Amid a changing global legal market, three storied Wall Street firms retain commanding reputations. Legal Business assesses New York law’s enduring inner circle.
‘Almost all absurdity of conduct arises from the imitation of those whom we cannot resemble.’
Samuel Johnson
Thomas Reid gets an annual reminder of the similarities between the New York firm he runs, Davis Polk & Wardwell, and two particular peers, when it begins its recruitment drive.
‘Year after year, when we make an offer, someone will come back and say: “I’m delighted to get an offer from your firm, but can we discuss the differences between you and Sullivan & Cromwell [or “you and Cravath”] because that is the other firm I have an offer from.”’
Reid reports this conversation has repeated continuously over the 25 years that he has been with the firm. Some things never change.
Of course, much else has changed within New York’s legal community, but Davis Polk, Sullivan & Cromwell and Cravath, Swaine & Moore retain a distinctive position in Manhattan’s legal firmament; a position denoting prestige, premium pricing and top-quality practitioners. When people refer to white-shoe firms – a phrase New York lawyers have shunned for years given its connotations of Waspish privilege and clubby exclusivity – this trio comes first to mind.
Nevertheless, the three have proved enduring and more capable of adapting to the changing seasons than many once supposed. Those carefully cultivated brands retain huge potency.
But while a shared history means the trio appear destined to be always compared, on closer inspection there are inevitably considerable differences in terms of business, strategy and world view.
Cravath’s determination to remain exclusively focused on New York law marks it out – even on Wall Street – while Davis Polk and Sullivan have made more accommodations to globalisation and modern notions of law firm governance. Cravath has also remained more classically centred around the hubs of corporate practice and commercial litigation, while the latter two are distinguished by a heavier focus on finance, and a greater willingness to move into new business lines and foreign territories.
Where the trio undoubtedly share common ground is in the emphasis on culture and attempts to preserve it. Intrinsically linked to this is the firms’ commitment to focusing on the most complex matters for marquee clients.
‘The world has changed dramatically in so many ways but the one thing that is constant is that when people talk about which firms are our natural peers and toughest competitors, it is always us three that get compared,’ reflects Reid. ‘None of us want to dilute our identification with New York City – our home office – but certainly ourselves and Sullivan have realised, that as the world has changed, London and Hong Kong have become relatively more important. As regulatory practices have become more important in the US, Davis Polk has realised that we need to have regulatory practices in Washington DC, London and Hong Kong that are very credible. They may not be 200-lawyer offices but they can certainly handle matters for clients.’
Meanwhile, Cravath head Allen Parker argues that – despite greater competition from a widening array of rivals – his firm has never been in better shape strategically or financially. ‘Our traditional approach to doing business and servicing clients works well for us. We don’t feel any pressure to change our strategy or model.’
Cravath, Swaine & Moore
Key stats:
- Revenue: $648m
- Growth track: Revenues up 6% in 2014 and 14% over previous five years
- Profit per equity partner: $3.36m
- Partners: 90 equity, one salaried partner
- Total lawyers: 442
Key clients:
IBM, Mylan, Shell, Unilever, PwC, JPMorgan Chase, Time Warner, British American Tobacco, INEOS, Saint-Gobain, Terra Firma, Kraft Heinz, Qualcomm, Novartis, Disney
Leadership:
Allen Parker, presiding partner
Key lawyers:
Co-head of corporate Scott Barshay and co-head of M&A Faiza Saeed, securities head Kris Heinzelman, leader of the international practice Mark Greene, and EMEA head of M&A Richard Hall all have big reputations. A group of young partners, including Damien Zoubek, Eric Schiele and George Schoen, have established strong reputations. Current chair Evan Chesler is hugely influential and remains one of the most high-profile trial lawyers in New York.
‘Unique in this world’
There are few Wall Street firms that can claim to value culture quite like Cravath. Although it is approaching its 200-year anniversary, the name has changed repeatedly over that time – earlier in its evolution it went by the less elegant Blatchford, Seward & Griswold – not bearing the famous Cravath, Swaine & Moore brand until 1944. From the start, this was a firm close to power, acting for some of the defining names of 19th century American capitalism, thanks to the huge political clout of name partners Samuel Blatchford and William Seward. However, it was Paul Cravath who was to define the firm over a 41-year career after joining in 1899.
Cravath himself shaped much of the firm’s governance and approach to training and practice management that endures today. Issues of significance still go to discussion at the weekly Monday lunch, where the entire partnership breaks bread in a room large enough to accommodate its 86 New York-based partners. Demonstrations of unity extend even as far as attending memorial services for deceased partners, where partners fulfil the ‘Cravath procession’ and walk in single file in letterhead order behind the casket.
‘Some may think it’s odd, but for us it’s a show of respect for our colleague,’ reflects Parker. ‘I have been to several and it’s quite a moving experience, not to mention a demonstration of camaraderie that is very unique in this world.’
Parker became the firm’s 15th presiding partner in January 2013 in the firm’s only elected role. His two predecessors were among the most respected names on Wall Street, star litigator Evan Chesler and before that corporate veteran Robert Joffe.
Cravath traditionally runs a leadership election every four years; although there is no term-end, provided no leader serves past 63 years of age. Before his appointment, Parker served six years as deputy presiding partner to current chair Chesler. The position, which historically was a one-year transitionary role, was extended into a longer-serving role to accommodate Chesler’s heavy schedule of client work.
In contrast, Parker is largely dedicated to running the firm – he refers to ‘leadership’ rather than ‘management’ – though he still handles some client matters. Underlining its reputation as counsel to US powerbrokers, Parker has been known to hold ‘fireside chats’ during partnership meetings with high-profile figures such as Henry Kissinger and General Electric chief executive Jeffrey Immelt.
The firm does not operate an executive committee but is not quite as light on management as its reputation suggests (Parker jokes that governance used to be ‘Athenian democracy in the old days’). The firm has four department heads for corporate, litigation, tax, and trusts and estates appointed by Parker following a series of consultations. There are also managing partners for litigation and corporate, who have a brief to manage training in their groups. ‘The first thing I look for is leadership ability. There are many outstanding partners with good client coverage skills – but can they encourage and motivate colleagues? You have to have practice heads who can work well with people and who care about furthering the success of those around them as much as pursuing their own careers. That’s how the firm does well in maintaining an extraordinary culture.’
Underlining its emphasis on collegiality, Cravath remains one of the few major American law firms to operate a pure lockstep, with plateau partners earning three times that of entry level. (Elite Wall Street firms, whether lockstep or merit-based, generally avoid ‘barbell’ compensation models with wide disparities between top and bottom earners.)
Satellites and global horizons – Going international, New York style
Even in the age of globalisation, the most prestigious Wall Street law firms have traditionally followed a very particular path in following clients abroad. Despite the quality of their partner ranks and client bases, it is an approach that has self-imposed limits in making them mainstream players in European deal and disputes work. Comments one veteran M&A partner at Freshfields Bruckhaus Deringer: ‘You just don’t see them. The only person we see is [Michael] Hatchard at Skadden [Arps, Slate, Meagher & Flom]. On big-ticket M&A, you don’t see any of them.’
Even at Sullivan & Cromwell, the most expansive of the trio, fewer than 30% of its 800 lawyers are based outside of the US. At Cravath, that figure is below 10%, with its sole overseas office in London employing 38 lawyers. But times are changing. While top firms have for decades been ready to travel around the world to provide New York law counsel, the last 20 years has seen Sullivan and Davis Polk & Wardwell move progressively into foreign law in targeted areas (considerably earlier in Sullivan’s case). Sullivan now has eight overseas offices, against seven at Davis Polk. Cravath, on the other hand, once had three overseas offices but closed Paris in 1981 and Hong Kong in 2003.
In London, the number of lawyers housed by Cravath, Sullivan and Davis Polk has risen by 40% since 2007, from 120 to 168 lawyers. While the numbers are modest in comparison to firms such as Latham & Watkins and White & Case, these are significant commitments for firms notoriously averse to profit dilution.
The fastest-growing office in this period has been Cravath’s, which has quietly built up under the leadership of Philip Boeckman, who took hold of the reins in 2007 when William Rogers returned to New York. Cravath’s City office has doubled in headcount over the past eight years and Allen Parker, Cravath’s presiding partner, expects further growth to continue on a par with its modest Wall Street expansion. ‘You won’t wake up and see ten partners in London but the office will grow in tandem with New York. In ten years’ time you might see six or so partners in London.’
The expansion is unsurprising given the boom in recent years in high-yield issuance by European corporates – Cravath has long been a market leader in high-yield bonds – with a sprinkling of corporate work also handled in London. The star of its team is David Mercado, who relocated to London in 2008. Richard Smith, a corporate partner at Slaughter and May with responsibility for the firm’s US relationships in the City, remarks that the ‘high-yield team in London might even be busier than its New York office and that’s saying something!’ Partner Joel Herold relocated from New York two years ago to support the practice.
While Cravath has had requests for English law capability from long-time clients, its leadership remains unconvinced. Without a medium-term prospect for such a move, Cravath remains a regular referral partner of Slaughters’ European network, including Hengeler Mueller, Uría Menéndez and Bredin Prat. One shift in the practice in recent years was the end of the short-lived experiment to field some US contentious work in London, with John Beerbower retiring soon after transferring to London in 2008 to add an arbitration capability to the office.
Cravath’s decision to shut its Hong Kong arm still raises some eyebrows as Davis Polk and Sullivan have invested in Asia. Parker, however, is insistent it was the right move: ‘Our experience was that the Hong Kong market did not differentiate by quality of work so we were not able to maintain a profitable presence. Most firms say they are there with the expectation that the Hong Kong legal market will someday become profitable for them but I doubt we’ll see that in my lifetime.’
Davis Polk, by contrast, has made a major commitment in Hong Kong. The office is now the second largest at Davis Polk, with over 100 lawyers, despite opening 20 years after its London launch in 1972. Hong Kong has become so influential that the office became the first in the international network to deploy English law capability when the firm hired Paul Chow from Linklaters in 2010. That hire came as part of a drive on the Hong Kong market, with its Hong Kong law practice launched that same year through the hire of Bonnie Chan, the senior vice president of Hong Kong Exchanges and Clearing, where she led the IPO transactions department.
Davis Polk managing partner Tom Reid says ‘Hong Kong has been an offensive move’ as the firm ‘wanted to get ahead of the trend we could see developing with Hong Kong law becoming as important as New York and English law in Asia’. Davis Polk, which is more heavily weighted in white-collar and regulatory work than its closest peers, wasted no time in adding litigation to its Hong Kong practice.
With the Department of Justice extending the reach of US prosecutors into Asia, China ramping up its enforcement and the Securities and Exchange Commission taking a growing interest in China as more Asian companies seek to list in the US, the decision to hire in Clifford Chance’s head of Asia-Pacific litigation Martin Rogers to launch litigation in Asia in 2012 proved well timed. Other notable hires include corporate partner Antony Dapiran arriving from Freshfields and well-established capital markets partner Jon Gray joining from Linklaters.
London corporate partner Jeffrey Oakes describes the shift into foreign law. ‘Tom [Reid] pushed us to take steps we’d been thinking about for a long time. It was a realisation we’d taken the prior strategy as far as we could. We’re not as big as others but we’re in all the right places with the highest quality.’
However, some contend that its London arm is still underdeveloped. If Hong Kong was an offensive move, the introduction of an English law practice in London was defensive. The firm hired two prominent practitioners in Simon Witty, who joined from Freshfields to launch London’s English law offering, and Will Pearce, who arrived from Herbert Smith Freehills. The pair have both won their own business but some feel the practice is still punching below its weight and needs more investment.
One influential Magic Circle partners says ‘you don’t have a long list of people you’d want to go to there, let’s just put it that way’ and a senior M&A partner at a leading New York firm in the City adds: ‘I’m unimpressed – they just don’t have the profile.’
Unlike Hong Kong, the firm has yet to add a litigation practice in London. Witty says disputes ‘would be an obvious area for the next move’ in London and the firm has moved offices in anticipation of investment. The relocation will allow the firm to house double its 58-lawyer headcount. With Davis Polk’s international ambitions centred on Asia, having shut down its eight-lawyer branch in Frankfurt in 2009 after 18 years of service, its international ambitions are now set to be tested with China’s recent market correction hitting the always-volatile Hong Kong IPO market.
In contrast to its peers, Sullivan had tended to move early but gradually in terms of international growth.
While the firm has the most overseas offices of the trio with eight in total, Sullivan’s investment ahead of the financial crisis centred on Europe, resulting in a more demure period for overseas expansion. Its London office has grown the least of the three firms, with headcount rising modestly from 70 to 82 lawyers since 2007. Nonetheless, Sullivan has a string of respected partners in the City including ex-Freshfields M&A partner Tim Emmerson and long-serving London chief Richard Morrissey. Replacing Emmerson and Morrissey when they retire is flagged by peers as an issue but in truth Sullivan retains by far the widest City bench of its peers including respected operators such as Vanessa Blackmore and corporate partner Ben Perry. It also strengthened the office in 2013 through the addition of finance duo Chris Beatty, who relocated from New York, and Linklaters restructuring partner Chris Howard. Freshfields finance partner Presley Warner joined in 2011.
While Sullivan has largely focused on handling the global matters of its core clients, rather than sourcing local work, its long-term approach and sheer quality wins respect. One London partner remembers the arduous process of meeting every Sullivan partner before being offered the job. ‘The process took over six months as there is no concrete process for lateral hires given they are rare. I just really wanted the job!’
Warner, meanwhile, argues that the firm achieves a singular level of co-operation: ‘I could ring Rodge Cohen on a Sunday at 2am and he would pick up and say: “I’m just on another call. If you give me a minute, I’ll be right with you.”’
Slaughters head of M&A Stephen Cooke concludes: ‘You have to admire Sullivan. It’s had consistent profitability growth and weathered all of the economic storms when other white-shoe firms have had bumps along the road. Sullivan has managed to do international expansion in a very measured way without denting profitability and bringing about the internal politics that follows. It isn’t a massive number of lawyers, but it’s a decent footprint.’
‘We are a real cradle-to-grave firm. You start at the firm as a young person, rise through the lockstep system, and when you retire you have a generous retirement plan that lasts for the rest of your life,’ says Parker. (The commitment to retired partners extends to maintaining workspace in the firm.)
While many leading New York firms cultivate a level of generalism, Cravath is renowned for taking this approach to the extreme with its ‘Cravath System’, a challenging but widely-admired system of training its associates via repeated rotations. The model is designed to produce partners with a broad depth of knowledge in core practices, particularly corporate and litigation.
Even with this commitment to train its own, on average only 5% of Cravath’s intake make it to partner. By consensus, even by the elevated standards of leading New York firms, it is an approach that develops superb technical lawyers with the confidence and perspective to make commercial judgement calls.
Stephen Cooke, head of M&A at regular referral partner Slaughter and May, comments: ‘One of the most impressive things about Cravath is the younger generation of partners like Damien Zoubek, Eric Schiele and George Schoen. They’re spot on, but personable too.’
Maintaining a lean partnership and a marked resistance to external recruiting, Cravath is unsurprisingly highly profitable, with its profits per equity partner (PEP) standing at $3.36m in 2015, while revenues were $648m, up 14% since 2010. In the last ten years, the size of the partnership has grown 6%, not an inconsiderable figure for a firm with a famed abhorrence for expansion or foreign offices.
While it still avoids senior recruitment, the 442-lawyer firm has eased that blanket ban somewhat in recent years. In 2007, Cravath recruited highly-regarded Skadden bankruptcy partner Richard Levin to kickstart a restructuring practice (its avoidance of lateral hiring was the main reason why Cravath delayed a substantive move into the lucrative US bankruptcy sphere for so long). While at Cravath, Levin represented the Detroit Institute of Arts in the city’s 2013 bankruptcy; acted for General Motors’ independent directors on the carmaker’s 2009 Chapter 11 filing; and advised Credit Suisse Group in the Lehman Brothers Holdings bankruptcy. Levin recently departed, as he approached Cravath’s mandatory retirement age of 65, joining litigation and restructuring shop Jenner & Block in May. Cravath is currently covering restructuring with a range of partners in banking, corporate and litigation rather than insolvency specialists.
Despite a cohesive partnership, Cravath has lost a handful of its ranks in recent years to rivals, a once unheard of occurrence. The notable exit of M&A partner Sarkis Jebejian to Kirkland & Ellis in 2012 drew much attention in Manhattan amid claims that Cravath’s lockstep was no match for the $6m-plus packages the larger firm was ready to make.
The firm’s former business development chair James Woolery departed in 2011 to become co-head of North America M&A at JPMorgan Chase. Other partners have moved into prominent business or political roles. Litigator Katherine Forrest was hired to become the US Department of Justice (DoJ)’s deputy assistant attorney general for antitrust, and in 2010, partners Francis Barron, Ronald Cami and Julie Spellman Sweet all left Cravath for in-house positions at Morgan Stanley, TPG Capital and Accenture respectively – although Barron returned to Cravath in 2012.
Some rivals contend the firm’s finance practice – never as cherished as it is at Sullivan and Davis Polk – has declined due to such losses, in particular the 2000 departure of Robert Kindler for JP Morgan.
Conversely, Cravath brought in the former US Patent and Trademark Office director David Kappos as an IP partner in early 2013, the same year it picked up John Buretta, a former Cravath associate and more recently director of the US DoJ Deepwater Horizon task force, as a litigation partner. In 2011, the firm also hired former US assistant attorney general for antitrust for the Obama administration, Christine Varney.
New clients that the firm has secured in the last two years include 3G Capital, AGL Resources, Cable One, Evolent Health, Sapient Corporation, Vista Outdoor Operations and The Kraft Heinz Company.
Such names stand alongside a stellar roster of clients established over decades, including IBM, American Express, Credit Suisse, Goldman Sachs, JPMorgan Chase, Mylan, Novartis, PwC, Qualcomm, and Time Warner.
Cravath, of course, secures plenty of headline work. In corporate, the firm represented RockTenn in its $16bn combination agreement with MeadWestvaco in January 2015, with partners Richard Hall and Andrew Thompson leading; acted for Mylan in its acquisition of Famy Care businesses that same month with Mark Greene and Minh Van Ngo advising; represented Shell as US counsel in its $70bn acquisition of BG Group in April with William Rogers and Hall; and advised Heinz and 3G Capital in its $60bn merger with Kraft in March with Scott Barshay, Schiele and Jonathan Davis as lead advisers.
In litigation, the firm achieved a string of patent victories for Mylan in June, including a judgment upholding the validity of Mylan’s patents on the respiratory drug Perforomist; secured a victory for NCR in a $1bn Superfund clean-up case in May 2015; and won dismissal of securities class action for PwC in March.
While the firm is not short of high-profile mandates, Cravath has been criticised for resisting a broader move into regulatory work – one of the most lucrative current areas of work for Wall Street firms. ‘Cravath does not have regulatory lawyers and is losing big corporate matters because of it,’ argues one senior partner at a New York rival.
This is a familiar critique of the firm – which has been very wary of moving into new practice areas; for example being slow to move into hostile takeover work when it began to reshape corporate America in the 1970s, allowing younger firms such as Wachtell and Skadden to seize the initiative.
And despite its commanding reputation in commercial litigation, securities disputes and antitrust litigation, some argue its commitment to building a white-collar defence practice – which many peers now view as strategically essential – has been half-hearted.
Such comments reflect claims among some New York peers that Cravath has ceded some market position over the last ten years to larger and more international rivals. Under this reading, Cravath’s twin-engine focus on disputes and corporate is out of step with current trends. It has also been noted that Cravath’s growth has lagged many peers over the last ten years while PEP, which used to be outpaced only by Wachtell, has now been surpassed by seven major US firms.
Cravath litigator Rachel Skaistis answers: ‘I know many firms have large departments or groups consisting of former government lawyers, who focus exclusively on regulatory work. We have opted for a more streamlined “small team” approach, something we believe is beneficial to our clients and fits well with our generalist litigation practice.’
The Cravath team consists of four litigation partners, Buretta, Benjamin Gruenstein, David Stuart and Skaistis, who focus principally, although not exclusively, on investigations work.
Parker comments: ‘We are building this practice organically. We are very careful about how much exposure we have to a particular area. By sticking to our knitting, there are some things that we will miss. We may not take advantages of some of the peaks, but then we also avoid the related valleys.’
In a wider sense, it is clear that Cravath remains committed to its practice mix and approach, even if it leaves it further from the mainstream of the US legal industry.
Davis Polk & Wardwell
Key stats:
- Revenue: $1.07bn
- Growth track: Revenues up 10% in 2014 and 27% over previous five years
- Profit per equity partner: $3.3m
- Partners: 153 equity partners
- Total lawyers: 872
Key clients:
JP Morgan, Morgan Stanley, Citigroup, The Royal Bank of Scotland, ExxonMobil, Shire, Comcast, AstraZeneca, Cigna, Credit Suisse, PepsiCo, China National Offshore Oil Corporation, Emerson
Leadership:
Tom Reid, managing partner
Key partners:
Co-heads of capital markets Richard Truesdell and Michael Kaplan, financial institutions head Randall Guynn, dealmaker George Bason and the firm’s longest-serving partner Arthur Golden, who was a member of the management committee for nine years, are all influential. James Rouhandeh, the firm’s litigation chief, sits on a three-man executive committee that governs the firm and has grown in profile in recent years. John Bick, head of corporate, is the other member of that management trio. The firm’s Hong Kong ambitions rest heavily on corporate partner Bonnie Chan and leader of the firm’s Asian M&A group, Miranda So.
No more buckskin
As effortless as the progress of leading Wall Street firms can seem – an image such firms are typically at pains to project – in reality such institutions can face periods in which their fortunes fall as well as rise.
Davis Polk is as good an example as any. During the 2000s, in conditions in which its close connections with banking giants should have powered on its business, the firm could not quite find its form.
Financial performance lagged peers, key partners departed, including the firm’s former M&A head Dennis Hersch, who became global chair at client JP Morgan in 2005, alongside partners Lewis Kaden, Susan Merrill and Ulrika Ekman, who also quit to go in-house (the loss of key partners to banking clients is a familiar footnote for elite New York law firms that stumble, illustrating the extent to which the market relies on lauded individuals).
Under long-time leader John Ettinger, the firm was viewed as having become too complacent, while performance management also suffered.
In the 1960s the firm was dubbed by some the ‘Tiffany of law firms’, which, like most white-shoe firms, preferred to hire young associates listed in the Social Register that wore buckskin shoes. One partner at a top-five global law firm laughs: ‘In the early days, Davis Polk partners were not allowed to give out business cards because the business was supposed to come to them. They were taught: “you sit by the phone and it will ring because you are the best lawyer in town”.’ In a more competitive market – peers were increasingly ready to get out and hustle for business.
There were other contributing factors for its loss of pace. The 2002 introduction of the Sarbanes-Oxley Act affected the popularity of the US for foreign issuers, the euro was pushing some companies to list in Europe and London continued to rise as a finance hub. Heavily focused on securities work, the loss of dominance of US law-driven work was an issue.
Davis Polk had launched international offices relatively early – its first foreign branch in Paris opened in 1962, followed by outposts in London, Tokyo, Hong Kong, Madrid, Beijing and São Paulo. In the US, the firm had extended its practice to Washington DC and Menlo Park. But a lack of commitment to foreign law hampered its practice.
There were to be signs of revival after the fallout from the 2008 collapse of Lehman Brothers. The Davis Polk name still went a long way in business circles when truly bet-the-company situations emerged. A string of high-profile crisis roles ensued, including advising the Federal Reserve Bank of New York on the US government’s multibillion-dollar market support programme and Davis Polk was a prominent voice in guiding clients through the age of Dodd-Frank.
Another part of its revival came with the 2011 appointment of the Scots-born-Reid as its new managing partner. After graduating at the University of Edinburgh, Reid had taken a scholarship at Columbia University in New York, subsequently joining Davis Polk in 1987.
Barring three years as an investment banker with Morgan Stanley in London, it has been his only career outlet. Returning to Davis Polk in 2003, he became head of corporate in 2008 and was an influential voice in pushing the firm into Hong Kong and English law. While many peers have focused on the City over other markets, Davis Polk’s biggest bet has been in Hong Kong, where it has its largest foreign office.
Reid comments: ‘The culture we had before we made these international moves was very different to when the firm was founded in 1849. Cultures need to change because society changes, and we need to be aware of that and be the best possible reflection. This is a particular obligation of a law firm.’
Much of this expansion came during 2010 to 2013. It strengthened its enforcement capability in Asia, having launched in Hong Kong in 2010; and opened a London-based English law practice in 2012 to complement the firm’s English law practices in Hong Kong and Brazil, after the 2011-launch of its first Latin America office in São Paulo. Reid characterises the Hong Kong push as ‘an offensive move’, commenting: ‘We were the first US firm of our calibre to move there.’ (See box, ‘Satellites and global horizons’.)
He comments on Davis Polk’s hiring process: ‘We spend a long time talking to potential lateral partners – like months – and they meet a large number of the firm’s partners before we decide that we are comfortable with the fit. Adding the DC, Hong Kong and London partners slightly changed the firm’s culture, and introduced a more international flavour.’
The strategy paid off for a firm that generated over $1bn in revenues in the 2014 financial year, increasing 10% on the previous year and 27% since 2010. Partner profits were up 12% to nearly $3.3m, while revenue per lawyer (RPL) stood at $1.2m.
There was more to Davis Polk’s resurgence than crisis work and a foreign push. Under Reid, the firm was a different and certainly more commercial beast. Rumours have long swirled in Manhattan that the firm took a far harder line on partner performance, including a substantial number of partner exits.
A reduction in the size of Davis Polk’s partnership from when the banking crisis hit – from 170 to 153 currently, a notable drop in a period in which revenues have grown and the firm has invested in several foreign offices – suggests a tougher take on performance.
One partner at a rival firm, who claims that at least ten partners were managed out, says: ‘The firm used to have a few sleepy practices and many partners that were content and just didn’t face encouragement and discipline. When Tom came in, he had a lot to deal with. He is very focused and that is admirable.’
Reid refutes flat out that such blunt measures were taken. ‘Did we have a programme of just axing partners? No. [The reduction] was a function of the fact that we had a lot of partners reach a natural retirement zone and we didn’t promote associates to partners at the same rate before the crisis, but we did not have a programme of systematically reducing partner counts.
‘There was an intense focus on trying to anticipate what was going to happen alongside a focus on performance, because when the financial crisis hit we knew we were going to be hit in turn with a horrendous storm of litigation and regulation. We spent an enormous amount of time as a firm focusing on our clients and demanding of all our partners a higher level of performance, client attention, and greater competitiveness. But nobody looked at how the market was turning down and decided we needed X% less partners – that discussion just did not happen.’
Like Cravath, Davis Polk employs a lockstep system where there are no gates and the most senior partner makes three times more than the junior partner. The firm’s tightly co-ordinated three-member management committee is elected by the entire partnership on a one-partner-one-vote basis and comprises head of corporate John Bick, litigation head James Rouhandeh and Reid, who try to meet once a week. The firm’s practice heads often take on a considerable amount of management in addition.
There is little doubt that a more robust leadership line was adopted at the firm, and Reid is personally credited by many insiders and peers for galvanising the firm.
Comments one Davis Polk partner: ‘Tom is influential. He’s a pretty straightforward guy. He’s decisive but he does it in a thoughtful way. He realises that there’s something special at Davis Polk and no-one wants the firm to change to be more profitable or to be like another firm.’
One partner at a New York peer firm comments: ‘When Tom came in, he had a lot to deal with. He was very focused. I admire him. The difficulty here is that dealing with underperformers can scare the good people. Once people start saying, “this place is not what it was”, that is hard to recover from. But I don’t hear that from Davis Polk. I don’t hear that negative internal talk.’
The firm’s all-equity partnership boasts many leading names, including global capital markets co-heads Richard Truesdell and Michael Kaplan; alongside the firm’s longest-serving partner Arthur Golden, who is friends with Robert Greenhill, one of the pioneers of the modern M&A advisory business on Wall Street.
As can be seen from its network, Davis Polk has been willing to shift with the market in recent years, seen in its investments in Washington DC and the Bay Area, respectively positioning it for regulatory work and technology clients.
Perhaps a notable feature of its evolution of late has been the development of one of the elite white-collar defence and enforcement practices in the US (its Hong Kong investment is heavily focused on enforcement work).
Davis Polk picked up a series of mandates from new clients in 2014/15, including ANZ, Cogent Partners, McGraw Hill, Euronext, Silicon Valley Bank, Sunac China, MercadoLibre, SL Green, Arch Coal, TeliaSonera, SunPower and Accuray.
Some 30% of the firm’s client base comprises financial institutions in New York with the remainder being a spread of corporate clients, both US and international.
Recent highlight M&A deals include the firm advising AstraZeneca on its successful defence of Pfizer’s unsolicited bid of $122.3bn; representing Comcast on its proposed acquisition of Time Warner Cable for $70.7bn; and acting for Shire on its proposed acquisition of AbbVie for $55bn.
The firm’s capital markets team in 2014 advised The Royal Bank of Scotland and Citizens Financial Group on Citizens’ $3.5bn float, the largest IPO by a bank in the US in over a decade; while in bankruptcy Davis Polk represented Merrill Lynch Capital Services in settlement with the City of Detroit in its $18bn Chapter 9 case – the largest-ever municipal bankruptcy in the US. Moreover, the firm advised the joint lead arrangers and bookrunners in a $61bn unsecured bridge loan facility, a $12bn unsecured-term loan facility, and a $2bn unsecured revolving credit facility for Verizon Communications connected to its acquisition of Vodafone Group’s stake in the Verizon Wireless joint venture.
By any measure, Davis Polk was back with a bang.
‘You’ll never be as good’
If Cravath and Davis Polk have faced their share of turbulence in the last 15 years, the largest of the trio, Sullivan, is distinguished by seemingly serene progress. Boasting a 28% rise in revenues over the last five years, Sullivan went into the banking crisis in robust form and, like Davis Polk, pivoted quickly to move with the fast-changing market.
Having taken an early role on the fire sale of Bear Stearns to JP Morgan in 2008, Sullivan was already mobilising the previous year as the credit crunch hit by developing its restructuring group (the practice formally launched in 2004/05). The firm organised a cross-disciplinary group to work with both investors and issuers to prepare them for the crisis. A quick response was fitting for a firm long regarded as the go-to lawyers for Goldman Sachs, which famously foresaw the wipe-out in mortgage-backed securities well ahead of its peers.
‘The credit markets started backing up in June of 2007 and then the two Bear Stearns CDO funds collapsed and debt pricing widened and certain instruments became harder to place,’ recalls chair Joseph Shenker. ‘At that point the firm starting organising itself, and when the crisis hit, everyone moved into even higher gear, and our preparedness came into play.’
With RPL of more than $1.5m and partner profits of $3.68m this year, Sullivan retains a strong position in M&A and securities. The firm recently advised Concordia Health in its $3.5bn acquisition of Amdipharm Mercury Company; represented Cytec Industries in its merger agreement with Solvay for $6.4bn; and acted for Teva Pharmaceutical in its agreement with Irish company Allergan to acquire Allergan Generics for $40.5bn.
The firm also lined up high-profile deals from multinationals such as BP, Diageo, Philips, France Télécom, InBev, British Airways, Scottish Power, Endesa and Merck, and managed to carve out a niche in cross-border M&A, alongside retaining a large chunk of finance work from its longest-serving and most loyal clients Goldman Sachs, Morgan Stanley, JPMorgan Chase, Standard Chartered Bank, BNP Paribas, Canada Pension Plan Investment Board (CCPIB), Barclays and AIG.
Sullivan’s pedigree is every bit as striking as Cravath, being involved soon after its launch in 1879 in the creation of Edison General Electric, while in the 20th century partners John Foster Dulles and Harlan Fiske Stone held high office.
While often seen as a reluctant internationalist, Shenker stresses the firm’s early global credentials (Sullivan famously played a major role in the building of the Panama Canal) stating that since joining in 1980, between 40-50% of revenues have come from clients headquartered outside the US. Last year, the firm had more incoming associates born in Greater China than those born in Shenker’s birthplace in Brooklyn, New York.
Sullivan prides itself on being responsive to long-term changes in the business environment, while eschewing industry fads. Post-banking crisis, Sullivan has broadened its practice in IP and bankruptcy and moved with the market to expand its leveraged and high-yield teams.
‘We constantly expand into new areas and new geographies depending on where our clients need us,’ says Shenker, who notes a current focus on building a portfolio in sub-Saharan African (Kenyan-born corporate partner Inosi Nyatta has been a key figure here).
The firm also made an effort to expand its litigation practice, notably in white-collar defence and investigations work, and launched in Palo Alto in 2000 to position itself with America’s California technology giants. ‘We are not pigeon-holed lawyers,’ Shenker says. ‘We train our lawyers to be generalist in their space so that, for example, many of our litigators can handle a mortgage securities case or a regulatory dispute, or an antitrust or IP case.’
Shenker took the leadership reins from Cohen in 2010 having served as vice-chair to his predecessor for four years. The firm’s governing style has been described as ‘mysterious’, ‘closed’ and ‘controlling’ by some of its peers. Its management committee comprises 13 members, including litigators Robert Giuffra and Karen Patton Seymour, M&A star Aquila, corporate partner and principal counsel to Goldman Sachs’ John Mead, as well as Shenker, who has had a seat for the last two decades. The committee sets the firm’s agendas, policies, business direction and strategy, as well as deciding how the firm’s annual profits will be distributed among its partnership.
While its practice mix, size and focus on investment banks closely resembles Davis Polk, Sullivan’s culture is distinctive from either of its two peers. In contrast to the democratic traditions of Cravath and Davis Polk, Sullivan makes little secret of a more centrally driven leadership style.
Nor does the firm operate a lockstep. While tight-lipped on its remuneration policy – dubbed ‘black box’ by one peer, though the firm rejects that description – its remuneration is based on long-term performance alongside wide professional commitments.
The elevation of Shenker to lead the firm has ushered in some shift in style. Cohen brings a more academic air, albeit with an intellectual intensity. Shenker, in contrast, is close to the conventional view of the assertive Wall Street lawyer.
‘Sullivan makes no bones about the fact that it is not lockstep,’ comments one managing partner at a leading New York firm. ‘It has a committee of partners that run the firm and this committee is not subject to elections by the entire firm.’
Another senior partner at a Wall Street firm adds: ‘Sullivan has more internal politics in comparison to Cravath and Davis Polk because of its different remuneration structure.’
One partner at the firm speaks of Sullivan’s singular culture: ‘There’s a famous line [from the book The Partnership by Charles Ellis] that says how, even if you get Goldman bankers out, even after a few beers, what they will never do is say anything bad about Goldman Sachs. When partners at Sullivan get together, they don’t complain about the firm. It’s extraordinary. No-one leaves.’
He adds: ‘When you look at the people who lead the firm – Rodge Cohen, John Mead and Joe Shenker – these people are so incredibly talented and yet perfect gentlemen. I’m never going to be Rodge Cohen, no matter how high I pull myself up, and he just sets the tone. The loyalty stems from how the people that lead the firm are at the top of their game. You can learn from them, but know you’re never going to be as good.’
Shenker comments: ‘I don’t think it’s [the firm’s governing style] that mysterious. While the press and other firms may not know, the firm’s partnership and associates know.’
Whatever the differences, Sullivan is leanly-managed. ‘We are full-time practitioners. My client workload is no lighter, and is actually heavier than it was before I joined the management committee, and the same is true for Rodge, and every other committee member and practice group head,’ says Shenker.
The 174-partner firm has a sizeable alumni network, of which many have achieved senior roles at some of the firm’s clients. This includes Mark Wiseman, who is currently chief executive at CPPIB, and the firm’s former associate Frank Dangeard, who was appointed senior executive vice president for a few years at France Télécom.
Sullivan & Cromwell
Key stats:
- Revenue: $1.28bn
- Growth track: Revenues were flat in 2014 but are up 28% over the previous five years
- Profit per equity partner: $3.68m
- Partners: 170 equity partners
- Total lawyers: 814
Key clients:
Goldman Sachs, Barclays, Nomura, AIG, Teva, Diageo, Amgen, Anheuser-Busch InBev, Concordia, Eni, Fiat Chrysler, Apollo
Leadership:
Joseph Shenker, chair
Key partners:
Corporate partner Francis Aquila is highly influential, holding relationships with clients such as health insurer Amgen and drinks company Diageo. Senior chair Rodgin Cohen is arguably still the firm’s most high-profile lawyer, thanks to his status as one of the leading bank regulatory and securities lawyers in the US. John Mead, who has been a partner for over 30 years, is hugely important due to his role as relationship manager to the firm’s biggest client Goldman Sachs. New York litigator Robert Giuffra and Los Angeles managing partner and West Coast litigation chief Robert Sacks have emerged as influential partners over recent years. London-based corporate partner Richard Morrissey retains a strong reputation.
The circle widens
Cravath, Sullivan and Davis Polk have continually confounded claims that their traditional approach would be outmoded in an age of globalising law.
Part of that, in recent years, has been a shift in the global economy that has strengthened the hand of US lawyers, thanks to the relative resilience of the US economy, American lenders and the growing vogue for European borrowers to tap US investors directly. The rise of US-driven regulatory work has been another obvious boon. The gravity-defying realities of Manhattan’s legal market obviously plays a major factor, as the most profitable and hard-to-penetrate legal market in the world.
But it is more than good fortune and the power of the US dollar. The model of these three firms based on minimal bureaucracy, a focus on quality over size and deep client links has demonstrated some material advantages against their global rivals, whether hailing from Los Angeles or London.
The model has also proved deft at forging partnerships with genuinely world-class practitioners who are highly motivated and closely aligned. In a market increasingly forcing a distinction between a wide array of firms handling relatively price-sensitive mid-range work, and a small band handling top-end advisory work, this trio has demonstrated virtues that have proved relevant in an age of rapid change.
None of which makes their position unassailable: Latham, Gibson Dunn and Kirkland represent a new force of competition. Such firms are emerging and still evolving beasts – as they mature and gain in size they will likely become more dangerous rivals. Alternative legal providers are another long-term challenge. The culture and traditions the trio espouse – no matter how romanticised – do limit their ability to adapt to the market.
Aric Press, a partner at New York consultancy firm Bernero & Press, says: ‘Forty years ago they were alone. Now there are more firms with equal status. The circle has widened and the three firms have to be very mindful of their competitors and remain close to their clients. This is more about maintaining these relationships than changing strategy to fight off competition.’
Nevertheless, in the vast US legal market, the trio appear well positioned as long as each firm can offer something distinctive and maintain that crucial quality edge on rivals. Ultimately time will tell, but these firms have already passed that test many times over.
In the end, Parker’s conclusion stands as far more than marketing spiel: ‘There is an incredibly strong identification with the firm as an institution and an ideal. Generations come and go, today we have the Millennials – but there will always be a group of people within every generation who want to be part of something they consider unique.’ LB
jaishree.kalia@legalease.co.uk; tom.moore@legalease.co.uk