Magic Circle in the US: Running to stand still

‘There are more than 40 US law firms that are more profitable than the Magic Circle. The Magic Circle firms are, in US profit terms, very much middle-of-the-road players.’

Maurice Allen, founder of consultancy LTN & Partners, who has been a partner at Clifford Chance (CC), White & Case, Weil, Freshfields and Ropes & Gray, is under no illusions about the scale of the challenge facing the Magic Circle firms in the US. Top US firms continue to increase their profitability, while UK firms struggle to stand alongside them.

Allen ably sums up the situation: ‘You get moments in time when people realise that “if we don’t do something, we’ve got a real problem here”.’

Building out

Allen & Overy (A&O) was already building aggressively in the US before it announced its merger with Shearman & Sterling. The firm had just 54 US partners in 2020, up from 51 in 2013. Now, it has 87 – a result of a renewed focus on lateral hiring in the wake of 2019’s failed combination with O’Melveny & Myers. In 2021 alone, it opened offices in Los Angeles, Silicon Valley, and San Francisco, adding Boston in 2022. These moves also helped generate an impressive 57% increase in Americas revenue as reported on Companies House, from £161.2m in 2021 to £252.4m in 2022 (see box). No other Magic Circle firm has ever recorded such a large leap year-on-year.

‘You can recruit really top teams, and we did. But you’ve got a long way to go to catch the biggest US firms, and it takes time.’
Karen Seward, Allen & Overy

Still, the firm felt it was not moving fast enough. ‘You can recruit really top teams, and we did,’ says Karen Seward, who has co-led the firm in the US since 1 May. ‘But you’ve got a long way to go to catch the biggest US firms, and it takes time.’

The collapse of Shearman’s merger talks with Hogan Lovells in March presented a tantalising opportunity. ‘We were building steadily,’ explains Seward. ‘Then along comes Shearman, and jet propels us materially towards our destination.’

While most in the market view Shearman as a firm that has struggled in recent years, its brand is far from depleted, and it has notable strength in New York finance – a core market that has been notoriously difficult for outside firms to crack.

A&O plans to use the access to New York transactional work that the merger will provide to expand in other areas. Seward expresses a desire to be ‘top tier in projects and renewables’, and cites life sciences in Boston and tech and transactional in Silicon Valley as key areas of focus.

Many A&O insiders view the Shearman deal as a coup. ‘We’re all feeling very pleased with ourselves,’ admits one A&O partner.

‘My worst nightmare was to wake up one day and read that one of the other Magic Circle firms had merged with a US firm,’ says a former Magic Circle partner. ‘We always knew that would put immense pressure on us, and that we’d have a queue of partners outside the door asking what the hell we’re doing.’

Still, if other Magic Circle firms are rattled by the prospect of A&O Shearman, they are not showing it. Freshfields in particular remains bullish.

‘We have a very different approach to those firms that consider mergers,’ says Alan Mason, global managing partner at Freshfields. ‘We have a global strategy that puts the US at the heart of the firm, alongside Europe, the Middle East, and elsewhere. We don’t have headquarters and subsidiaries. The US isn’t some outpost, far away from a European head office.’

Mason refers to the last four years as a growth phase for Freshfields. The numbers bear this out: the firm is now ahead of CC and A&O on total US headcount, though it lags both on partner numbers. US revenues, too, have increased steadily, with a jump of 29% from 2021 to 2022 reflecting some strong high-value work, though the firm is again behind both A&O and CC (see box).

Freshfields receives positive notices for its growth. ‘Freshfields is probably in the strongest position,’ comments one New York corporate partner at a US firm. ‘It took a slow and steady approach, building out a very good arbitration and litigation practice across DC and New York, and it was able to gain some recognition there. It then modified its lockstep in a manner that allowed it to make meaningful hires in corporate.’

Opinion is divided, however, on whether those hires have paid off. Prevailing sentiment characterises the situation as ‘too early to tell’, and some argue that Freshfields has overpaid for talent. But Freshfields nonetheless stands out as the only Magic Circle firm to have brought over truly big names in the last few years. Its October 2019 hire of a team from Cleary Gottlieb led by Ethan Klingsberg made waves, as did its September 2021 recruitment of Damien Zoubek from Cravath.

‘We’re smaller than we would like to be. But we’re trying to avoid being big for big’s sake.’ Paul Lewis, Linklaters

When presented with a list of key recent US hires into Magic Circle firms, one New York firm head is candid: ‘The only names I recognise are Ethan Klingsberg and Damien Zoubek.’

Notably, Freshfields has had some success in linking up its US offering. Its work for Google is a case in point. A key client around the world, recent years have seen the firm instructed on high-profile US work. In March 2022, a team led by Klingsberg advised Google on its $5.4bn acquisition of Mandiant. In January, Freshfields was instructed to defend Google in an antitrust suit brought by the Department of Justice and eight US states seeking the breakup of Google’s advertising technology business. The team on this case is led by Eric Mahr, who joined Freshfields’ Washington DC office from the US Department of Justice (DOJ)’s antitrust division in February 2018.

The way the firm has parlayed its relationship with Google fits in with its strategy, as outlined by Mason: ‘What we see as our market is the top-end, elite element of transactional, litigation, and risk management and regulatory matters. We stepped back and said, “which industries globally are going through the biggest transformations?” And then we targeted those industries. The tech sector is obviously a major part of that.’

In particular, Freshfields is betting on disruption. ‘There’s a generational shift among general counsel, and that’s creating opportunities,’ comments Mason. ‘Add in the rise of the tech companies, and there’s a lot of potential to succeed. Institutional relationships are starting to shift.’

CC, meanwhile, exceeded £2bn in revenue in its most recent set of financials, and recently opened an office in Houston. Global managing partner Charles Adams emphasises a preference for ‘steady and sustained growth’ through strategic hires and the opening of offices across the US. He adds though: ‘We are constantly evaluating and re-evaluating our strategy. We will see whether the opportunities arise to accelerate our strategy.’

According to the firm’s website, the firm has 315 lawyers in the Americas, marking a 31% increase since 2013. Over the last five years, the firm says its US partner number has grown from 73 to 100, with the opening of its Houston office.

However, for many in the market, while CC has made efforts with hiring (see box), it has not yet made a substantial impact. Aside from 2020, when it ticked up to almost 15%, the proportion of its total revenue drawn from the Americas has been essentially flat at 13% for the last five years, compared to increases of five percentage points for A&O and two for Freshfields.

CC maintains its position with the highest US revenue among all Magic Circle firms, though, at £259m in 2022, while A&O closely follows with £252.4m, as the gap between the firms has started to narrow over time.

‘Clifford Chance is trying to work out what to do with what it’s got, and it appreciates that it doesn’t cover all the bases that it needs to,’ says Allen.

Still, if there is a US laggard among the Magic Circle firms, it is Linklaters. The firm is behind its peers on both headcount and revenue (see box), and the proportion of its total revenue drawn from the Americas has dipped from 6.1% to 5.7% in the last five years. ‘We’re smaller than we would like to be,’ admits firmwide managing partner Paul Lewis. ‘But we’re trying to avoid being big for big’s sake. We’re looking to grow in areas that are strategically valuable to the firm.

‘The Magic Circle firms in London continue to lose ground to US firms. Going into the US, the Magic Circle firms just don’t have the same firepower.’
Ted Greeno, Quinn Emanuel

‘One area where we’ve grown a lot in the last year was energy and infrastructure. That’s not radical – a number of other firms have been doing the same. But we’re extremely strong in renewables around the world, especially offshore wind. And renewables are going to be very big in the US, in the wake of policy shifts.’

But some are sceptical of this approach. ‘Linklaters is terrific in offshore wind in Europe,’ a former partner acknowledges.

‘And it may well be able to make an inroad into the offshore wind market in the US. It’s a strategy, but I don’t find it an incredibly compelling one. It gives you access to one market where you’re already an expert. Project finance expertise can get you from one finance market into the other. But historically it hasn’t provided a platform for broad market seizure.’

Lewis is aware of the risks of overspecialisation: ‘Is it feasible to operate in a major jurisdiction without a corporate core? You can pick up bits, but corporate tends to be the thing that stitches it together. If we wanted to pick up a life sciences team in Boston or an energy team in Texas, we could likely do that. But if you try and do things in the wrong order, it won’t be sustainable.’

It is this caution that animates Linklaters’ approach to the US. ‘People get very fixated on revenue rather than profit,’ says Lewis.

‘But you need revenue of a size and scale that can actually make you profitable. The philosophy in a lot of places is, “if we increase revenue then profit will come”. That may turn out to be true. But it may not. And the US is a very costly jurisdiction in which to get that wrong.’

The issue, of course, is that Linklaters has not made the sort of profitable investments that Lewis refers to. No member of the Magic Circle has a truly top-tier New York corporate practice. But Linklaters lags further behind than most, and in February 2022 lost key partner Peter Cohen-Millstein to Hogan Lovells.

‘It had a huge amount of talent in the US,’ says one partner with knowledge of the market. ‘But the firm wasn’t willing to take the investment decisions it needed to. It has incredibly talented people in the US, but it’s not getting behind them.’

Culture, money, and leadership

Perhaps what is most striking about the Magic Circle firms’ US performance is how little has changed in the last decade. Headcounts and revenues have increased, with significant rises in both in the years since 2020 for every firm but Linklaters (see graphs, below). But none of the firms has been able to make a true breakthrough.

Six years ago, CC’s former managing partner Matthew Layton said he expected the firm’s US turnover would surpass 20% of the total revenue in the medium term. However, all Magic Circle firms, including CC, have failed to hit this target, underscoring the challenges of penetrating the US market.

‘If you were to design a global law firm from the ground up,’ admits Lewis, ‘you’d want a strong portion of revenue to come from the States. And that’s not a single-digit number – it would ideally be in the 20-30% range.’

In New York in particular, decades of struggle have produced little recognition. ‘I just don’t see the Magic Circle firms representing the biggest companies involved in the biggest deals in the US,’ says a leader at a top US firm. ‘They just have not broken through in a meaningful way.’

One London partner who recently moved from a Magic Circle firm to a US firm sums up the situation: ‘It’s the reverse of the struggles that the US firms used to face maybe five or ten years ago in the UK. It’s essentially a credibility issue. In the UK, a general counsel is never going to get fired for hiring a Magic Circle firm to act for them. But they might get fired if they hire a firm no-one on the board has ever heard of, and then everything goes wrong. So, UK firms now need to grapple with the equivalent issue in the US.’

In some ways, this is unsurprising. In the words of one former Magic Circle partner: ‘The US has been a bit of a graveyard for many non-American companies who try to expand there. It’s not limited to the law.’

And penetrating this world can be difficult for any outsider. ‘The only non-New York firms that have ever really made it at the top end in New York are Latham and Kirkland,’ notes a former partner. ‘No-one else, American or not, has ever made a significant dent.’

Still, these cultural hurdles are not insurmountable. Overwhelmingly, commentators pointed to a more fundamental reason for the Magic Circle’s US woes: money. Top US firms are simply far more profitable and can pay higher rates to attract top performers.

Ted Greeno, co-managing partner of litigation specialist firm Quinn Emanuel Urquhart & Sullivan’s London office, explains: ‘The Magic Circle firms in London continue to lose ground to US firms. That’s because the US firms have a home market that gives them a lot more financial clout. Going into the US, the opposite is true: the Magic Circle firms just don’t have the same firepower.’

Tony Williams, principal of Jomati Consultants and former CC managing partner, is blunter: ‘Hiring in the US depends on how deep your pockets are.’

The problem is of course a perennial one, and Magic Circle firms have not been in denial about it, with each of the firms making efforts in recent years to turn the tanker on remuneration.

To stay competitive with high-paying US rivals, CC first broke lockstep in 2015 by revising its core equity point range, allowing top performers to earn up to 115 or even 130 points. Two years later, reports indicated that CC was willing to offer 150-point deals, which were 50% above its core City plateau, or 130-point deals with additional bonuses.

A&O also introduced a bonus pool in 2015. The firm then broke lockstep in summer 2016 to hire a finance team led by White & Case’s Scott Zemser. The move did not pay off: Zemser departed to Mayer Brown in January 2018. The firm again broke lockstep in February 2017 to hire a three-partner finance and securities team from Paul Hastings, led by Bill Schwitter, current US corporate practice chair. Michael Chernick, another of the February 2017 hires, departed to Shearman in October 2019.

Looking ahead, Seward says that: ‘A&O Shearman will continue the modified lockstep that we’re in.’ The bonus pool is a means of rewarding exceptional performance: ‘It could be financial or it could be non-financial, it could be an amazing bit of pro bono work or community outreach. It is really important that our remuneration system is underlined by our values, including great performance for clients. Bonus is not, however the main delivery mechanism for remuneration.’

Maybe so. But the ability to pay above lockstep has undoubtedly been key to what success A&O has seen in US lateral hiring.

Freshfields went further. In November 2017, it widened its equity ladder. This gave management a freer hand, enabling the firm to reportedly pay an unprecedented $10m a year guaranteed for five years to attract Klingsberg.

When asked about remuneration, Mason is confident: ‘The market has moved on. We have to be competitive in every market that we operate in, and that goes for the US like it goes for everywhere else.’

Linklaters lumbered late to lockstep reform. The firm voted to overhaul its pay structure in December 2021, introducing a system that allows it to accelerate partners up its ladder, to pay extra for ‘exceptional contribution’, and to elect lawyers to the partnership at an earlier stage.

However, sources say that the firm has rarely made use of these provisions, and never in the US. Speaking on remuneration more generally, Lewis emphasises caution: ‘You make a wrong move in the States, and it’s very expensive.’

Linklaters may have avoided costly mistakes. But it has also been conspicuous in its inability to attract big-name talent.

The profitability gap leaves the Magic Circle firms in an undeniably difficult position. But opinion is divided on the extent to which the issue is one of management. Some give credit to Magic Circle leaders. ‘They’re thinking long-term, about how to build an institution,’ says a former Magic Circle partner. ‘Compared to the advantages that the US firms have, they have to work a lot harder.’

Others, though, view UK firm leaders as complacent. ‘There’s still a lot of ignorance about the US market’, says Allen. ‘The UK firms make a lot of bad choices. They underestimate how hard it is to break in. They make the same mistakes, time and time again. They get the headline hire, thinking, “this is great, this’ll sort it”. And they invariably end up hiring someone who’s on their way down, and overpay for it. Whereas the US firms in London by and large invest in relatively junior people.’

Differences in how UK and US firms are managed and operate compound this issue. Allen continues: ‘It’s hard to describe how different the approach to law is in the States. American law firms have very light management. They move quickly, they’re very flexible. That’s why they’re successful in London: they can make decisions very quickly, and they’re good at correcting mistakes. It’s not that they’re wiser. It’s that they can just get things done. If you talk to someone at a Magic Circle firm, they’ll often tell you it’s really hard to get things done.’

‘Two steps forward, one step back’?

What hope, then, for the Magic Circle? Can the elite UK firms break the pattern that Williams characterises as ‘two steps forward, one step back’?

For many, A&O Shearman holds out the possibility of a breakthrough. ‘Assuming we merge,’ says Seward, ‘we will have a market leading and unique offering, combining the US with our unrivalled depth globally. It allows us to fill that perfectly-sized Shearman-shaped hole in the US.’

For Allen, the merger also offers A&O a chance to re-examine its position. ‘One of the major benefits of the merger for A&O is that it allows the firm to reassess how it is perceived in the US market and who it is competing with. Shearman competes in that market. It knows it has lost a lot of good people, and it knows how to attract people. It will help A&O navigate that. If you’re clever, and they are, that’s one of the reasons you do a merger like this: you pick the brains of the people who know the market.’

But, while the merger announcement has shaken up the UK legal scene, reaction in Manhattan has been more muted. ‘People view it as a bigger change in London,’ says one source. ‘I haven’t heard anybody in the US fearful that you’d have this behemoth that would be an unstoppable competitor. It would allow both firms to reinforce their existing client relationships with large banks and other financial institutions, and maybe to build out. But I don’t think anyone sees it as a game-changer.’

Another source remarks: ‘When I ask US firm leaders what they think about it, they often scratch their heads and say, “why would I think anything?”’

A&O failed in its attempt to merge with O’Melveny. And the spectre of CC’s 2000 combination with Rogers & Wells looms large – what one US partner calls ‘probably the most value-destructive merger in legal history’.

Recently appointed CC New York managing partner Ness Cohen, who started out at Rogers & Wells, describes CC’s merger as ‘really ambitious’. Despite Cohen’s positive view, prevailing market sentiment suggests that the combination faced significant challenges, with Adams effectively ruling out another merger in the press conference accompanying CC’s latest financial results. He said the firm was ‘not pursuing’ a US merger but was instead seeking ‘a progressive and constant build-up’.

As Williams notes: ‘Other Magic Circle firms would have followed suit if the deal had been a resounding success.’ And, until A&O Shearman, none did.

But, for all the potential pitfalls of a merger, elite UK firms are not burdened with an overabundance of options. If top US firms are unruffled about A&O Shearman, they are even less concerned about other Magic Circle firms’ strategies.

As Williams points out, ‘the difficulty with lateral hiring is that it has a mixed success rate. There is often up to a 50% attrition rate over a three-to-four-year period.’ A&O was stung by the departure of leveraged finance specialist and US executive committee member Zemser. The firm also lost tax equity specialist Sam Kamyans to Kirkland in June 2023, after hiring him from Akin Gump in March 2021.

CC’s practice was hit by a series of departures in 2008, including its global chair and partner Mark Kirsch to LA-headquartered Gibson Dunn. In 2015, CC’s ambition to build its New York office suffered a setback with the loss of M&A pair Ivan Presant and Joseph Cosentino to Greenberg Traurig. In 2021, private funds partner Victor Levy left for Kirkland & Ellis in New York. In the same year, long-time CC partner Nick Williams jumped over to Dentons in the US.

Freshfields again gets better notices here: ‘Their losses are largely folks who, it turned out, didn’t do what the firm wanted them to’, argues one partner at a New York firm.

‘Hiring in the US depends on how deep your pockets are.’
Tony Williams, Jomati Consultants

But there are exceptions. Maj Vaseghi, for example, a key hire in the firm’s expansion into California in July 2020, returned to Latham in March 2022.

With its opening in Houston, CC aims to make a focused play for the energy and infrastructure sector. Regional managing partner Sharis Pozen says that the opening of the Houston office had been on the cards for a ‘long time’. This marks a shift from ten years ago, when the firm said it was focusing on regulatory and investigative work in the pharma sector.

Linklaters is also looking to expand in the sector. The firm hired Ron Erlichman from Sidley in November 2022, and he now co-heads its Americas energy and infrastructure team with Marius Griskonis, who joined from White & Case in March 2023.

But looking away from New York may not provide the opportunities Magic Circle firms look for. One US partner notes: ‘Texas, California, and Boston are some very interesting markets. We’re interested in them too. I do understand the desire to move away from New York. But you run into the same problems. Talent in those places isn’t paid all that differently than in New York, and you can’t do the most profitable work for those clients without US corporate capabilities.’

‘Standing still is not going to do it ’

All this is especially important in a time of market consolidation. One Magic Circle partner explains their view: ‘Latham and Kirkland have put a lot of clear blue water between them and everyone else. We’re likely to see a scrabble for scale. There might be some speed dating. People may need to make their choices very carefully.’

In this context, organic growth may not be enough: ‘Pulling in teams is great. But it’s a slow and delicate set of steps. It takes a long time. And meanwhile, some of the other firms have got the hammer down.’

Mason takes a similar view: ‘Over the last decade or so, there have been US disruptor firms coming into Europe and shaking the market up. They have also had an impact on the US market. We have seen some US firms retrench a bit from their international businesses to focus on the really high-end remunerative markets, particularly New York. That’s created an opportunity for us, with our diversified offering. But even within the New York market, there’s a lot of change.’

Allen in particular sees this as a good time for mergers: ‘Over the next five, ten years, we will see a lot more merger activity. In a market like this, in business, you’d be buying up potential competitors. Part of the problem for law firms is that they can be very precious about their culture. Don’t be so precious! There absolutely should be more mergers being done. I hope this ushers in that era. It’s long overdue.’

‘Freshfields’ losses are largely folks who, it turned out, didn’t do what the firm wanted them to.’ New York partner

None of the other Magic Circle firms admits to actively pursuing a merger. Freshfields is, again, most forthright on this point. ‘We’re trying to build something bespoke here’, argues Mason. ‘We are cultivating a modern culture: non-hierarchical, decisive, and fast moving – it’s a “law firm of the future” theme.’

Freshfields and A&O represent two competing approaches to the future. It is possible for either, both, or neither to succeed. But looking at the market today, one thing becomes abundantly clear: doing nothing is not an option.

‘The Magic Circle now understand the scale of the struggle,’ summarises Allen. ‘They know that standing still and saying we’re fine is not going to do it anymore. They’re moving from complacency to actively addressing the issue.’ LB

elisha.juttla@legalease.co.uk

alexander.ryan@legalease.co.uk