Hogan Lovells’ marriage has settled down but can the union blossom into global power couple?

As the Hogan Lovells union matures, Matthew Field and Victoria Young assess the global challenger’s prospects

As partners in a 2010 transatlantic marriage, the first few years of Hogan Lovells’ nuptials were not without issues. The proposition that a merger-of-equals between a major UK and a US law firm would fire growth and renew ambition was found wanting as the pair became caught up in complex integration. It also soon became apparent that – despite being initially billed as two institutions with much in common – a substantial cultural gap between Lovells and the more thrusting Washington DC-bred Hogan & Hartson was complicating its post-merger relaunch.

During those years, the decision to loosely import the DC firm’s compensation model into legacy Lovells further riled up the London partners, who were becoming increasingly sensitive to the charge they were being taken over.

To some extent, such turbulence is inevitable in such a large combination. The 819-partner firm’s leadership, unsurprisingly, argues that a collaborative culture remains a defining trait of the firm, despite the grind of post-merger logistics. With its integration programme behind it, the firm has moved to a solo leadership structure in the past three years under US-based chief executive Steve Immelt.

Many of the firm’s old guard have now moved on, with former Hogan & Hartson chief executive Warren Gorrell stepping back from fee-earning in its DC heartlands late last year.

The then Baltimore-based litigator Immelt took up the top job in place of Gorrell and co-chief executive David Harris in July 2014, a highly symbolic step given the dual structure of the firm that retains separate profit centres and considerable legacy management.

In the three years since, Hogan Lovells has sustained steady if unspectacular growth, but by consensus has been firmer than in the initial post-merger years, when its expansion ground to a halt.

Last year, the 2,700-lawyer firm saw turnover up 6% for 2016, its best annual growth figure since the combination. Global turnover now sits at $1.93bn. The first three years post-union saw turnover dip to $1.63bn in 2012 when profit per equity partner (PEP) hit a low of $1.1m. PEP has edged up to $1.3m, though the figure remains far behind many leading global and US peers. Neutral observers and more honest individuals internally would concede that, given its business model and platform, the firm should be aiming for PEP to be 10-20% higher than currently.

Still, there is no sign that Hogan Lovells is to ditch its image as one of the most collegiate operators in its weight class, even amid claims that the firm is too, well, nice to compete with hard-driving New York and City rivals.

Global chair Nicholas Cheffings observes: ‘You have people joining us saying: “I expected people to be friendly when I arrived, but it’s been nine months now and I’m still trying to work out where are all the people you are hiding from me?”‘

But even the critics concede that, where many peers have made heavy going of cross-border mergers, Hogan Lovells’ marriage was operationally slick.

‘The integration was pretty fantastic given the size of the two firms,’ says one former partner. ‘It was a massive task that they did very well, even if two plus two hasn’t equalled more than four.’

Another ex-partner, admiringly citing the initial efforts of Gorrell and Harris, says: ‘The “Silver Circle” are under particular pressure – with Ashurst being the key underperformer – but Hogan Lovells has done much better.’

The merger was also billed as a new opportunity to combine the traditional government regulatory and litigation strengths of the two firms, while bulking out the corporate offering in London and New York. While the former made sense – and has gone on to make even more sense given the post-Lehman drive towards a more regulated global economy – it is widely felt that Hogan Lovells’ transactional practice has made little ground.

‘We have made great progress in M&A transactional work. We have a cross-border execution capability we think clients really notice.’
Steve Immelt, Hogan Lovells

The soft centre

Many still maintain that the firm lacks the drive and star names to excel in the core transactional disciplines.

The retirement of M&A veteran Gorrell deprived the US business of its top rainmaker, with Gorrell in later years overseeing a book of business often put as high as $50m. Set against that, the huge influence of Gorrell, who one former partner claims was paid ‘well outside the range of others’, was problematic for those who felt it fostered a cult of the individual.

In the City, Hogan Lovells has seen the departure of a range of corporate names in the past two years, including M&A partner Guy Potel for White & Case in 2016 and leveraged finance partner Stuart Brinkworth to Fried, Frank, Harris, Shriver & Jacobson in 2015. The corporate and M&A energy practice was also impacted by the departures of global co-head of energy and natural resources Matthew Williams and renewables co-head John Deacon for Orrick, Herrington & Sutcliffe.

There has been relatively little lateral hiring in corporate to make up the difference. The recruitment of private equity partner Ed Harris from legacy SJ Berwin in 2013 was a welcome exception, with Harris now installed as one of London’s top billers, although Hogan Lovells’ buyout team in the City is just six partners strong. Overall, the firm has made 15 lateral hires in London in the last three years – a modest figure for a 151-partner practice.

The corporate team has seen Hogan Lovells turn to young talent like Ben Higson, who heads up the London corporate team and sits on the firm’s global board as its under-45 representative.

A key mandate for the team was a position advising long-term client SABMiller on its $108bn takeover by Anheuser-Busch InBev (AB InBev). The deal featured input from more than 300 lawyers at the firm. However, despite a client relationship dating back to the 1990s, the firm lost out on the key transactional mandate to Linklaters’ corporate team led by Charlie Jacobs and Nick Rumsby.

Linklaters was instructed on the main takeover defence work, winning the call to advise as early as 2014, while Hogan Lovells acted for the management and led competition issues including US and European antitrust work. Says one former partner, arguing that SAB had pressed Hogan Lovells to upgrade its public M&A for years: ‘In the end, on the final big deal they were displaced because they didn’t have a credible M&A practice. They were warned.’

Such an arrangement saw Linklaters take the lion’s share of the deal’s legal fees, winning around 60% of the $76m of SAB legal fees compared to around 40% for Hogan Lovells.

While Linklaters was chosen for the main M&A role, former SAB general counsel (GC) John Davidson comments: ‘I was at Lovells for 23 years man and boy. As a firm they work extremely well and I always had a huge amount of respect for them.’

Higson is bullish about the firm’s corporate capacity, noting that London corporate revenues have increased 12% over the last three years (including the real estate and pensions teams) despite ‘relatively flat’ demand in the wider market. He adds: ‘I counted 48 new clients in that time in London, including pretty much every sector. We have done US work out of London as a result of the 2010 merger, such as advising Lockheed Martin on international deals.’

‘In the end, on the final big deal they were displaced because they didn’t have a credible M&A practice. They were warned.’

Hogan Lovells has also picked up new mandates for AB InBev following the merger – a new client for the firm’s corporate department.

Other tipped names in its deal practice include Daniel Simons, Richard Diffenthal and new partner John Connell. Corporate insurance specialist Charles Rix is often still cited as one of the firm’s out-and-out heavyweights.

And as Legal Business went to press, it was reported the firm had hired a team of Silicon Valley deal lawyers, including Dewey & LeBoeuf veteran Richard Climan from Weil, Gotshal & Manges, adding West Coast firepower to its US corporate bench.

Of marquee clients in the City Lovells arguably had a stronger profile for finance than M&A, though some claim that core relationship Barclays has been a less regular client in recent years (data from Legal Business‘s sister brand The Legal 500 nevertheless indicates that the banking giant still uses the firm in a wide number of areas).

The client data (see box below) also demonstrates a wide range of bluechip clients instructing Hogan Lovells across a wealth of major product lines and geographies, even if a relative lack of position as lead corporate counsel somewhat undercuts the impressive global client roster.

Immelt adds: ‘We have made great progress in M&A transactional work. We have a cross-border execution capability we think clients really notice. In London we have been known for litigation and regulatory work more so than corporate, but we are committed to a global practice.’

Upping the game

As a pioneering merger for the global legal sector, Hogan Lovells popularised the notion of transatlantic unions under multiple profit centres.

But while the firm operates as separate UK and US entities – and has no plans to fully merge its profit centres – there is more integration than at expansive global vereins Norton Rose Fulbright or Dentons. Hogan Lovells also operates a largely unified pay structure with a 15% bonus pool that sees partners receive pay in a ratio of up to 10:1 from top to bottom of equity. However, most of its equity partners are paid within a 4:1 ratio (the merger saw Lovells abandon its flat 2:1 lockstep pay ladder for partners to largely adopt Hogan’s ‘contribution-based system’). The firm says there are only a few ‘outliers’ paid above the core 4:1 range, though critics still grumble about a few mega-earners in the US draining its bonus pool.

That balance is also reflected in turnover: 52% of the firm’s total billings comes from the US. London and Europe contribute 41%, and Asia and the Middle East add 7%.

It should be noted that despite the frequent caricature of laid-back Lovells, the City office has been a relative out-performer in recent years, even in a period in which competition has never been more intense.

London generated revenues of £282m in 2016, up 7% on the previous year from £263m. While for the 2015/16 year the firm’s international LLP saw turnover rise 8% to £638.2m and profits in the region spiked from £183.9m to £217.3m, driving local PEP up dramatically from £698,000 to £879,000. Indeed, given the robust profitability of its City office, there are some claims of discontent that the ‘handful’ of mega-earners are largely confined to the US practice.

With the platform in place, management is now looking to plan for the future.

The firm is set to increase capital contributions by around 7.5% each year from 2017 to 2021, equating to roughly $12m per year over the period. Both Lovells and Hogan & Hartson had not increased capital contributions for years.

Deputy chief executive David Hudd says the move was necessary to meet its investment plans: ‘We have office moves, refurbishments and technology that is expensive over a number of years. We were maintaining the roof while the sun is shining. One thing King & Wood Mallesons shows is the moment things get sticky the banks will start telling you how to run the business.’

The firm has engaged in a two-year refurbishment of its Washington DC office to include more collaborative work spaces and has launched several global service centres to drive efficiency, moving a number of roles from the capital to its Louisville service centre, launched in 2016, which now supports 75 positions. Outside the US, UK and Africa managing partner Susan Bright has overseen the opening of a low-cost centre in Birmingham in late 2014 and the firm’s first services centre in Johannesburg at the start of that year. The Birmingham branch now has 30 permanent staff and handles increasing amounts of due diligence and document review.

The capital will also help to finance product development. Hogan Lovells’ disputes team has been working on PRISM, an online early-stage case assessment tool.

 

 

‘There is a common will and drive across the firm. We need profitability to underpin the business and we need to be at the upper end to attract the talent we need.’
David Hudd, Hogan Lovells

 

 

Comments litigation, arbitration and employment head Michael Davison: ‘We’re taking that a stage forward this year, looking at how we can use our data in a predictive way.’

In the US, the firm has invested in a Cyber Risk Services business, which was formed in 2016 with a team of risk and technology specialists based in Washington.

Bright says that the firm is determined to trial new ideas to improve client service: ‘We are incubating innovative ideas and putting together a tech hub in London. Last year we held an internal innovation competition that had over 200 submissions, breaking down silos across the firm.’

Pulling disparate initiatives together across its wide network will, nevertheless, be a challenge for a firm known for fondness for leadership by committee, a tendency that the merger with the much leaner Hogan & Hartson seems to have not quite addressed.

There have been votes for the partnership on some issues, with no vote on new capital contributions and, according to one former partner, no vote on a strategy to launch in Australia in 2015, although individual lateral hires are voted on as a formality.

An interesting question for Hogan Lovells is whether it will reposition itself to make more of its contentious muscle or continue to hope for a transactional breakthrough. The attempt to challenge top law firms on transactional work has little to show for it – in disputes and arbitration work, its heritage and global footprint arguably gives it a better shot at top-tier status.

As such, the long-term expansion of its regulatory practice shows the firm embracing historical strengths on both sides of the Atlantic, with the hire of Claire Lipworth from the Financial Conduct Authority this year. The firm is also targeting fintech clients with the hire of Pinsent Masons financial services head John Salmon last year. Immelt notes that the firm is looking at the current risks around technology and regulation: ‘It’s a pretty dynamic world in 2017.’

Davison cites the firm’s pan-European disputes coverage across Europe, particularly Germany, as a major asset.

Similarly in real estate, an increasingly revitalised product line thanks to the number of funds targeting the sector, Hogan Lovells is one of the few major City firms to have been consistently committed. It would appear to be another opportunity for the firm, with the practice generating around 10% of its London revenues.

Comments Rob Booth, GC at Hogan Lovells client The Crown Estate: ‘We have used Hogan Lovells for over five years, a relationship that has steadily expanded over that time. Most recently, they picked up our offshore energy work, displaying the client focus and strategic insight that we very much see as their core strengths. We have a strong relationship across the various strands of work that Hogan Lovells do for us, with the ever-brilliant Nicholas Cheffings at the helm of the relationship.’

In a challenging market, the firm has secured 45 new clients and panel appointments over the last two years. While PEP has improved on its post-merger lull. A solid brand, a quality outfit, but hardly a momentum play.

Says Hudd: ‘There is a common will and drive across the firm. We have got a lot of things sorted out. We need profitability to underpin the business and we need to be at the upper end to attract the talent we need.’

Higson adds: ‘We need to be very financially robust to build on strong foundations – to create these exciting opportunities.’

Taking an in-depth look at the firm back in 2013, Legal Business leant heavily on marital allusions to describe the challenges of living with a partner after the big day, as signalled by the headline to the piece, ‘The daily grind’.

The good news as Hogan Lovells reaches the traditionally tricky year seven, is that the marriage appears more harmonious and, well, united. The firm is by consensus professionally run, and a little leaner and more focused than it was, even if Hogan Lovells is never going to be reinventing itself as a hard-edged billing machine. ‘It is different now. I am told it is a lot sharper,’ says one former City partner. ‘David Hudd is good. He understands that you can’t just do this goopy, muddling along thing.’

Unlike some global mergers, the 2010 deal did not weaken the position of its legacy firms and probably strengthened it somewhat. The fears that were so apparent in its London partnership several years back, that the US business was progressively assimilating the firm, have also markedly receded.

Still, having made it over the early relationship hurdles, it seems a little unlikely that Hogan Lovells is about to dramatically transform itself into transatlantic power couple anytime soon.

For many of its partners, that is just fine.

matthew.field@legalease.co.uk

victoria.young@legalease.co.uk