisers on the $1.86bn acquisition of Hutchison Telecommunications’ fixed-line business, Hutchison Global Communications. Hong Kong corporate partner Hilary Lau led on the mandate alongside Mark Robinson, head of TMT for Asia.
Evidencing the potential for Asia-Pacific investment into the rest of the world, global M&A head Gavin Davies in 2019 advised longstanding client Tokyo Sumitomo Corporation on its US$450m acquisition of European parking operator Q-Park’s businesses in Sweden, Norway and Finland from Q-Park Operations Holding. The practice also has lofty ambitions to dispel longstanding jibes about its underweight private equity offering globally.
Other geographies have long seen top clients become institutionalised by small numbers of advisers, but in Asia the scramble for influence has only just started. With HSF’s existing presence in the region, it probably has more of a fighting chance than many in galvanising that influence. As Tai says: ‘We are bulkier on the private capital side here. Clients in Asia do not have these generation-spanning relationships with firms like they do in the US or Europe, so we have strong ties with many sovereign wealth funds in Asia. We are one of the go-to firms.’
The firm is under no illusions about these ambitions. It has much work to do if it wants to create anything like a market-leading private capital practice in key jurisdictions like London and New York. A private capital push is also a priority of D’Agostino’s Ambition 2025 strategy. ‘There will be some key laterals, although the market is very aggressive and competitive. We’ve got a number of partners in the firm who are already doing fantastically in this. Our plan is to make more partners do what they’re already doing but focus on the private capital client base,’ says D’Agostino.
Cox is also bullish: ‘Do I wish we had 20 private equity partners in London right now? Of course. It’s where the money is. It’s a huge opportunity though – we have to invest in it because that part of the market is not going to go away.’ Stephen Wilkinson, London M&A heavyweight, adds: ‘When I look back at our core clients when I first started, the list was dominated by the listed companies. When I looked again at the clients in December 2021, there were still listed companies there, but they weren’t the majority. There were private capital clients, privately owned clients, governments and sovereign clients. The world has changed and we are trying to rebalance our practice to an extent.’
‘When I first started, our core client list was dominated by the listed companies. In December 2021, there were still listed companies there, but they weren’t the majority. The world has changed and we are trying to rebalance our practice to an extent.’
Stephen Wilkinson, Herbert Smith Freehills
Paris corporate head Hubert Segain is a staunch supporter of the strategy, notwithstanding a slightly skewed argument that the firm’s main weakness is in some ways its greatest strength: ‘What’s surprising is if you reverse the proposition, the firm has done well to position itself in the market without a strong private equity offering. It’s extraordinarily impressive.’
It is a tall order, with superstar private equity laterals hardly ten-a-penny, but the firm intends to leverage its international network to help it grow.
The firm’s Africa practice, headed by Nina Bowyer, makes up roughly £50m of the firm’s overall turnover of £1.038bn and is tracking 10% growth for the next financial year. With a long-established specialism in the energy and mining sectors, Bowyer says the practice is ready to be called upon: ‘Private equity – we feel this is an area as an Africa team where we can open doors. As an energy partner I know that the major players have started moving into the upstream energy space. With our vast experience in African energy we want HSF management to know we can lead the charge.’
Carrying the torch
Casting an eye over Europe reveals a mixed bag, with EMEA billings growing 76% in the last eight years indicating an obvious boon.
Cox recalls that immediately post-merger, management was fixated on standardisation and having all jurisdictions behaving in the same way. However, that approach was never going to fly in Europe: ‘As time went on, regional autonomy has become a good thing, as long as everything is run efficiently. One of the strengths of the EMEA platform is that each of the offices is successful in its own local markets, they’re not seen as part of one global conglomerate, although the global network is very important. Who would want to detract from that?’
Cox insists that Germany has been a ‘key priority’ for HSF over the last five years, but that the firm still considers itself underweight there. According to Wilkinson, HSF Germany comprises 19 partners across Frankfurt and Düsseldorf. For comparison, the firm’s Paris office (which services a smaller market) has close to 30.
Indeed, the Paris office has grown revenues by 50% since the merger and it even had to take on additional office space last year to house its growing headcount. In France, HSF has built from a low base to become a contender for transactional work. In November 2021 the office advised French utilities giant Engie on its €7.1bn sale of Equans to Bouygues, and in 2019 advised Altran Technologies on its €5bn sale to Capgemini.
In Segain, the Paris office also possesses a forthright corporate chief capable of delivering a clear response to detractors: ‘I have always found the UK press to be very harsh on HSF corporate. When I look at the number of partners in their 40s, there are really good people. If I have a transaction that needs to be done in London, ten years ago I wouldn’t have found more than two or three people I would want to help. But now there are well over ten.’
Harsh, or a natural comparison with HSF’s stellar disputes reputation in London? Wilkinson says: ‘At the time of the merger, the corporate ranking in the league tables was number 50 and average deal value was about £280m. That was all credible and not to be sniffed at but when you’ve got a disputes practice that’s at the top of the tree and very profitable, there is always scope for people to ask if the firm is doing as well as it could and, if not, why not?’
Cox adds: ‘Over the last ten years we haven’t done ourselves any favours with corporate in terms of reputation. But when you look at the stats, it’s hard to argue with it.’ According to Cox, the firm’s London corporate and disputes groups’ revenues are now ‘only within a few percentage points of each other’.
Even Damien Byrne Hill, HSF’s disputes guru in London, admits that in the last year the corporate team, riding the wave of blistering deal activity, outperformed his contentious division. These days, corporate and contentious make up roughly a third of the firm’s business each.
Refinitiv data for 2021 had HSF ranked number one in the UK, Australia and Asia-Pacific and third in Europe for announced M&A deals by value. Shortly after the merger, in 2014, the firm sat at sixth place in Asia-Pacific and 14th in Europe by the same metric.
In London the firm advised on a heavyweight M&A deal in 2021, as M&A partners Caroline Rae and Bob Moore acted for National Grid on its £7.8bn acquisition of Western Power Distribution. At the end of 2020, M&A partner Malcolm Lombers led a huge multidisciplinary team in advising Tryg on its £7.2bn joint bid with Intact Financial Corporation for RSA Insurance Group.
This is in addition to the firm’s longstanding FTSE 100 client base – prior to its acquisition by Comcast in 2018, Sky was a prime example, according to Wilkinson.
‘Bec was the first to say that next time we needed to feature other lawyers and business services professionals as well as partners. She wasn’t even senior partner at the time.’ Chele Dore, Herbert Smith Freehills
On the disputes side, Byrne Hill and D’Agostino insist that HSF remains the premier disputes shop in London, something begrudgingly accepted even by those outside the firm. One former HSF staffer describes Byrne Hill as a ‘torch carrier for the firm’s leading disputes practice’.
In the UK, HSF insurance head Paul Lewis’ representation of the Financial Conduct Authority in the Covid-19 business interruption Supreme Court test case exemplifies a peerless mandate. Elsewhere in a headline Australian matter, the firm acted for National Australia Bank in the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.
The chasing pack
Credit where it is due – this conscious rebalancing of corporate and a concerted effort into private capital and Asia are clearly steps in the right direction. However, there is still a considerable amount of pressing work in the in-trays of new leadership duo D’Agostino and Maslen-Stannage.
At the end of 2017 the firm pushed through a much-needed reform of its compensation structure, adding some flexibility to a previously rigid lockstep structure. It extended the equity ceiling from 100 to 130 points, giving management the ability to reward high performers, and introduced a system of partner bonuses which, according D’Agostino, had previously not existed.
Added remuneration power notwithstanding, D’Agostino is alive to the ferocity of the war for talent: ‘There was definitely a general market shift. You can even see it continuing to those firms that weren’t on that journey making the same changes. Even if there wasn’t a market shift, we were being critical on how we compensated in our markets. We needed more tools and flexibility.’
It is also impossible to ignore HSF’s lack of thrust in New York. While the firm has markedly grown its New York hub (revenues have increased by 120% in the last eight years, and in November 2021 it picked up high-profile financial litigation partners Marc Gottridge and Lisa Fried from Hogan Lovells), such developments have been from a woefully back-footed position. Today, the US generates just 4% of global turnover.
D’Agostino says the plan is to grow the office organically to support its disputes team and Latin America-focused transactional group, but concedes: ‘It’s not at the size we want it to be yet.’ As for the perennial question of a US tie-up? ‘We always keep an open mind. You see the track record in the market though and it’s hard.’
However, based on impressions held of D’Agostino and Maslen-Stannage (or ‘Bec’ to her friends) when sounding out the market for this piece, the leaders may not be beyond pulling off a coup.
Tai says: ‘Both Justin and Bec are very personable; there’s nothing too big or small for them. In Asia people can be quite hierarchical, so junior people might not be so forthright when suggesting ideas. But both Justin and Bec never have any qualms about talking to people directly.’ Cox summarises: ‘Justin is a people person. There are dozens of examples around the firm of people who would say the same. He’s surrounded by people who are very good at their jobs, and he motivates them by just being who he is.’
A former HSF partner notes that, while previous senior partner James Palmer was ‘as British and London-focused as you could get’, Maslen-Stannage has a broader appeal: ‘Rebecca is well-liked by London partners. Of the Australian contingent, she is far more of an intellectual powerhouse than (previous chief executive) Mark Rigotti but he was the right person at the time to bring the firm through the merger. He was a peace maker and post-merger he ingratiated himself to London partners. Rebecca was waiting in the wings and now is the right time for her.’
Chele Dore, HSF’s chief business development officer, recalls a Maslen-Stannage anecdote that encapsulates the leader’s egalitarian approach: ‘We did a video as part of a workshop and Bec was the first out of a call of tens of partners to say that next time we needed to feature other lawyers and business services professionals as well as partners. She wasn’t even senior partner at the time.’
While the firm is not short of fortitude in its legacy heartlands of the UK and Australia, it is clear that a more international foothold must be gained if HSF is to right some of its more persistent wrongs.
On the plus side, it will at least be attempting this from a stronger position of integration.
As Wilkinson concludes: ‘We’re now a firm with a global presence that has a merger in its history but it’s not something that’s at the forefront of people’s minds. It’s who we are rather than what we talk about.’