As some seasoned campaigners of the second half of the LB100 prepare to move up a class through mergers, a few City-based specialists continue to defy the tide of consolidation.
Of the merger activity that has swept through the Legal Business 100 (LB100) this year, it is the mid-market City players and national heavyweights that occupy the second 50 of the LB100 that have been most affected.
Speechlys, which went through a tie-up before with Campbell Hooper in 2009, had been gearing up for another union for some time and from a financial perspective, its marriage with Charles Russell is far more a merger of equals than it would have been with Withers, with which Speechlys had unsuccessful merger discussions in 2013. In its last full financial year, Speechlys’ revenue was more or less flat (down 1%) at £56.8m, while profit per equity partner (PEP) rose 7% to £319,000.
The larger of the two firms, Charles Russell recorded a more robust revenue increase of 7% to £73.4m while PEP was up 5% to £336,000, which, according to senior partner Christopher Page, is attributable to growth across private client, real estate and a ‘storming year’ in litigation.
Case Study: Forsters
While many London law firms have only just started to see signs of recovery after years of struggle following the collapse of the UK’s property market, West End specialist Forsters has continued its upward trajectory and has recorded double-digit growth in fees for four consecutive years.
Regularly attracting real estate investment from high-net-worth individuals from Asia has seen the firm record a 12% rise in revenues to £36.4m in 2013/14, while profit per equity partner also increased 12% to £486,000 from £435,000. This growth track has seen the firm improve revenues organically by 62% over the last five years. And after the firm’s net income tumbled to £5.3m in 2009, it has almost doubled since then to reach £10.2m in 2013/14.
Both managing partner Paul Roberts and recently installed senior partner Smita Edwards identify the real estate practice as the driving force behind this year’s healthy performance, which benefited from greater confidence in the property market and key client wins. ‘International investment into London has been a real feature,’ says Edwards.
‘We’re not trying to be everything to everyone,’ she adds. ‘We’re focusing on our core sectors and having lawyers with specific expertise. Clients come to us because we know what we’re doing – we’re not trying to spread ourselves too thin.’
‘There’s no other firm like us,’ adds Roberts. ‘We’ve taken a very specific approach to the industries we specialise in and grow in those areas. We attract property work because we’re recognised as being very good at it.’
High-profile work this year for the firm has noticeably come from Asia and included a multi-disciplinary team led by real estate partner Howard Gill advising Hong Kong-based private equity house Joint Treasure International on its £126m acquisition of the Grosvenor Square hotel from the Marriott group. It also advised Japanese multinational Takenaka Corporation and its group companies on the £112.5m acquisition of One Fleet Place in the City, home to Dentons, from LondonMetric.
And while the Mayfair-based firm’s private wealth practice has doubled in size over the last five years, management predicts growth across all core practice areas next year and has already embarked on a recruitment drive with the aim of increasing firm headcount by 15% in 2014/15. To manage this upscaling, the 44-partner firm has taken on another premises opposite its current offices near Berkeley Square.
But for all the talk of expansion by Forsters, management is unconvinced by the idea of merging with another firm, and does not feel the need to follow in the footsteps of rivals Charles Russell and Speechly Bircham who announced their union over the summer.
Roberts comments: ‘We don’t see the business logic to being substantially bigger by merging with another firm that does the same thing. We’re happy with our ability to generate profit and our performance overall.’
Lashed together
However, in its last financial year before the merger, Lawrence Graham’s profit performance was relatively strong. In a significant reversal of the double-digit fall in profits in 2012/13, PEP was up a startling 61% on the £260,000 posted in 2012/13 to £419,000, ahead of the £404,000 average for the 21 City and national firms that occupy the second half of the LB100.
Hugh Maule, the former managing partner of Lawrence Graham and now head of corporate, finance and private capital at the new firm, told Legal Business that costs had been ‘managed hard’, while real estate was a ‘key driver’ behind performance. But more than anything else, this attention to the bottom line was undoubtedly about getting itself in shape ahead of the merger.
On whether the new entity will become one of the more interesting and innovative merged platforms post-Lehman, its chairman Andrew Witts says: ‘There’s a big expectation for us to review how we deliver. Our strength post-merger is the flexibility we have. We’re learning a lot on how to staff and meet client needs for pricing. We have one pool of lawyers in London and we learnt quite quickly about being flexible with pricing while maintaining profit margins.’
Revenue 2009-14
Total Lawyers 2009-14
Revenue per Lawyer 2009-14
Another move to create a competitive force in the national market saw Blake Lapthorn, Boyes Turner and Morgan Cole attempt merger talks last year that nearly created a £100m national business. While the tripartite deal was scuppered when Reading-based Boyes Turner withdrew, it did not stop Blake Lapthorn and Morgan Cole forging ahead and combining on 1 July this year to form Blake Morgan, a 120-partner firm with revenues of around £72m.
With Blake Morgan currently looking for new premises in London and Cardiff, managing partner Walter Cha believes the firm’s immediate goals are very straightforward. ‘We have 12 to 18 months to focus on key markets where we want to build expertise in those areas and spread and deepen relationships with the clients,’ he says. ‘In an improving economy, the workforce becomes more mobile, so recruitment is more difficult, so it’s also about nurturing and retaining the talent we have.’
Another move that spoke volumes about the fluctuating market for many second 50 firms was the takeover of troubled Manches by Penningtons in October 2013, taking on 265 Manches employees, including 46 partners in a pre-pack deal brokered by PwC. The demise of Manches was, according to the administrators, caused by problems with cash flow and bank debt in the face of an unforgiving economy. It had been identified as an acquisition target for a number of years, with consistently poor financial performance culminating in revenues dropping 13% to £26.3m and PEP falling 43% to £134,000 in 2012/13.
Almost a year later, and having acquired offices in Reading and Oxford, Penningtons Manches chief executive David Raine says integration has gone well but the deal was never just about acquiring critical mass.
‘The rationale is not just to grow for turnover, but to make sure we have credibility and capability in the market for clients,’ he says. ‘We’re seeing more people approach us to look for opportunities.’
This is a point that is understood by clients. ‘At the mid-tier level we watch the consolidation that’s occurring and understand why that would be,’ says Philip Bramwell, group general counsel of BAE Systems. ‘We consider that mid-tier consolidation improves our pool of available external resource and gives us a wider choice for what we would call mid-tier legal matters.’
Fastest-growing firms in organic revenues 2009-14 |
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| Firm | 2009 | 2014 | % change |
| Mishcon de Reya | £47.3m | £104.6m | 121% |
| Kennedys | £67.3m | £128.5m | 91% |
| Osborne Clarke | £84m | £142m | 69% |
| Capsticks |
£23m |
£37.7m | 64% |
| Forsters | £22.5m | £36.4m | 62% |
| Watson, Farley & Williams | £72.5m | £117m | 61% |
| Bristows | £22.1m | £34.1m | 54% |
| Browne Jacobson | £33m | £50.2m | 52% |
| Travers Smith | £64.5m | £97.2m | 51% |
| Gateley | £48m | £71.7m | 49% |
Fastest-shrinking firms by revenue 2009-14 |
|||
| Firm | 2009 | 2014 | % change |
| Dundas & Wilson | £66m | £46.9m | -29% |
| Clarke Willmott | £47.2m | £36.2m | -23% |
| Maclay Murray & Spens | £55.4m | £43.3m | -22% |
| Bevan Brittan | £41m | £33m | -20% |
| Lawrence Graham | £60.3m | £50.8m | -16% |
| Morgan Cole | £33.5m | £28m | -16% |
| Simmons & Simmons | £291.3m | £268.6m | -8% |
| Nabarro | £126.5m | £116.7m | -8% |
| Shoosmiths | £99m | £93m | -6% |
| Freshfields Bruckhaus Deringer | £1,287m | £1,232m | -4% |
Small and nimble
Average revenue per lawyer (RPL) for the 21 firms that are either City-based or nationally spread in the second half of the LB100 is £236,000, while profit per lawyer (PPL) comes in at £59,000. Average PEP across these 21 firms is £404,000. However, the majority of the City-based boutiques come in well above these averages and have done so for many years.
One of the top performers in the second half of the LB100 is public sector and litigation-focused Winckworth Sherwood, which has achieved consistent revenue growth in recent years, with turnover up 19% to £30.5m in 2013/14. More significant was a large increase in total profits, with PEP drastically increasing by 44% to £742,000. Significant client work on the HS2 high-speed rail project and being named on Network Rail’s panel for public law, as well as being retained on the Sainsbury’s panel of preferred advisers more recently, have helped lift the top line considerably.
Profit per Equity Partner 2009-14
Profit per Lawyer 2009-14
Leverage 2009-14
While specialist litigation firm Stewarts Law unveiled more or less flat revenues (up 3% to £46.4m) and PEP (down 1% to £1.13m), it follows a sustained period of striking growth, with turnover leaping 30% to £45.2m in 2012/13. Managing partner John Cahill believes the firm has every reason to feel optimistic. ‘[It was] a transitional year for us with particular focus on consolidating the extraordinary growth of around 30% per year achieved over each of the last five years,’ he says. ‘When I took over as managing partner in 2000 we were turning over about £3m. It has been quite a journey.’
Cahill expects turnover to exceed £50m in 2014/15 and notes the firm has ‘done well to maintain growth, secure profitability at a high level and create a balance sheet free from external debt’.
While litigation is the mainstay of Stewarts Law’s practice, which has allowed the firm to be a success story during the recession, many firms that have focused traditionally on real estate have floundered during the same period with the loss of lucrative property mandates. One exception has been West End boutique Forsters (see case study), which continues to impress, recording double digit growth in fees for four consecutive years.
PEP: fastest-growing LB100 firms 2009-14 |
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| Firm | 2009 | 2014 | % change |
| Thrings | £112,000 | £415,000 | 271% |
| Blake Lapthorn | £65,000 | £210,000 | 223% |
| Mishcon de Reya | £395,000 | £975,000 | 147% |
| Shoosmiths | £147,000 | £290,000 | 97% |
| SGH Martineau | £186,000 | £358,000 | 92% |
| Travers Smith | £470,000 | £880,000 | 87% |
| Gordons | £464,000 | £862,000 | 86% |
| Forsters | £266,000 | £486,000 | 83% |
| Bevan Brittan | £166,000 | £287,000 | 73% |
| Freeths | £147,000 | £254,000 | 73% |
PEP: fastest-shrinking LB100 firms 2009-14 |
|||
| Firm | 2009 | 2014 | % change |
| Dundas & Wilson | £319,000 | £180,000 | -44% |
| Trowers & Hamlins | £476,000 | £323,000 | -32% |
| Ince & Co | £341,000 | £244,000 | -28% |
| Fieldfisher | £518,000 | £412,000 | -20% |
| Capsticks | £467,000 | £373,000 | -20% |
| Walker Morris | £486,000 | £406,000 | -16% |
| Stephenson Harwood | £616,000 | £532,000 | -14% |
| Turcan Connell | £457,000 | £400,000 | -12% |
| Hill Dickinson | £300,000 | £271,000 | -10% |
| Bird & Bird | £481,000 | £436,000 | -9% |
Other firms are reporting revitalised real estate practices. Russell-Cooke moved up six places on the back of a healthy 11% rise in revenues to £28.7m, while PEP increased 18% to £236,000.
‘We’ve had our best-ever year due to an upturn in markets,’ says managing partner Dominic Fairclough. ‘We had a strong year in commercial property – the banks that finally want to lend some money have helped for work in that area.’
Likewise, another highly-regarded West End firm with a traditionally strong property practice, Fladgate, is one of the strongest performers in the fourth quartile of firms this year, with revenues up 15% to £32.5m and PEP up 33% to £539,000.
Forsters, Russell-Cooke and Fladgate are testament to the fact that despite the death knell being sounded for West End firms with a strong real estate bias, the five-year performance of the firms – with revenues up 62%, 29% and 37% respectively – demonstrates an unsung resilience. LB
sarah.downey@legalease.co.uk
Staying the course: the five-year view on the LB100
The merger merry-go-round continues to revolve in 2014, with large-scale tie-ups between LB100 firms continuing to dominate the overall picture. The charts for top-line revenue performance and lawyer headcount between 2009-14 look remarkably similar, demonstrating the close correlation between headcount and revenue and the inevitable influence played by consolidation.
Since the 2008/09 financial year, total lawyer numbers have grown by a third from 49,053 to 65,111, while total revenues have risen by nearly half to £20.82bn from £14.18bn. Over the same period and despite leaner years following the collapse of Lehman, firms have kept profits per equity partner (PEP) at significantly high levels: average PEP across the LB100 between 2009 and 2014 grew 10%, from £583,000 to £640,000.
But despite significant headline growth, up close the changes are less stark. The disparity in revenue per lawyer (RPL) and profit per lawyer (PPL) between three main groups within the LB100 has not deviated much. In 2008/09, RPL for the top quartile of firms was £334,000, 77% higher than that of the bottom half at £189,000. In the last financial year, RPL for the top 25 was £359,000, 76% higher than the £204,000 posted by firms ranked in the 51-100 group. Five year RPL growth for the two upper quartiles and the second half of the table is 7%, 9% and 8% respectively.
In PPL terms, there has been little movement in the gulf between the top and bottom of the market. In 2008/09, the difference between average PPL among the top 25 firms and the bottom half was £66,000. Five years on, and that gap is still £66,000. However, the top 25 has managed to pull away from firms in the second quartile in PPL terms. In five years, the top 25 peer group has managed to grow PPL by 14% from £102,000 to £116,000, while firms ranked 26-50 have grown PPL by 9%, from £58,000 to £63,000.
Leverage has been a factor in all this. While the top 25 firms have reduced equity partner leverage from 6.5:1 to 5.5:1 over five years, the bottom half, by contrast, has seen leverage ratios jump significantly in the last year. However, as the graph shows, ratios at firms across the LB100 are broadly identical now compared to five years ago – a sign that firms have worked hard to make associate utilisation rates efficient.
Individually, two firms stand out for exceptional performance in both top-line and bottom-line organic growth. Mishcon de Reya and Travers Smith are stalwarts of the second quartile and both have succeeded over the last five years for different reasons. While Mishcons’ laudable targeting of private wealth during the financial crisis has been well documented, explaining its 121% increase in revenue and 147% surge in PEP since 2008/09, Travers Smith is demonstrating the benefit of developing a distinctive culture and model through tough times. In the summer of 2009, it recorded a 20% drop in revenue and a 38% fall in PEP, something that most commentators saw as symptomatic of a domestic corporate market imploding. Five years on, revenues have grown 51% from £64.5m to £97.2m, while PEP has recovered to better-than-pre-crisis levels, up 87% to £880,000.
‘Our business has traditionally been more volatile than some of our competitors because we’ve had a greater dependency than many of them on transactional work,’ says Travers Smith senior partner Chris Hale, who adds that this volatility has been tempered somewhat by building a credible litigation practice.
A handful of firms demonstrate why consolidation has dominated the LB100 overall, with Morgan Cole, Blake Lapthorn, Lawrence Graham and Dundas & Wilson’s performances best described as mercurial. Dundas, until recently viewed as Scotland’s top firm, showed why it was ripe for takeover by CMS Cameron McKenna with revenues and profits tumbling relentlessly over five years.
Blake Lapthorn strangely sits near the top of the profit-growth charts, albeit from an extremely low base: in 2008/09 PEP fell to £65,000. A restructuring of equity and several redundancy rounds followed as it managed to get itself back on track ahead of its merger with the equally erratic Morgan Cole on 1 July this year.
Lawrence Graham experienced a startling rebound to its bottom line in 2013/14 ahead of its May merger with Wragge & Co but this only masks the wildly fluctuating performance that has prevailed at the firm since the crisis took hold. After years of feast or famine, doubtless some of the more successful Lawrence Graham partners will be praying for the consistency that its merger with Wragge & Co could bring.
mark.mcateer@legalease.co.uk