In the Spotlight – SJ Berwin

After very public merger talks with Proskauer Rose and a contentious managing partner election, SJ Berwin has been left to lick its wounds. The firm needs to act fast to determine its immediate future

If one of the unwritten rules of masterminding a law firm merger is to keep it private for as long as possible, SJ Berwin’s talks with Proskauer Rose were a complete disaster. The drawn-out talks with the New York practice were leaked to the press 16 days after the two formally sat down to talk about a deal. What followed were the most publicly played out merger discussions since Ashurst’s ill-fated 18-month talks with Fried, Frank, Harris, Shriver & Jacobson, which ended in 2003.

‘We decided to move to Dubai and Hong Kong just as things were getting difficult, but we persevered.’
SJ Berwin

SJ Berwin partners claim that they learnt more from the press than they did from management about which direction they were taking the firm in. ‘There was a real desire for knowledge about what was happening,’ one partner at the firm says. ‘We were all so frustrated with what was being reported in the press.’ Remarkably, despite six months of talks, SJ Berwin’s managing partner Rob Day and senior partner Jonathan Blake insist that the overall structure of what the merged firm might look like was never put to the partnership.

‘One way or another the vision of the new law firm wasn’t materialising and in the end it dragged on for a long time,’ says Blake. ‘It doesn’t help that the press were all over it.’

Not helped by poor communication from management, tensions over the future of the firm split the partnership and were laid bare last November during the firm’s managing partner elections. As the Proskauer talks ended that same month, new managing partner Day, Blake and the rest of the firm’s partnership have been left with the task of picking up the pieces from two of the worst years in the firm’s history.

A spate of partner departures, two failed mergers and profits which halved in a financial year, have left big questions hanging over the firm’s direction. The entrepreneurial firm has always had big ambitions, challenging the more established practices in the City. In less than 30 years it became one of the 20 largest firms in the UK. But just where it sits in the market is now under question.

Stateside seats

Bathed in early January sunshine in SJ Berwin’s Thames-side offices, Day admits that the timing of the Proskauer talks was a mistake. The UK firm’s fragile financial position and the low morale of the partners meant that it was going into talks with the New York firm from a position of weakness. ‘Nonetheless, management felt that, with Proskauer’s New York strength, plus a good fit in funds, private equity and employment, we would have actually created a firm that had a great presence in the key financial centres in the globe,’ says Day.

A partner in the firm’s corporate practice before he became managing partner, Day was part of a core group of senior figures, including competition head Stephen Kon, corporate supremo Steven Davis and Blake, that drove much of the firm’s US strategy. When consultants from Hildebrandt Baker Robbins were brought in to advise the firm on strategy in the autumn of 2009, the message was clear: SJ Berwin should set its sights on the US.

‘Ultimately our clients were at the point where they were looking for firms with wider coverage into major financial centres,’ Day comments. ‘By the time you say, “ok, we’d like to try to focus on Asia and Europe”, you’re missing the obvious point if you don’t join that strategy up with the US.’

‘There was a big emphasis on cost-cutting and controlling costs during the downturn and the firm became an unpleasant place.’
Former partner, SJ Berwin

Launching in the US had flitted in and out of the firm’s strategy over the past decade. By 2007, instead of seeking a merger, SJ Berwin’s strategy had crystallised around ‘best friend’ referral relationships with Boston’s Goodwin Procter, West Coast practice Cooley Godward Kronish and Paul, Weiss, Rifkind, Wharton & Garrison in New York.

With Cooley’s US West Coast footprint not matching SJ Berwin’s focus on the East Coast and Paul Weiss remaining avowedly independent and far more profitable, speculation centred on Goodwin Procter. This was heightened when, in 2009, the US firm took space in SJ Berwin’s Queen Street Place offices.

In January 2010, as renewed emphasis was given to the firm’s US plans, SJ Berwin management contacted each of its best friends to say it was keen to do a US merger.

The UK firm settled on a shortlist of three with Orrick, Herrington & Sutcliffe and Proskauer Rose joining Goodwin Procter. Although management vehemently denies that it ever entered into exclusive talks with Orrick, the two firms started to take a closer look at one another. The US firm would have delivered a debt-led practice with wide geographic coverage, but Orrick lacked the serious New York offering that SJ Berwin craved.

SJ Berwin insists that it took the decision to walk away from the merger talks, but it was Orrick that released a statement on 6 May announcing that the discussions had come to an end.

The public secret

Although SJ Berwin management maintains that exclusive merger talks with Proskauer Rose began on 1 May, the firms had been eyeing each other up for some months before that.

The ‘personalisation process’, as Blake refers to it, was kickstarted at the beginning of May with a meeting of 20 people from both firms. Blake, Day, Kon, litigation head Craig Pollack, Paris managing partner George Pinkham and Ralph Cohen, managing partner at the time, were among the SJ Berwin partners who met with a group from Proskauer that included the firm’s chairman at the time, Allen Fagin, and the current head Joseph Leccese, who took over in January.

As well as New York, a deal with Proskauer would bring seven other US offices, including Chicago, Boston and Washington DC. It would also add greater resources in Hong Kong and Paris as well as a presence in Brazil, creating a global top-30 firm with a partnership of more than 360 partners. From Proskauer’s view SJ Berwin would transform its position in London, a market that it had struggled in on its own.

Day says that some ‘very interesting things’ started to emerge as the two sides continued to delve deeper into considering what a combined firm might look like. There were obvious overlaps in private equity funds and transactions, and Proskauer’s rapidly developing high-yield practice complemented SJ Berwin’s general finance and corporate practices.

‘What was starting to partly drive M&A was the frothy high-yield market. Clients started using it as a financing tool and so, for us, one of the attractive features of a merger was having that US capability,’ comments Davis on the advantages of combining with Proskauer. On the competition side, SJ Berwin’s widely admired team would gain a considerable Washington DC component to its European-focused practice.

There was a less obvious fit, however, between the two real estate practices. Geographically the two had very little overlap, with both largely focused on their domestic markets.

‘There was simply no communication from management about the mergers until the last minute. We learned about it through the press.’
Former partner, SJ Berwin

Although management likes to bang the drum that any combination would not have been a takeover by the US practice, the fact is that SJ Berwin was negotiating from a position of weakness. ‘The problem was that SJ Berwin management were trying to negotiate a merger deal when profits were down 50%,’ observes an ex-partner. ‘It all comes down to remuneration. It wouldn’t have been equal with Proskauer because SJ Berwin’s PEP was so out of kilter.’

Proskauer dwarfs SJ Berwin financially. In 2009, the US practice generated $643m (£403m) in revenue and saw profits rise by almost 7% to $1.46m (£925,000). During the 2009/10 financial year, in contrast, the UK firm posted a 7% fall in revenue to £171m and even though PEP had started to recover, partner profits still stood at £443,000.

As well as the financial mismatch, SJ Berwin had suffered from a steady drip of defections. In June, finance specialist Stuart Brinkworth resigned to join Hogan Lovells. In July co-head of arbitration David Goldberg joined White & Case. Then, in September, Jon Vivian, the firm’s former real estate chief, announced he was leaving with 20 other lawyers for Irwin Mitchell. Vivian says that the merger was not the sole reason for his departure, but sources close to him say that he was against it.

As stories concerning a possible combination began to appear in the press, management started to field questions from partners over the minutiae of the potential deal. However, according to a number of people who spoke to LB on condition of anonymity, at first those closest to the merger talks denied that they were even happening.

‘There was no message from management, which was a typical thing. There was simply no communication from management about the mergers until the last minute. They would say, “No, no, we’re not doing anything,”’ asserts one former partner. ‘The talks were like a public secret. We learned about it through the press.’

Blake and Day deny these claims and maintain they were always honest with partners. Blake insists the talks were presented to the partnership in an open way. ‘[The partners] were all very aware that we were having talks with Proskauer Rose on an exclusive basis and so we talked to them about the strategy in general and the process that we’d gone through and the employment of advisers,’ he comments. Blake admits the leaks affected partner morale and Day says the problem was that they hadn’t reached the point where they could tell the partnership anything of real substance.

By the time a possible merger was finally mooted to the SJ Berwin partnership at the partners’ retreat in June, tensions had mounted over the press leaks and lack of communication from management. Consultants from Hildebrandt also attended the retreat, described as an ‘unfortunate’ partners’ weekend by one who attended. The weekend was full of heated discussion about what a new firm might look like, whether it was a takeover attempt by Proskauer and how partners would be compensated.

Management insists that, despite the months of talks, the numbers of a merged firm were never presented to the partnership. However, SJ Berwin partners quickly started to draw their own conclusions by putting the two firms’ numbers together. The firm’s 88 equity partners would make up roughly 35% of a combined equity partnership of 252 partners, but given the mismatch in profits would account for around only 20% of the profits.

As management danced around the specifics of a deal, partners from both sides began to get to know each other. In June, real estate partners Bryan Pickup and Edward Page travelled to the US to meet their counterparts. That same month London competition head Simon Holmes, along with four partners from the competition practice, visited New York for dinner with members of Proskauer’s antitrust group. In September finance chief Jeremy Cross took a delegation from the firm’s London and German finance groups.

But as more partners were brought into the process, SJ Berwin was pitched into a highly politicised managing partner election. Having taken over as managing partner in 2002, Ralph Cohen had privately informed his senior colleagues at an April meeting of the strategy committee that he would be stepping down in November 2010, 18 months before the end of his third term.

The ensuing October election saw a trio of contenders emerge to replace Cohen, with Day, the establishment choice, challenged by corporate partner Perry Yam and litigation partner, and fellow strategy committee member, Hilton Mervis.

The first round of voting saw Mervis knocked out and put Yam ahead by 16 votes. Day was always considered the likely person to take over from Cohen, but the support for Yam challenged that. What happened between the first and second rounds of voting is a matter of some conjecture.

According to a number of sources close to the firm, partners were corralled into voting against Yam. ‘There was an uprising,’ recalls a former partner. ‘He got the support because he wasn’t part of senior management and he was about change. It was a vote against existing management and the task force was mobilised after the first round of voting because the result sent a shockwave through management.’ Although both Blake and Day insist that no pressure was brought to bear on partners, Yam eventually lost by five votes.

Day’s first significant action as managing partner was to announce an end to the Proskauer talks. A joint statement issued in November said simply that both firms needed more time to put a deal together. Proskauer Rose refused to comment beyond the joint statement and didn’t contribute to this piece.

A partner at SJ Berwin says: ‘Where it had its momentum it was exciting, but there were periods of more than a month where the momentum died down.’ Another adds: ‘It was almost a catch-22. People would have needed to know more to vote on it but it wouldn’t have received the support from the partnership.’

Blake and Day insist that if something had been brought to a vote, it would have received the required two-thirds majority. But concerns among SJ Berwin partners that the US firm was angling for a takeover wouldn’t go away. Incredibly, given that the discussions began in earnest in May, Day and Blake say they never got to a point where details of how a new firm might look were ironed out.

‘This vision of a new law firm coming into fruition didn’t seem to be happening. The talks lost momentum through the summer, during their chairman and our managing partner elections, and there was to be a delay of several weeks following the year end. We both felt we couldn’t hang around with the uncertainty that the possible merger was causing,’ says Blake.

‘There are no specific and hard reasons why the thing didn’t happen in the end,’ he continues. ‘It sort of ran out of time because too many things got in the way of implementing a vision.’ As a lesson in how not to run merger discussions, it’s hard to find many rivals.

Growing pains

Since its creation in 1982, SJ Berwin has always been one of the most volatile firms in the mid-market. Its exposure to the real estate and private equity markets in particular means that its transaction-led practice suffers more than many of its peers in a downturn.

In the years leading up to the recession, the firm’s business grew at lightning speed. In 2005/06 revenues jumped by 27% to £155m, while a year later they were boosted by 22% to £189m. In the 2006/07 financial year, headcount at the firm increased by 20% adding £11m in staff costs to expenses.

‘We were growing and so was our reputation for being driven and ambitious,’ comments Cohen who has now returned to fee-earning as a competition partner. ‘We rode the private equity wave and we were seen as one of the prime stakeholders in the industry,’ he adds.

‘Clients started using high-yield as a financing tool and so the attraction of a merger was having a US capability.’
Steven Davis, SJ Berwin

In 2007/08 profits reached their zenith, with PEP hitting £802,000. Although clouds were gathering over the world’s economy the mood within the firm’s London headquarters was still relatively upbeat. ‘I remember talking to people [about Northern Rock] because it was unprecedented, and at the time the business continued to perform quite well, and the reaction was “How bad is it really?”,’ says Day.

The answer for almost everyone in the market was ‘very bad’, and for SJ Berwin it was almost catastrophic. The firm’s highs turned into a deep low when in 2008/09 the firm reported that PEP had fallen by almost 50% to £410,000, marking one of the biggest drops by a top-100 UK firm. Similarly, revenue slumped 14% to £184m.

SJ Berwin’s corporate finance practice, one of the darlings of the business, faced what its head Steven Davis calls ‘a perfect storm’. ‘We felt the cold shiver of the recession very quickly,’ he says. ‘At the beginning we were expecting that a number of restructurings or distressed sales would come through, but what we discovered was that there wasn’t a lot of activity. It was never clear that the traditional bread and butter wasn’t coming back.’

According to data from mergermarket, the number of UK M&A deals that the firm advised on between 2008 and 2009 almost halved, dropping from 40 to 22, while globally the firm’s deal flow plummeted from 83 to 43. Activity levels in London dropped between 20% and 25% during the recession.

It was just as bad in the real estate group. In 2005, the property group contributed £25.3m – or 20% – to the firm’s £122m turnover. Today the practice still contributes around £25m to the top line but makes up just 15% of the firm’s overall business and last year saw income fall by almost 13%. The 26-partner practice counts British Land, The Crown Estate, Evans Randall, Marks & Spencer, Axa and Hilton among its clients.

SJ Berwin, of course, was not alone in seeing corporate and real estate activity decimated in the downturn, but crucially it failed to see a sufficient increase in counter-cyclical areas.

‘We didn’t really have advisory work ticking along in the background, we didn’t do a lot of restructuring work and contentious work wasn’t a big enough part of our practice mix,’ says Day. Nonetheless senior management has been widely criticised for not broadening the firm’s practices, thus leaving it open and vulnerable to challenging markets.

‘There was a wider recognition that the firm had to focus on more and widen the depth of the practices,’ says a former London-based partner. ‘But the attitude was, “if someone or something comes our way we’ll go with it”. Management had its head buried in the sand. There was a big emphasis on cost-cutting and controlling costs [during the downturn] and the firm became an unpleasant place.’

The most painful period facing SJ Berwin management and partners began in January 2009. The firm started the year with a round of redundancies and a ‘no replace’ attrition rule. The cuts, by no means the deepest among City firms, saw 20 London associates asked to leave along with 20 secretarial staff. The firm also shut down its film finance department, which resulted in the departure of four partners and three associates.

‘When things suddenly changed because of the downturn, [the redundancies] were the hardest decision we had to take because we have great people and it’s ultimately a long-term decision,’ says Day.

The partnership was also put under the microscope. In 2006, the firm had a total of 83 equity partners and 59 non-equity partners. By 2009, those numbers had jumped to 97 in the equity with 74 non-equity. As the firm grappled with the new economic reality the equity ranks shrank by more than 9% between 2009 and 2010. In 2009/10 a total of 20 partners left the LLP. ‘Our very best year was followed by an awful year,’ Blake reflects.

Matters weren’t helped in August 2009 when HM Revenue & Customs accidentally sent threatening letters to each SJ Berwin partner (one was also sent to Blake’s wife) claiming they were in arrears for tax payments that should have been made in July. The firm had successfully negotiated a deferral agreement with HMRC on its July tax bill. SJ Berwin wasn’t alone in seeking a deferral. Hammonds and DLA Piper had also agreed with HMRC to spread their July 2009 bill across a few months.

Day, who stepped in to cover for Cohen while he was on sabbatical from July to early September in 2009, insists that the firm could have made the tax payment to HMRC but that the additional capital helped meet the firm’s costs. It was a sign, however, that business was not weathering the recession well.

As billing fell and costs remained high, management was forced to not only turn to the taxman for help, but also decided to stop profit distributions to partners. Management denies that it ever stopped paying partners fully during 2009, with monthly drawings continuing, but partners missed out on a number of payments from August well into 2010.

‘When our income line was dropping off we were faced with the choice of going to partners for more money or the bank, and we thought that we may as well go to partners,’ explains Day.

‘One way or another the vision of the new law firm wasn’t materialising and in the end it dragged on for a long time.’
Jonathan Blake, SJ Berwin

Perhaps most remarkably, the firm continued to expand its small overseas network despite the tougher market conditions. Its attempts to push beyond its European network of offices and establish itself as an international contender saw the decision to launch both a Dubai office and an office in Hong Kong within a month of one another.

In April 2009, it was decided that London litigator Tim Taylor and Paris corporate partner Benjamin Aller would both relocate to set up the Middle East office months before the collapse of Dubai World, the region’s largest investment body. Currently the office has just four lawyers, including Taylor, Aller and two associates.

A month before the Dubai launch, SJ Berwin poached Daniel Liew from Dewey & LeBoeuf’s Hong Kong office to open its first outpost outside of Europe. Commercial partner Peter Tse and real estate partners Hans Thomas Kessler and Giovanna Kwong joined Liew in Asia, although Tse has since left the firm.

‘We decided to move to Dubai and Hong Kong just as things were getting difficult, but we persevered,’ argues Cohen. ‘China was seeing counter-cyclical growth and clients wanted to see our brand there.’ Continuing its Asia expansion, the firm added a Shanghai office in October 2009.

The light of Day

Day now talks animatedly about Asia and expanding the firm’s Chinese offering when asked about SJ Berwin’s immediate future. He insists that three new overseas offices are on his radar and says a proposed move into South Korea has been shelved after the recent turmoil in the region.

Perhaps unsurprisingly given the lack of real decisions taken in the Proskauer talks, Day has started his management career by streamlining SJ Berwin’s decision-making process.

Out go the strategy committee and partnership committee, replaced by just one overarching decision-making body. The eight-member partnership board, which cannot include practice heads, is expected to meet once a month and will make major decisions on the firm’s strategy. Two seats will also be available to non-executives although they have yet to be appointed. Day-to-day running of the firm will now fall under the remit of a management committee comprising the practice heads.

Day and Blake, whose second term as senior partner ends in 18 months’ time, are positive about what the future holds for the firm. With the gradual return of private equity work and a recovering real estate market, things are certainly starting to look better. At the half year, SJ Berwin saw revenue rise by 9% to £87m and, after partner losses and cost cutting, PEP jumped 34%. The year-end figures should be strong, according to management, which is also keen to make clear that the idea that the firm has been rocked by the departures of so many partners during the past year is wrong.

As for its relationship with its former US friends, Day and Blake claim that the firm continues to work with Goodwin Procter and Paul Weiss. A notably vague statement from the Boston practice insists: ‘Goodwin Procter continues to enjoy a positive relationship with SJ Berwin, and to cross-refer matters when appropriate to address our clients’ needs.’

It’s clear that the UK firm must learn from past mistakes over poor decision making and a lack of communication among the partnership. As the half-year performance suggests, it remains a fundamentally healthy firm with – failed Proskauer talks aside – a strong City brand.

However, it still faces the same challenge of trying to compete on an international stage while being outgunned by numerous UK and US rivals. The firm therefore remains a prime candidate for a merger. Perhaps next time it will keep things a little more under wraps. LB