New York’s legal elite re-asserted themselves through 2014, reaping the benefits of a bountiful market for high-end work. Have they done enough to preserve their legacies?
On a crisp September morning, the sun shines brightly from the newly refurbished rooftop offices of Gibson, Dunn & Crutcher, 55 floors up on Park Avenue. There is no hustle on this terrace and time for a few photos of the stunning view. Even with the long trail of cars far below dividing the city, it is a calm place. The calm, of course, is utterly deceptive. 2014 was a breakthrough year for top Wall Street law firms. In the streets and offices in Midtown and Wall Street, the market is buzzing and no-one is benefiting more than the traditional legal lords of New York.
After a turbulent period since the credit crunch gripped Wall Street in 2007, and introduced a streak of introspection and insecurity into Manhattan’s once-unthreatened legal community, 2014 was the most confident year for New York’s legal elite, bringing back some of the swagger of old.
Revenue figures for many elite firms support this, and highlight an apparent ‘Matthew effect’, where the richest law firms are getting richer, widening the gap with their peers. No wonder a tour of the city saw partners at three firms separately describe their current state with the same phrase: ‘We are blessed.’
While bankruptcy work as a whole has been subdued since 2012, a resurgence in corporate work, and robust levels of disputes and regulatory activity, have powered most to new highs, even as the US legal market as a whole has experienced only modest growth. ‘The economies have recovered and there has been a lot more activity in general, especially within regulatory and enforcement work,’ says Shearman & Sterling managing partner David Beveridge.
The question this raises is if this flight to quality will sustain Manhattan-centric advisers in the long term despite continued upheaval in the legal market. Or, alternatively, will the globalisation of the legal industry further the long-term erosion of the status of traditional Wall Street firms in favour of thrusting out-of-towners like Latham & Watkins and Kirkland & Ellis?
Cravath, Swaine & Moore presiding partner Allen Parker says: ‘Large New York firms had a very good year, driven primarily by growth in M&A activity, both in mid- and large-cap. The question now is sustainability. At Cravath, we feel confident that we can sustain this success, given that our growth has been across the firm and has largely come from our traditional bread-and-butter representations of Fortune 500 and 50 clients.’
‘Our best year’
That 2014 would end as a banner year for New York firms wasn’t clear to many advisers until the crucial post-summer billing period confirmed that the leading law firms were gaining momentum into the crucial fourth quarter.
In the end, it was even better than some had anticipated, with some firms posting record-breaking revenues and others claiming that 2014 was the ‘best year ever’; as Kirkland & Ellis’ executive committee member David Fox puts it: ‘The place is humming.’
‘This is one of the best years, if not the best year we have ever had,’ observes Parker at Cravath. ‘We saw enhanced activity in nearly all our practice. From a net income point of view, this is the best year we have ever had and a significantly better year than 2013.’
According to the results of Citi Private Bank’s 2015 Client Advisory survey, confidence is finally returning for many law firm leaders. As cited in the survey, the response from managing partners showed that ‘the beneficiaries of the uptick in demand tend to fall into two categories: those with strong brand-name transactional practices, or firms who have demonstrated value to their clients by offering quality work at the right price, while creating a well-managed cost structure to maintain or improve their margins’.
The results build on a more respectable financial performance in 2013 for leading New York firms – well ahead of the results posted by peers in London. So much for the paradigm shift supposedly shaking up US law in the post-Dewey age.
Disputes leader Paul, Weiss, Rifkind, Wharton & Garrison in particular outshone competitors and is enjoying its 15th record-breaking year in revenues in a row, with turnover having broken the billion dollar barrier.
Profits per equity partner (PEP), meanwhile, hit $4m, placing the firm alongside Quinn Emanuel Urquhart & Sullivan and Wachtell, Lipton, Rosen & Katz, the only two firms to traditionally achieve PEP over $4m.
‘Breaking the billion-dollar revenue mark in 2014 was a very significant milestone for us,’ says Paul Weiss chairman Brad Karp. ‘We are very proud of what we have accomplished, not just in 2014, but in the seven years since the financial crisis began. Over that period, our revenues have increased by 60% and our profitability has increased by more than 40%.’
Karp, who has chaired the 850-lawyer firm since 2008, comments: ‘[In 2014] we achieved greater balance between our two key practice areas – litigation/regulatory and transactional. We remain old-fashioned in our values – we are an all-equity partnership, and operate in a collegial and democratic fashion. Our compensation system is modified lockstep and hasn’t changed significantly in decades. It is increasingly difficult to find a firm like ours in the current environment. You won’t see us de-equitising partners, abandoning our lockstep system or compromising our culture in search of increased profits.’
Much of the firm’s growth was derived from the avalanche of litigation and regulatory defence work flowing from the banking crisis, and related legislation such as the Dodd-Frank Wall Street Reform and Consumer Protection Act.
‘We are continuing to see significant financial crisis-related activity,’ says Karp. ‘While several of the substantial litigations are winding down, we are seeing increased regulatory activity targeted primarily at financial institutions. I hope, for our clients’ sake and for our economy’s sake, that we are nearing the end of this punishing cycle, but I am not optimistic that this indeed is the case.’
Some 80% of the firm’s lawyers are based in New York and Paul Weiss has been moving in recent years to build out its other major engine in corporate to complement its disputes team.
Despite its prominence in the busy and inherently transatlantic area of financial disputes, Paul Weiss remains committed to its focus on US law. This is perhaps surprising when celebrated disputes boutique Boies, Schiller & Flexner in 2013 launched a City practice, in part to service regulatory work for Barclays, and Quinn Emanuel successfully started moving into international law back in 2007, but Karp maintains the model works for the firm.
Around 90% of the firm’s all-equity partnership operates under what it now terms a modified lockstep, with a small band of partners effectively paid above the top of its equity ladder (some rivals argue the Paul Weiss model cannot be classed as the relatively pure lockstep deployed at Cravath and Cleary Gottlieb Steen & Hamilton).
The firm deepened relationships with clients like Standard Chartered Bank, News Corporation and ExxonMobil, which augments its existing client list that includes Citigroup, Apollo Global Management, Deutsche Bank, Kohlberg Kravis Roberts (KKR), Oaktree Capital Management, Time Warner and IMG.
In maintaining a relatively small size, a marked resistance to external recruitment, and its celebrated generalist stance and training model, Cravath is one of the most traditional – even patrician – members of Manhattan’s legal community. Critics frequently argue this model has proved inflexible, hampering its movement into emerging fields since the 1960s, such as hostile M&A, banking, bankruptcy and now regulatory work. But while Cravath concedes that its model forces certain strategic choices on it, few can doubt that it has, pound-for-pound, one of America’s highest quality partnerships.
Though the firm remains associated with M&A and securities work in Europe, it has always prided itself on having a full-blooded disputes practice, while its traditional strength in high-yield has positioned it to benefit from a booming leveraged finance market. Such advantages aside, part of its rebound has been down to a revival in general corporate work. ‘We have seen a lot of work in our residential mortgage-backed securities cases, as well as a great deal of activity in traditional commercial litigation. An added bonus is that when a firm is involved in an M&A transaction, you also become involved in the related litigation, especially in the hostile context,’ says Parker.
In September 2014, Cravath’s securities litigators celebrated a long-awaited victory defending a class action for Xerox Corporation that alleged it overstated cost-saving benefits of its corporate reorganisation back in 1998. Sandra Goldstein argued on behalf of Xerox before the US Court of Appeals for the Second Circuit, alongside partner J Wesley Earnhardt. Cravath litigators Michael Reynolds and Kevin Orsini also successfully defended JP Morgan Securities in a lawsuit brought by Town North Bank for alleged misrepresentations and omissions regarding risks associated with asset-backed securities, including residential mortgage-backed securities and collateralised debt obligations.
Some notable deals include: advising InterMune on its $8.9bn acquisition by Roche led by partners Faiza Saeed and Ting Chen; Unilever’s acquisition of Talenti Gelato & Sorbetto in December; and new client Scientific Games in its $5.1bn acquisition of Bally Technologies in August.
While questions over the sustainability of the firm’s approach are old hat, a more recent point raised by peers is whether the firm has effectively moved into one of the most strategically important current areas of work to Wall Street firms: regulation (see box, opposite).
Parker responds: ‘Because our corporate practice is focused on transactional work, we have always made sure that we have regulatory expertise that’s necessary to support our primary practice areas. By contrast, we have concluded that stand-alone regulatory expertise is not essential for our client coverage now.’
The firm cites John White, who served as director of the division of corporation finance at the Securities and Exchange Commission from 2006 to 2008, and supports the firm’s securities and M&A practice; and litigator Christine Varney, who also chairs the firm’s antitrust practice, and was previously the assistant attorney general for antitrust and a commissioner of the Federal Trade Commission.
The current trends in cross-border disputes and the boom in high-yield in Europe raise the question of whether there is a case for Cravath to move into some targeted UK law niches. Parker concedes there are some voices supporting such a move in the firm’s City arm but says he sees the firm sticking to its US law focus.
Never settled – regulatory work continues to drive the agenda
While the transactional market has been fitful and unpredictable in recent years, the growing flood of big-ticket regulatory work and related disputes has remained a one-way bet for leading US law firms.
Last year saw a string of major companies announce nine-figure-plus settlements, capped off in August by the Bank of America (BoA) agreeing to pay a $17bn fine for selling flawed mortgage securities leading up to and during the financial crisis.
The fine was the largest ever levied by US authorities on a single company and came after JP Morgan’s $13bn penalty in November 2013, which was then the largest settlement in American history. Another key settlement in 2014 included BNP Paribas’ $9bn penalty, alongside guilty pleas in New York’s federal and state courts for violations of US laws regarding economic sanctions against countries including Iran, Sudan and Cuba. For this one case, the New York State Department of Financial Services (DFS), led by Benjamin Lawsky, received more than $2.2bn. In fact, last year, the Department of Justice (DoJ) alone recovered nearly $37bn from big banks for their role in selling fraudulent mortgages before the financial crisis.
Many New York law firms have also hugely benefited from the avalanche of high-stakes financial litigation and, while these cases are expected to slow this year, a lot of this work is being replaced by regulatory investigations, particularly global investigations, as the trend to enforce and investigate matters globally increases.
‘One of the most significant trends [of 2014] is the cross-border element of regulatory investigations, which is springing up across jurisdictions not previously seen,’ says Jonathan Kolodner – criminal, securities and enforcement specialist at Cleary Gottlieb Steen & Hamilton. ‘US regulators are setting the tone and the pace of investigations and this practice is spreading to other countries.’
Some New York advisers saw US and foreign financial institution clients, bank investors and trade associations ask for assistance on complex compliance issues, like the Dodd-Frank requirements, the Volcker Rule, living wills, swaps activities, restructuring of foreign and domestic banks’ operations, asset management activities, regulatory capital, market and product expansion, and over-heightened prudential standards.
Debevoise & Plimpton represented former BoA chief executive Kenneth Lewis in regulatory matters relating to its controversial 2008 acquisition of Merrill Lynch, including defence against civil claims brought by the New York Attorney General and various civil securities and derivative cases.
Cleary Gottlieb also has notable regulatory work under its belt, including advising the International Swaps and Derivatives Association in the drafting and negotiation of its resolution stay protocol launched in November 2014; advising the Securities Industry and Financial Markets Association in preparing some of the most extensively used master documentation; and representing trade associations and The Clearing House on the development of US and European frameworks for addressing the failure of global financial institutions.
Many advisers have expanded their regulatory practices to cope. For example, before the financial crisis, regulatory work accounted for roughly 15% of the work of Ropes & Gray’s New York arm. By September last year this had increased to 50%. Goodwin Procter on the other hand, created a speciality group of finance litigators and regulatory lawyers to deal with mutual fund litigation, for example.
Numerous factors have contributed to the rise in regulatory work in 2014, including the US Securities and Exchange Commission’s renewed focus on financial fraud and auditor responsibility. The DoJ, meanwhile, has been ever more vocal about its intention to bring cases against individuals for Foreign Corrupt Practices Act (FCPA) violations, particularly secondary participants, such as attorneys, accountants and board members, who failed to prevent violations.
Other contributing factors include the increased protection for whistleblowers – under the Dodd-Frank Act – which has caused a rise in litigation, and the number and intensity of False Claims Act investigations. Arnold & Porter partner and former chief of the Major Crimes Unit in the District Attorney’s Office for Southern New York, Marcus Asner, comments: ‘We’ve seen a big uptick in False Claims Act activity, especially in the New York area where a lot of the buzz is focused on the healthcare sector. FCPA investigations can be especially tricky. They typically are handled at the outset by the civil division of the US Attorney’s Office and the state attorney general, and rely on whistleblowers, a lower burden of proof, a different set of investigative tools and a potential for treble damages if the government prevails at trial. Things get particularly hairy because there’s always a real potential that the criminal side of the house is lurking in the background.’
The more robust enforcement dynamic has often led to claims that US regulators use aggressive tactics and powerful prosecutorial sticks to beat innocent companies and individuals into settling or admitting liability. ‘A recent trend we have noticed is a disturbing tendency for regulators to target conduct that they do not like, but that is not clearly illegal,’ says David Kornblau, co-chair of Covington & Burling’s securities enforcement group. ‘We expect to see other courts begin to show the courage to rein in the DoJ, and federal and state regulatory authorities, in weak cases where defendants have the will and resources to litigate rather than settle.’
One managing partner at a leading New York firm says US-based institutions have been under ‘withering attack’. ‘It’s difficult and challenging to deal with the Justice Department,’ he says. ‘They have been willing to bring criminal action against institutions and forced people to settle things that they wouldn’t necessarily settle on. There is a general level of hostility – the relationship between law firms and companies on one hand and US regulators on the other. It is a tough environment for US companies and there is a limit to how much of it they can stand.’
As a result, companies are embarking on early disclosure to minimise the risk of significant enforcement action. But with many global investigations involving mortgage-backed securities, foreign exchange, interest-rate benchmarks and US sanctions concluding this year, regulators will inevitably have to find other markets and practices to scrutinise.
According to Bruce Yannett, deputy managing partner and chair of the white-collar and regulatory defence group at Debevoise & Plimpton, activity is expected in cyber security, especially involving trade secret thefts, cyber attacks and data breaches, reflecting the US regulators’ proactive stance on the issue. ‘With the winding down of the mortgage crisis matters, companies should be prepared for increased regulatory focus on proper accounting and on cyber security.’
On the other hand, federal and state enforcement agencies expect to see more companies under scrutiny and more whistleblowers coming forward, while the DFS expects to see activity in the virtual currency space, as more mainstream financial institutions move into the virtual currency world. This follows the release of the proposed regulatory framework BitLicense in July 2014, for New York virtual currency businesses to help protect consumers and root out illegal activity without stifling innovation.
While American companies look to be hit with a new stream of activity this year, companies should remain prepared for the continuation of aggressive cross-border regulatory enforcement and investigations, even if many believe the wave of headline-grabbing cases against major banking groups will subside after the frenzy of activity through 2013 and 2014.
Regulatory work has also been pushed to the forefront of practice for leading US firms because of the wide range of agencies in the US, which at times collaborate and at others compete to secure high-profile victories.
This dynamic has been shifting globally as regulators collaborate across borders to target financial institutions over the foreign exchange markets, Libor and ISDAfix. These are being conducted by overseas regulators like the UK’s Financial Conduct Authority, the European Commission and the Hong Kong Monetary Authority.
This is alongside the long list of US authorities that are pushing enforcement, such as the Consumer Financial Protection Bureau, the US Commodity Futures Trading Commission, Federal Housing Finance Agency, Office of the Comptroller of the Currency and the New York Attorney General’s office. Yannett adds: ‘We are facing an aggressive enforcement environment and our clients, now more than ever, need to conduct ongoing diligence with a view toward defending against regulatory authorities if necessary.’
The Middle Way
While times have been good for US law-driven New York firms, the post-Lehman period has largely been fruitful for prestigious names, such as Sullivan & Cromwell, Davis Polk & Wardwell and Cleary Gottlieb, that have made varying degrees of targeted moves globally.
Sullivan in particular has eschewed any kind of reactive strategy to stick to its long-term path of steadily globalising its practice around a small number of finance hubs and a select band of clients and practices. With revenues rising 8% in 2013 – 22% up over a five-year period – the firm has been successful despite avoiding the kind of flashy lateral hires that have become common in the US.
‘We try not to react to what other firms are doing when it comes to lateral hires,’ says chairman Joseph Shenker. ‘We maintain a long-term approach and look to strategically recruit individual practitioners rather than hire large teams from other firms.’
Shenker adds that corporate pharmaceuticals is one sector in which the firm has seen a rise in deals. Other busy areas for the firm have been M&A, cross-border deals, capital markets and litigation.
Shenker has been leading the firm since 2010 and has no term-end. The firm does not run election processes; instead partners are appointed into leadership based on ‘consensus and acclaim’. The firm’s management committee contains between seven and nine members, including Shenker.
The recent history of Sullivan’s closest peer, Davis Polk, is far more volatile. Having been widely perceived to have drifted off course during the 2000s, under managing partner Tom Reid, the firm has been viewed as a renewed force. However, this has come at the cost of a more aggressive stance to performance management, with several peers claiming that dozens of partners have been managed out of Davis Polk’s equity in recent years.
Another firm to deliver a noted rebound in recent years is Simpson Thacher & Bartlett. While two thirds of the global firm is centred around corporate – predominantly M&A and capital markets – with the remaining third broadly covering litigation, the firm’s New York office is more evenly balanced between M&A, capital markets, banking and a high-end litigation practice.
The standout performer among its peers in the 2013 financial year – when Simpson hiked revenues by 15% – the firm has been a clear beneficiary of the resilience of America’s top private equity houses since 2010, which has been boosted by the combination of cheap credit and a growing US economy.
As go-to counsel for two of America’s elite buyout houses – The Blackstone Group and KKR – Simpson has also been well-placed to benefit from this and the wider shift in power from conventional banks in favour of an array of other less regulated financiers (one peer claims Blackstone and KKR are both responsible for over $100m each in fees annually to Simpson in direct and referred business).
Executive committee chairman Bill Dougherty is in the early days of his leadership, taking up the seat a year and a half ago. In terms of competition, Dougherty says he admires many firms including Cleary Gottlieb, Sullivan, Cravath, Wachtell Lipton and Paul Weiss.
Key deals for the firm included advising on BC Partners’ acquisition of PetSmart for $8.7bn; on Blackstone’s sale of its wholly-owned US industrial platform IndCor Properties to affiliates of GIC, Singapore’s sovereign wealth fund, for $8.1bn; and acting for Lorillard on its $27.4bn sale to Reynolds American.
For Cleary Gottlieb, 2014 brought the return of the mega corporate bids. Its M&A practice in New York saw a sharp rise in the number of complex transactions, compared to previous years, after acting on a string of headline deals. The firm advised Medtronic on its $42.9bn acquisition of Covidien; represented the parent company of Biomet and its private equity owners – Blackstone, Goldman Sachs Asset Management, KKR and TPG Capital – in its $13.35bn merger with Zimmer Holdings; and acted for Google in the sale of Motorola Mobility’s mobile devices business to Lenovo Group.
The 1,200-lawyer firm also saw increasing consolidation in the pharmaceutical industry across the last year, which led to some high-profile deals, such as the $66bn acquisition of Allergan by Actavis. Cleary Gottlieb also cashed in on global investigatory work, thanks to its long-established international network. ‘In the past year, we have seen a noted increase in counsel requests from major US and foreign financial institutions, bank investors and trade associations for assistance on enforcement-related matters,’ says partner Jonathan Kolodner.
Perhaps the one exception to the upbeat view on top-tier firms is at Skadden, Arps, Slate, Meagher & Flom, which has seen pedestrian growth in recent years and scaled back considerably from its boom-time size. Judged, at least by the somewhat unreliable yardstick of peer opinion, New York’s largest law firm is seen as facing a relatively subdued period, while it has been noted that the firm has lost a number of prominent partners to aggressive lateral raids.
Ups and downs
If the most prestigious firms in New York have either sustained their success amid the downturn or regained their form in recent years, it remains a choppy market. The dramatically shifting fortunes of Shearman & Sterling are a notable case in point, with the firm going through a decade-long decline, which appears to have been arrested under the leadership of senior partner Creighton Condon, who stepped in to replace Rohan Weerasinghe after he quit for Citigroup in 2012, and David Beveridge, who was named global managing partner at the same time.
Revenues increased 9% in 2013 to $820.3m, while PEP was up 19% to $1.8m. Beveridge says the firm is in expansion mode, with a particular focus on disputes work, leveraged finance in high-yield bond work, private equity and M&A.
In February last year, the firm expanded its litigation and leveraged finance practices with six partners from Orrick, Herrington & Sutcliffe – the only lateral partners to join the firm’s New York office in 2014. (In September, Magic Circle firm Freshfields Bruckhaus Deringer recruited Shearman M&A partner Peter Lyons, who quit after over 25 years of service, although Lyons had been expected to soon retire from Shearman according to one partner.)
Shearman represented Zillow in its $3.5bn acquisition of Trulia; acted for Albemarle Corporation in its $6.2bn acquisition of Rockwood Holdings; advised Sun Pharmaceutical Industries in its $4bn acquisition of Ranbaxy Laboratories; and represented Canada Pension Plan Investment Board on its $1.6bn sale of Air Distribution Technologies to Johnson Controls. The firm also enjoyed a high-profile litigation victory when the Second Circuit overturned the insider trading conviction of its client Todd Newman in a decision that related to the definition of insider trading in the US.
In addition, the firm has added some notable clients to its list, including Zillow, BMI Healthcare and retailer Coldwater Creek – a significant win for the firm after the American women’s clothes retailer filed for bankruptcy protection in April 2014.
The firm also argues it has finally remedied after years of investment and reshaping what was historically its biggest weakness: an underweight litigation practice that left it heavily exposed to the business cycle; disputes is now its largest single practice.
Another peer to be buffeted by the market in recent years is Weil, Gotshal & Manges which had a tough year in 2013. The firm laid off 60 associates and 110 support staff, cut back at least 10% of its partnership’s compensation, mostly in its Dallas office. The move came after the end of a string of crisis-related mandates the firm was handling, including the record-breaking insolvency of Lehman Brothers.
Over the last year, Weil Gotshal has attempted to regroup with a focus on M&A, private equity, tax and antitrust work, and this combined with the savings made from the 2013 cutbacks has finally paid off. The firm’s PEP rose 16.5% to $2.4m in 2014 from $2.1m in 2013, after dropping 7% and 5% in the previous two years. Net profit also grew by $52m to $411.5m, shooting up 14.5%, while revenues grew only slightly by 1.2% to $1.2bn from $1.1bn in 2013. Revenue per lawyer in comparison, increased by 9% to over $1m from $985,000 as lawyer headcount dropped 7%.
Noteworthy deals include advising Kinder Morgan in its acquisition of the outstanding equity securities of Kinder Morgan Energy Partners, Kinder Morgan Management and El Paso Pipeline Partners for an estimated $70bn; and acting for DIRECTV in its $67.1bn acquisition by AT&T.
Executive partner and management committee chair Barry Wolf tells Legal Business: ‘In 2013 we made strategic changes to position the firm for continued success in 2014 and beyond. While these changes were difficult on a personal level, they were the right thing to do from a business perspective. The positive growth we are seeing now is a result of these changes and increased market share, as well as a reflection of market activity overall.’
Wolf, who has been stung by the sniping the firm attracted after its reverses in 2013, stresses Weil’s financial strength, with the firm carrying no debt and maintaining a fully funded pension scheme – avoiding the liabilities that still sit over some major New York players.
Echoing a refrain used by Latham & Watkins to describe its 2009 restructuring, Wolf also points out that most major New York firms have effectively cut their headcount since the boom by 10-15% – maintaining that Weil was singled out for transparently making its reductions rather than opting for ‘stealth redundancies’.
Still at the gate
Another year of confident performance from New York firms has gone some way towards settling the nerves seen on Wall Street at the aggressive advances of out-of-towners like Kirkland & Ellis, Latham & Watkins and Gibson, Dunn & Crutcher.
Kirkland in particular has ruffled the New York establishment since the banking crisis with its willingness to offer market-leading packages to recruit star names from firms unused to suffering from predatory recruitment.
While the long-term trend demonstrates the rise of the nationally-spread, globally-potent law firms like Kirkland and Latham, by consensus, the tide is currently not moving as forcefully in favour of the ‘barbarians’.
In some regards such tension underlines the conflict between the home turf firms built on relationships stretching back decades and the entrepreneurial zeal of newer entrants. One Latham partner laughingly cites the former ban at Davis Polk on handing out business cards. ‘They were taught: “You sit by the phone and it will ring because you are the best lawyer in town.”’
Kirkland executive committee member David Fox similarly laughs off what he maintains are stereotypes regarding the Chicago-bred giant, and maintains that the firm is collegial and meritocratic, particularly when moving junior talents up the ranks. ‘If you are great, you have the opportunity to succeed in a very big way. We consistently are ahead in the partnership opportunities that are available here, compared to any of our peers that I know of.’
One Kirkland partner based in New York adds: ‘I work here because I want to be in a place that encourages building business. And while you are left alone to manage your work, there is always a network of people around you to help you pursue opportunities.’
In September 2014, the 729-partner firm advised the healthcare technology provider TriZetto Corporation – owned by Apax Partners – in its sale to Cognizant Technology Solutions for $2.7bn in cash. In terms of litigation, one notable case included partner Michael Garcia – who serves as the chair of the investigatory chamber of the FIFA Ethics Committee – advising on the highly publicised investigation of allegations of corruption in the bidding process for the 2018 and 2022 World Cup tournaments.
The firm made four notable hires last year, three of which came from Skadden: Richard Aftanas (capital markets) and Ian John (antitrust) in October and Dean Shulman (tax) in July. The firm also recruited private equity and M&A partner Doug Ryder from Weil Gotshal in October.
The firm, of course, made its presence felt globally last year, hiring leverage finance partner Stephen Lucas in London from Weil Gotshal and Winston & Strawn’s highly regarded disputes head James Hurst – both deals reputed to be backed by $8m guaranteed annual pay deals.
In contrast, Los Angeles-based Gibson Dunn has mapped a more conservative growth path since becoming the first major firm based outside New York to launch in Manhattan in the early 1980s. Nevertheless, Gibson Dunn has been one of the most successful major law firms of the last five years, growing revenues by 45% between 2008 and 2013 to $1.387bn, while pushing its PEP to nearly $3m.
The successful move into New York – where the firm now has 340 lawyers – has been a key part of its recent success, as has a well-balanced practice pitched between a strong corporate and a muscular disputes team.
The 330-partner firm is in bullish mood in Manhattan following accelerating activity levels after the summer. ‘We were used to the seasonal lull occasioned by deal makers going to the Hamptons, the summertime where the phone wasn’t ringing as much, but that didn’t happen; it was crazy busy through the summer,’ says Steven Shoemate, co-head of the New York office and co-chair of the firm’s private equity group. ‘This represented in my mind a real turning point from years passed.’
The financial downturn left behind a lag in M&A activity and a boost in disputes, especially regulatory, a traditional strength of the firm, which generates more than half its revenues from contentious matters.
The firm has nevertheless invested substantially in both its corporate practice and New York arm, which has grown 30% in the last five years, including expanding its local real estate and tax teams. At the beginning of January 2015, the New York corporate practice contained 48 partners, 13 more than its local litigation team. ‘It’s gratifying to see all the docking and decking efforts over the years really coming together – we are on so many headline deals.’
Gibson Dunn hired seven partners across 2014, including private equity and M&A partner Matthew Hurlock, who joined from Kirkland in December, and Richard Birns, who joined from Boies Schiller in July.
The firm is currently representing The Williams Companies on the $50bn merger of Williams Partners with Access Midstream Partners; advised Goldman Sachs – the financial adviser to biotech company InterMune in its $8.3bn acquisition by Roche and Citi in August last year; acted for Morgan Stanley as financial adviser to IGT in its $6.4bn acquisition by GTECH in July; and advised Lazard as financial adviser to Walgreens in the $6bn acquisition of Alliance Boots.
The competitive threat of the best out-of-towners is certainly not going away. Indeed, the US legal market is clearly in the long term segmenting more into top-tier and middle-tier, rather than its historic state or geographic influences. Gibson and Latham are increasingly seen as part of the community, replacing some of the weaker local brands that have faded in recent years.
The less fortunate
As much as the current market superficially resembles the boom years, in many ways there is still no sign of going back to the period of easy growth that defined the US legal industry in the three decades preceding the credit crunch.
By consensus, clients remain considerably more vigilant on pricing and intolerant of law firms running up large bills with armies of junior lawyers on relatively standardised work. Formalised and prescriptive panels – once far more prevalent in the UK – have increasingly made their way across the US, eroding the long-term corporate relationships that once prevailed.
It could be argued that New York law firms – by following their cultural inclination to remain focused on Manhattan and averse to the profit dilution inherent in foreign expansion – have become almost accidentally adapted to the changing market. Maintaining their model has slowly evolved towards being relatively niche providers of high-end corporate, securities, tax and disputes work rather than the broader advisers to corporate America of yesteryear.
Even in good times, many argue the legal market is splitting even within the top 100 US law firms in favour of the advisers with scale handling large volumes of relatively standardised business-as-usual work with increasing pressure to find efficiencies on the one hand and roughly 20 to 30 firms able to provide high-margin strategic advice. That New York law firms have seen their dominance over the corporate legal services market eroded is beyond doubt, but they remain the strongest forces within that smaller club for the time being.
Under this view, questions can be raised about the next tier of New York-bred firms, such as White & Case, Willkie Farr & Gallagher, Cadwalader, Wickersham & Taft and Fried, Frank, Harris, Shriver & Jacobson – a group that has faced varying fortunes in recent years. Even amid a respectable year for the wider US market, 2014 of course saw yet another major brand stumble as Bingham McCutchen, having over-expanded, was forced into a distressed takeover by Morgan, Lewis & Bockius.
The continued spread of aggressive pay deals for a handful of rainmakers and an ever-more heated transfer market for high billing partners – which has pushed pay deals as high as $10m for a handful of US partners – represents something of challenge for the flatter remuneration and collectivist culture that prestigious Wall Street firms still strive to maintain.
Cravath’s Parker adds: ‘We are operating in a world not quite set on its economic footing yet. In addition to sluggish growth in various parts of the world, we are still subject to the possibility of some sort of disruption internationally – whether it’s terrorism or the outbreak of a significant conflict. As a result, we are seeing business leaders doing what they can to move forward and make strategic decisions within this framework.’
Beveridge picks up the point: ‘Clients are very sophisticated, there is a lot of pricing pressure. Everybody is being creative. The days of the billable hour and institutionalised relationships are more or less over.’
Even in a US economy set for another year of robust growth and relative outperformance against Europe, there aren’t enough blessings to go around for all. But against many predictions, New York law firms’ divine favour looks safe for now. LB
jaishree.kalia@legalease.co.uk