Paul Hastings: Paul Who?

Ronan O’Sullivan joined the small London operation of Paul Hastings as a senior associate seven years ago; now he’s running the office. LB meets the man with plans to give the top-30 US firm the success it craves on this side of the pond

Paul Hastings’ Ronan O’Sullivan is an ambitious soul. Described by peers as ‘punchy and hard-charging’, the firm’s slick and charismatic London chair talks confidently about doubling the office’s 50-lawyer headcount in the next five years.

‘I think we’ve got to the stage in London where we are part of the community. We are doing very high-end work. The challenge for us is the next five to seven years,’ says O’Sullivan. ‘Doubling in size; that would be our expectation.’

It’s certainly big talk. But O’Sullivan is being pushed by management in the US who want to see big changes in London. After 15 years in the capital, they’ve decided something needs to be done. ‘In the short term we’d like to be over a hundred lawyers,’ says William Schwitter, chair of Paul Hastings’ leveraged finance practice in New York.
‘In the medium term, say three to four years, we’d like to be about 130 to 150 lawyers in London.’

But insiders say that a few years ago the firm wanted to be 200 lawyers in London, so that ambition has been tempered slightly. O’Sullivan faces a big challenge, especially as Paul Hastings’ profile in London is patchy at best. It’s known for its real estate finance prowess and for hiring a seven-partner structured finance team from Cadwalader, Wickersham & Taft three years ago, and little else.

Globally it is a different story. The firm is in the top 30 with a turnover of $884m. It also has impressive financials, with a revenue per lawyer of just under $1m and a profit per lawyer of $416,000, similar to Ropes & Gray and Davis Polk & Wardwell.

‘I’d put them on the list of underachieving US firms in London’

In the US, Paul Hastings is talked about in the same breath as other quality west coast firms that have a much higher London profile, such as Latham & Watkins. But in London the firm is still flying well below the radar. As one managing partner of another US firm here puts it: ‘I’d put them on the list of underachieving US firms in London.’

That’s where O’Sullivan steps in. After taking the helm in 2011 at the age of just 38, he wants to get things m0ving in London by hiring into corporate, capital markets and energy; building the firm’s reputation; and doubling the lawyer headcount. He also needs to shake off the reputation the firm has for big personalities and high partner churn (eight partners have left the 19-partner office over the past three years), which has given the place the suggestion of a revolving door. All that, while trying to maintain quality and keep up with the demanding firmwide financial targets. It’s going to be tough.

Mergers

To achieve the growth the firm craves in London, the most obvious route would be a merger. The London office is still relatively small, while globally the firm has enviable PEP and strong offices in Asia that might attract a mate.

But although chairman Seth Zachary does not rule out a merger, it’s seen as unlikely: ‘We are pretty traditional. The most natural growth for us is organic. We haven’t seen too many local mergers on a full-firm basis in London that have been terribly successful but if the right one came along we wouldn’t be constitutionally adverse. But that doesn’t seem to be our likely growth strategy.’

O’Sullivan wants to grow the office by poaching teams from larger firms. ‘I think a mega-merger is unlikely but as part of our growth we will definitely need to have bolt-ons, whether that’s a five-person group or a fifty-person group,’ he says.

Without a merger Paul Hastings is going to have to hire big and hire fast, which won’t be easy when virtually every expansionist firm in London, both US and UK, is looking to
cherry-pick high-quality teams.

Convincing them to come his way is going to need all the skill O’Sullivan can muster, particularly when many would still struggle to pick the firm out in a line-up in London: ‘I think the brand issue will play to our benefit over the next five years,’ he says. ‘The fact that we are perceived as being a new entrant, and we are doing the sort of work at the end of the market we want to be in, that gives us an opportunity that some of our competitors will struggle to meet.’

The next five years

The shopping list is long. O’Sullivan wants to bring in some big-name capital markets players, on both the equity and debt side, and an energy practice. But talk is cheap. The London market is littered with US firms that planned to make it big in the capital and never quite managed to pull it off. Think McDermott Will & Emery, which saw its star slowly fade after it landed with a splash in the late 1990s.

Just 12 US-headquartered firms have over 100 lawyers in the City. Of those 12 firms, eight managed to grow to that size organically. The rest (Mayer Brown, Reed Smith, Jones Day and K&L Gates) bulked up in London through local mergers. For Paul Hastings to emulate the other eight – which includes the likes of White & Case, Sidley Austin, Latham & Watkins and Kirkland & Ellis – will require some serious investment, not only in staff, but also in the brand. These firms are well known, on both sides of the pond.

‘The fact that we are perceived as being a new entrant, and we are doing the sort of work at the end of the market we want to be in, that gives us an opportunity that some of our competitors will struggle to meet’

O’Sullivan is not oblivious to the history of less successful US firms in London. ‘US firms tend to land with a blast, hire up, perhaps forsaking a bit of quality on the way, and then look to get a stable group of clients. We are sort of beyond that landing phase,’ he says.

But perhaps the biggest stumbling block to getting the right laterals through the door is defining the London office’s strategy. The focus on private equity, structured finance and, most recently, corporate is confusing. With full-service offices falling out of fashion of late, what exactly does Paul Hastings want to be good at? It is something no-one seems quite sure of.

‘We are a corporate practice but with a strong real estate securitisation and finance restructuring practice,’ says former London managing partner Phil Feder.

For his part, O’Sullivan says: ‘Our structured finance practice is market leading and there is no question that our international M&A practice for complex deals is stellar. Whatever discipline we are in, we punch above our weight.’

‘We are building a standard corporate practice in London,’ says Schwitter. ‘We don’t want to be everything to everybody, but we want to have a finance and M&A practice that services financial institutions and corporates.’

It’s hardly a vision that’s going to wow the market. Sure, some of the differences may be down to semantics – how corporate and finance are defined – but Paul Hastings is also known for its thin management (‘We don’t like subcommittees,’ jokes O’Sullivan) with just two partners globally in full-time management roles, chairman Zachary and managing partner Greg Nitzkowski. It may go some way to explaining why management struggles to set out a clear vision of what the firm is best at. But if management can’t do that, it’s unlikely market perceptions of the opaque brand will change.

It’s also in sharp contrast to the recent vogue for US firms to make niche plays in London, sharply defining their raison d’être; think Kirkland’s charge into private equity or Ropes & Gray’s similar move into the funds space. Paul Hastings has a little bit further to go.

Time to get a move on

In 2003, the ailing Paul Hastings began its reinvention globally, implementing a strategic plan that called for international expansion and strengthening its litigation practice, as well as attracting high-end work from corporate clients. That strategy has paid off and, since 2003, revenues have increased from $488m to $884m. The firm also managed to boost profitability, with PEP doubling over the same period to stand at just under $2m, while the firm’s profit margin increased from 36% to 42%. International revenue now accounts for 28% of turnover, compared to just 3% in 2003.

As part of the strategic review the focus by 2005 was on bulking up in Europe, with a new office in Paris and growth in London top of the shopping list. O’Sullivan joined the practice as a senior associate from Herbert Smith that year, and he concedes that Paul Hastings was late to the party.

‘We’ve been in Europe for less than a wet weekend in real terms,’ he says. ‘When Paul Hastings came to me in 2005, they’d been in London since 1997 but it was largely a service office in those first years. When they approached me, there was a real commitment and ambition to build out London and, frankly, Europe,’ he adds.

At that time the office was still in its infancy and as recently as 2007 the firm had just two partners and 25 lawyers in London. The following year, Los Angeles-based real estate finance partner Phil Feder was appointed London managing partner and relocated to the capital. Feder, a big name in US property and chair of the firm’s global real estate practice, oversaw the hire of a seven-partner finance team from Cadwalader. It was a ballsy move, with many at the time questioning the logic of hiring a structured finance team just months after the collapse of Lehman Brothers.

‘It was a nice melding of my arrival and their arrival shortly after,’ says Feder. ‘The advantage of my practice and the Cadwalader practice is that we are both flexible enough to do the workout restructuring of defaulted debt, which over the last four years has been the name of the game in Europe.’

Strategy

The Cadwalader hires were the first real marker for the firm in London and undoubtedly brought some quality names onto the firm’s roster, including restructuring and litigation partner Michelle Duncan, real estate finance partner Justin Jowitt and capital markets partner Charles Roberts. Insiders say that both Roberts and Duncan play a major role in running the London office alongside O’Sullivan. But questions remain over whether it has translated into anything more than a nice bit of bolt-on turnover for the firm. ‘The Cadwalader hires did what they said on the tin. It was a self-contained business,’ says one recruiter.

Duncan agrees that most of the team’s business is its own. ‘We have most of the same clients now but we have managed to grow the practice,’ she says. ‘Most of the work that we do is self-generated, although Jacobs Engineering is a shared client.’ California-based Jacobs Engineering has been a client in the US for over three years, and the London office has advised the international technical firm on a series of European acquisitions, including the purchase of Norwegian-listed Aker Solutions for $913m.

The distance between the US and UK business and clients is a criticism levelled at the firm by many market observers. ‘There is a complete disconnect between the US and the UK. The business is all self-generated in the UK, and that’s the major problem,’ says another recruiter.

But O’Sullivan says that most of the clients in the two-partner corporate group are shared with the US and the wider network, citing Samsung, Deutsche Bank and Visa as examples. The office is also generating its own corporate work, he says, while in the finance practice most work is European-based and does not lend itself to global firmwide cross referral. He’s happy with the mix.

But outside of corporate, most of the work seems to be London-based with little US involvement. At the moment the office has more the feel of a boutique start-up than an outpost of an international heavyweight. Partners talk of the ‘dynamism’ and ‘entrepreneurial feel’ of the office, and laterals are expected to bring across a strong book of business.

That lack of crossover between the US and UK businesses should be a major concern to US management. After all, what’s the point in having a London office if it doesn’t benefit the mothership?

Hiring

Since the Cadwalader hires, Paul Hastings has continued its hiring spree (see ‘Comings and goings’, below), appointing or making up an additional eight new partners since 2009. Most recently, the firm brought in Macfarlanes’ corporate and M&A partner Garrett Hayes in 2011, former Ashurst finance partner Ugo Giordano this year and Clifford Chance finance partner Neil Hamilton this month.

But although partner headcount is on the up, the firm has also seen eight partners leave the London office since 2009, including energy head Jonathan Simpson to Hunton & Williams in 2011 and an employment team headed by Christopher Walter to Covington & Burling in the same year. Partners, associates and support staff seem to disappear through the proverbial trapdoor on an alarmingly regular basis.

The firm is known for its hard-billing culture with high monthly targets. With a single profit pool and a strong equity partnership, partners in London have the same billing targets as those in New York and Tokyo. It’s undoubtedly a difficult place to work.

O’Sullivan is bullish about the high churn in partners. ‘We are a pretty demanding office in many ways, principally because our clients are,’ he says. ‘Building a successful practice based on the metrics we expect of ourselves is hard. Inevitably there will be some partners that feel that this isn’t the right platform. There is a bit of friction along the way, but that’s fine by us.’

‘There is no magic dust and there are quite often missteps, but we think we are pretty good at it’

One current partner claims the departures have strengthened the office. ‘The level of partners in 2007 was embarrassing. They were quite junior partners but it was like they were given the key to the candy store. A lot of reason for turnover in staff is that the people that were here just weren’t that good.’

O’Sullivan believes that the firm has managed to iron out the early hiring problems and points out that all of the 15 partners that have been hired or made up in the London office since 2009 are still at the firm. ‘We are a firm of laterals, we don’t have a large homegrown group of partners, particularly in Europe,’ he says. ‘If you look at the high-end, big hires we have made and how they have integrated, it’s pretty impressive. There is no magic dust and there are quite often missteps, but we think we are pretty good at it.’

Financials

The London office has made solid progress and has been hiring some good names of late but there is still a lot to do. The firm needs to deepen its corporate bench and wants to build equity and debt capital markets practices. The consistent PR message is that growth will not be for growth’s sake, but will only be through quality hires.

Financially, the London office has also been ticking along nicely. The office has trebled its revenues in six years, admittedly off a very low starting base of £11.3m back in 2006/07. Today’s turnover of £33.05m compares to £24.3m two years ago, an increase of 36%.

Next year looks promising too – the London partners are on or over budget for the first six months of the year and London (alongside Milan) is one of the most productive offices in the network at present, according to Zachary.

In terms of staffing, the office has grown from 25 lawyers in 2007 to 48 lawyers this year. But the experience of other US firms in London shows that continued growth is far from guaranteed and that big ambitions may not materialise. Of the half a dozen firms that had around 50 lawyers in London five years ago, just one managed to double its headcount – Kirkland & Ellis. Three firms saw headcount rise marginally by around 15 lawyers, and two, O’Melveny & Myers and Wilmer Cutler Pickering Hale & Dorr, saw headcount fall over the same period.

But even with the numbers going in the right direction, making more money is not a strategy. All that ambition is laudable but lateral hire candidates without books of business are given short shrift, even if their arrival might help other partners get more work from their clients. Piecemeal hiring is not going to benefit the wider firm and allow it to grind more work out of existing clients.

Can O’Sullivan get the firm to double in size, deepen its bench and maintain quality and financial performance? It’s a tough ask. The most promising thing going for the team is its relative youth and dynamism, as there is a go-getter attitude in the office that many firms would envy.

‘This is a long-term gig. I’m continually measuring us against 2005 and looking forward to 2018,’ says O’Sullivan. ‘I think as we build up our story is a lot more credible than some other firms in London, who have gone long and destabilised. If you look at the past ten years, the results speak for themselves.’

Paul Hastings has a great name in the US but still has a mountain to climb in London. O’Sullivan is going to need more than just ambition; he might just need a reality check.