Stars and stripes in their eyes – assessing the US ambitions of A&O and Freshfields

Nathalie Tidman looks at the struggle for the City elite as US players dominate home and away

‘People like me, making the switch from the Magic Circle to a US firm – a Kirkland, a Latham, a White & Case – did so because being a powerhouse in the US is critical to becoming a truly global law firm.’

This former Allen & Overy (A&O) partner’s sentiment is ironic, given A&O and Freshfields Bruckhaus Deringer have in recent years been the most ardent of the City elite in their pursuit of a US breakthrough. Both realised the imperative of cracking the world’s largest legal market 20 years ago, but progress has been painfully slow.

The Magic Circle’s failure to forge ahead with any sort of pace in Manhattan has long been a hobby horse of Wall Street partners. ‘The Magic Circle is a hard sell if profitability means you can only pay £2.2m at the top of your lockstep,’ notes one Kirkland & Ellis partner.

The disparity of partner remuneration between the UK and US elite becomes all the more pressing in the age of the $3bn US law firm, while the currency delta between dollar and sterling grows even more gaping. Even for US firms bred outside of New York, it is a notoriously difficult market to crack, with the exception of those two $3bn firms – Chicago’s Kirkland & Ellis and Los Angeles-born Latham & Watkins.

Even Magic Circle partners in London and New York concede that there has been little substantive progress in recent years. One A&O banking partner is candid: ‘The Magic Circle firms have ended up hiring and losing people, taking two steps forward and one step back. They are not that different in size and reach than they were ten years ago.’

Quite. Freshfields in the US is currently home to 206 lawyers, including 38 partners, a figure that has grown little in recent years. The practice accounts for a roughly 10% (£140m) contribution to the firm’s overall revenue.

A&O’s US business is understood to be responsible for 8% of firm-wide revenue (in the £125m region) and growth in lawyer numbers has been similarly subdued. The firm has 123 associates and counsel and 46 partners, only 6% of its fee-earner base and an unspectacular 7% increase in lawyer headcount since 2015, when there were 43 partners. A five-year view shows a partner headcount increase by only one, while overall US headcount has increased by only 10% since 2013.

In comparison, the largest US practice of a London-bred firm remains that of Clifford Chance (CC) via its 2000 New York merger. CC currently generates around £214m in the US, 13% of its revenues. Yet these numbers pale against the most successful US entrants in New York. Kirkland, for example, now generates over $700m out of its 550-lawyer Manhattan arm after a decade of heavy East Coast investment.

‘There are only three ways of doing a US expansion. Hire individuals, hire teams or do a big merger. Our focus is on the first two – hiring teams and individuals.’
Peter Lyons, Freshfields

Inevitably, A&O and Freshfields remain publicly bullish on their aspirations for the US, with growth a top priority for management. However, much like their entry into the States, each plans to get there by different means.

‘Management has made no secret of its ambition to grow here in New York – we currently have 36 partners across corporate, capital markets, banking, tax, employment and litigation. We have beefed up high-yield and leveraged finance and made internal promotions, but the firm is keen to grow at a faster pace,’ says Tim House, former global head of disputes and now A&O’s US senior partner in charge of achieving its stateside goals. ‘This requires a deeper commitment. We are looking to hire teams rather than ones and twos – that has a better prospect of working quicker – but the only way to achieve the scale we want is through a meaningful combination.’

Peter Lyons, Freshfields’ US regional managing partner, favours the less risky tack: ‘There are only three ways of doing a US expansion. Hire individuals, hire teams or do a big merger. The latter has the highest degree of difficulty and risk. Our focus is on the first two – hiring teams and individuals.’

Coming to America

The strengths and weaknesses of both firms’ practices can be traced back to their entry into the US market and have informed their stated intentions.

Freshfields’ three-pronged attack in finance, disputes and corporate started in 1998 with the hire of a team from Milbank, Tweed, Hadley & McCloy. The team included Ted Burke, the well-regarded project finance partner who went on to become US managing partner in 2002 and global managing partner in 2005. Burke stepped down in 2013 to join private equity house ArcLight Capital in his Boston hometown.

During the 2000s the firm moved into contentious work ahead of peers. Notable hires in 2009 of three respected partners from US rivals to establish a litigation practice – including Adam Siegel and Aaron Marcu from Covington & Burling – meant Freshfields was an early mover in highly lucrative white-collar crime and investigations, which laid the foundations for the firm’s strongest US practice, now with 75 lawyers.

‘That team kicks ass and takes names, as we say in New York,’ says Lyons. Since hiring Siegel and Marcu there has been reasonable growth and the business now represents slightly less than 50% of US revenue, in line with high-end US rivals. The hire of antitrust litigator Eric Mahr from the Department of Justice this year has been another boon. ‘We wanted to capture business we were losing because we didn’t have someone like Eric. We’ve filled that gap,’ adds Lyons. Washington DC-based Freshfields veteran and global co-head of the firm’s international arbitration group Nigel Blackaby is described as a ‘certified superstar’ and Noiana Marigo, New York arbitration partner and co-head of the firm’s Latin America practice, has also built a strong reputation.

Freshfields’ third substantive recruitment drive came in 2014 when it secured the marquee hire of former Fried, Frank, Harris, Shriver & Jacobson senior partner and head of global capital markets Valerie Ford Jacob along with two other corporate partners – Michael Levitt and Paul Tropp. The arrival of Peter Lyons, Shearman & Sterling’s former global public M&A head, the same week and the willingness to pay certain recruits above the top of the lockstep were signals to the market that Freshfields meant business.

Given Freshfields’ relatively belated push into M&A and private equity, it is no surprise that the practice should be underdeveloped. Despite the initial fanfare, the team is still small, fielding 29 lawyers, 60% fewer than dispute resolution. Ford Jacob and Lyons are named frequently by colleagues and peers as credible practitioners, but there is a question mark over the strength of their brand as a selling point to fresh talent.

‘I rate Valerie Ford Jacob and Peter Lyons but they’re still not the best people in that market. Freshfields doesn’t really have any household names in New York,’ notes one ex-partner, now at a US firm in London. ‘Valerie does underwriter side on bond issuer stuff. I thought they were trying to get away from that and focus more on private equity.’ Ford Jacob herself points detractors to the deal she worked on with CVC relationship partner Charlie Hayes advising on the sale of Formula One to US media company Liberty Media, for an enterprise value of $8bn. The deal has led to further mandates from CVC for the US team.

Freshfields’ conservative hiring has, however, meant there have been few high-calibre departures in recent years. Says one US managing partner: ‘I am impressed with Freshfields’ ability to hold onto its talent. But I’m not sure how much longer that will last.’ The exit for Latham in 2016 of litigation partner Michael Lacovara, the firm’s gregarious executive partner, after only six months in the role remains a notable exception, striking a blow to the management at the time.

Less of a shock was the exit of capital markets partner Paul Tropp in July 2018 to Ropes & Gray, although he played a role in the development of the New York corporate practice as part of the Fried Frank team.

A current Freshfields partner plays it down: ‘He didn’t do that much international capital markets. There were a few former Fried Frank partners at Ropes – good friends of his – who had been trying to get him to go to Ropes from day one. It was nothing to do with money.’

However, ‘if Freshfields tells you he didn’t leave for the money, that’s utter bunkum’, adds another ex-partner.

Managing partner Stephan Eilers concedes the departure of corporate partner Doug Bacon as a loss for the firm’s New York office. Bacon, who joined Kirkland in 2016, had an enviable client list, including Novartis, Honeywell, Blackstone, KKR, TPG, Apax, MSD Capital and First Reserve. Eilers stresses that the firm’s strategy includes organic growth as well as laterals. ‘Next year we will have around 45 partners in the US following promotions in antitrust, M&A and arbitration, as well as new hires. We are focused on growth and the plan to have 300 lawyers by 2021 is an achievable number.’

‘We are a relationship firm for most of the bulge-bracket Wall Street investment banks, so yes, I think we have a compelling offering.’
Andrew Ballheimer, Allen & Overy

A&O, meanwhile, has been less fortunate in US partner retention since it made headlines in 2001 with the hire of Cravath, Swaine & Moore derivatives heavyweight Daniel Cunningham. He left for Quinn Emanuel Urquhart & Sullivan in 2009 and A&O has had a relatively high US turnover ever since. The US practice is also still believed to be loss making after partner remuneration.

Losing Peter Harwich, the M&A partner that left for Latham in 2017, is widely considered one of the firm’s biggest reverses in New York. House calls him a ‘serious player’; London partner Richard Browne describes him as ‘really successful.’ Other setbacks include the hole left by the highly-rated corporate real estate team, led by US senior partner Kevin O’Shea, which went to Milbank in 2016. The following year, highly-rated antitrust litigator and former prosecutor John Terzaken jumped ship in Washington DC to Simpson Thacher & Bartlett. Earlier this year, Scott Zemser, the global co-head of A&O’s leveraged finance practice, left for Mayer Brown after less than two years.

‘It’s very telling that they were all good; that it gets the quality people but loses them because of the platform,’ argues one former partner, now at a US firm.

Nevertheless, A&O continues to patch things up with some notable recent hires. Partners highlight the three-partner leveraged finance and securities team hired in 2017 from Paul Hastings, including Bill Schwitter, Michael Chernick and capital markets partner Jeffrey Pellegrino, a move that dealt a blow to their former firm. Many partners and peers cite securitisation and structured finance partner Lawrence Berkovich, who joined A&O in 2017 from Ashurst’s New York finance practice with four associates as a productive move. ‘Larry Berkovich is phenomenal,’ is global managing partner Andrew Ballheimer’s assessment of the hire, which has been instrumental in A&O’s ascent in the league tables for CLO work.

Franz Ranero, capital markets partner in London, is sanguine. ‘Not to sound complacent, but where we are after 12 months is where I hoped we’d be after about two or three years. It’s about creating products that hopefully develop with the client and winning their trust.’

House and Ballheimer insist that while the corporate practice remains far smaller than US-bred firms – comprising only six partners – the quality is high, including the acquisition earlier this year of veteran Stephen Besen from Shearman & Sterling and the return to the partnership of Paul Burns after stints in-house at Novartis and North Dakota LNG. ‘Besen has done brilliantly so far. If he continues as he has been doing, we’ll be dancing in the aisles,’ says Browne.

Three months into his role, Besen comments: ‘I have been retained by many of my existing clients. There is every indication that my clients will join me.’

Eric Shube, A&O’s head of US M&A and a 17-year veteran of the firm, points to a deal sheet including advising Novartis on the $52bn acquisition of NYSE-listed Alcon, SAP on the $2.4bn acquisition of Callidus Software and Fresenius Kabi on its merger agreement to acquire Chicago-based pharmaceutical company Akorn for $4.3bn as evidence that the practice is outperforming its reputation. ‘We are certainly doing deals where lawyers on the other side of the table are perceived market leaders. We see more of Cravath, Skadden, Davis Polk than Freshfields or Clifford Chance.’

House says the firm has also leveraged its banking heritage to forge a strong cross-border litigation offering. ‘We are particularly strong already in enforcement, white-collar crime and litigation.’

Meanwhile, Ballheimer responds to detractors that A&O lacks the relationships with US banks that would make it a true contender Stateside. ‘We are a relationship firm for most of the bulge-bracket Wall Street investment banks, so yes, I think we have a compelling offering with the big US banks. They are some of our best clients. Have we maxed out on the American banks in terms of the opportunities out there? No. The legal spend of these American banks is significant and we do well, but there are plenty more opportunities. The wallet is big and getting bigger.’

No perfect match

Potential or actual combinations between the UK elite and US firms have not been a success. Most interviewees cite the troubled union of CC and Rogers & Wells.

Eilers is clear that Freshfields’ strategy does not involve a US merger and roundly denies the notion it was ever on the cards, despite persistent claims from ex-partners that there were protracted talks with Debevoise & Plimpton around 2011. While supporters of the move pointed to similar compensation structures the talks failed to gain traction, with lack of headway thought to be a contributing factor in the departure of Burke. Former partners say Debevoise was underweight outside of the US, did not have the top-drawer M&A practice and financial services team that Freshfields wanted but had on its side pockets of excellence, including funds and litigation.

‘Freshfields has not spoken seriously to any other firms. It had some approaches from regional firms outside New York – smaller West Coast firms. Nothing you could call a marriage of the stars before the movie credits roll,’ says one ex-partner.

Despite the reticence to pursue a merger, the critical importance of the US to Freshfields should not be under-estimated, especially given the clout of its private equity and leveraged finance teams. Lack of progress stateside has been a heated strategic debate at the top of the firm for years – some of the detractors of senior partner Edward Braham see him as too cautious on US expansion. The firm in November 2017 also pushed through a shake-up of its lockstep that allows it to pay marquee US partners as much as five times that of entry-level equity partners.

As for A&O, the firm has remained coy on its talks with LA-based O’Melveny & Myers, but as Legal Business went to press they were still edging towards a deal. The obstacles that keep emerging are the disparate compensation structures of a City firm clinging to lockstep (notwithstanding a bonus pool to attract big names) and an eat-what-you-kill approach from the US. Then there is always the danger that the best partners at each firm will vote with their feet, either because the US partners are getting paid too much or because the UK partners are diluting profit.

However, Wall Street partners feel the merger is likely, citing the amount of O’Melveny CVs being circulated by headhunters. There are also questions about how a merged firm would survive the inevitable culture clash and whether the tie-up would be beset by conflict issues where a large banking practice is concerned.

Without naming its suitors, A&O speaks academically about what an ideal US merger would look like. ‘We have come to a realisation that there is not any one firm out there which will achieve all our ambitions at once to create real market depth in North America,’ says House. ‘I don’t think that firm exists, or if it does, it is not interested in a merger. If one could find a firm or more than one that brought the scale and brand and was well-attuned culturally, we would be keen to make that move. This is going to involve stages. Quite where you choose to start – be it litigation, finance, corporate – if there’s a firm that gives you something extra immediately – you can create a stable platform to build on.’

He admits there is a greater sense of urgency for a merger, driven by the twin forces of US disruptors and the wider impact of tech developments in the profession. A&O has after all been looking for a US deal, including scouting outside New York, for more than five years now.

As one London A&O partner concludes: ‘Statement of intent is important – there is a cachet that comes with massive investment. People will ask: “Are they committed?” Elite status is what we are after. If there is a big existentialist threat, we want to be ahead of that.’

nathalie.tidman@legalease.co.uk