The Global 100: The Zone – The US elite turns up the pressure

The gap between top US firms and the middle-tier masses continues to widen as pressure to secure top-decile talent intensifies. Can the chasing pack keep up with America’s elite?

‘The competition is frenetic in terms of attracting talent as is the competition in being retained on the most complex and sophisticated client mandates,’ notes Paul, Weiss, Rifkind, Wharton & Garrison chair Brad Karp. ‘When you think of the continuum with commoditised work on one end and hyper-complex big-ticket work on the other, firms like ours try very hard to ensure that 90% of work is in that tiny zone at the end of the spectrum.’

Regardless of uncertainty surrounding US politics, activity levels were generally robust through 2016, giving leading law firms plenty of work to fight for in what remains a turbulent and brutally competitive market.

In the wake of November’s surprise presidential victory for Donald Trump, markets boomed as investors banked on substantial levels of activity in healthcare, tax reform and infrastructure. Trump’s first 100 days as president saw 13 M&A deals over $5bn announced, according to Thomson Reuters.

And as Karp’s comments highlight, the trend that virtually all senior lawyers agree continued to define the vast US legal market is the pulling away of a band of 15-20 elite outfits, leaving their used-to-be-peers increasingly competing in a different and more structurally uncertain market.

In 2012 Manhattan’s Wachtell, Lipton, Rosen & Katz and Los Angeles-bred disputes leader Quinn Emanuel Urquhart & Sullivan were the only US firms to generate profits per equity partner (PEP) above $4m. Just four firms then had PEP over $3m with 14 recording numbers over $2m in the top 100. This year Wachtell and Quinn both generated over $5m. But another four firms saw PEP over $4m, leaving another nine firms with PEP above $3m, the level that is now the established share price floor for an elite US law firm.

Observes one New York partner: ‘If you were $2m profits per partner, people would say: “Oh my God!” All of a sudden it was $2.5m and people were like: “That’s unbelievable.” Then it became $3m. Then it was $3.5m-$4m. It’s not a fair fight for a firm with $2m versus $4m.’

‘Top firms are pulling away,’ agrees White & Case bank finance partner and member of the firm’s four-partner executive committee David Koschik. ‘There’s absolutely no doubt in my mind that that’s happening.’

Bruce MacEwen, president of law firm consultancy Adam Smith, Esq, takes a broader view: ‘Here in the US if you look at the second hundred firms, it’s really a menagerie. The vast majority are hollow middle firms. They’re not a destination for anything in particular and that’s a perilous place to be in the market.’

Those sitting below the elite are faced with the task of differentiating themselves from the pack, much like mid-tier players in the UK. For some that happens naturally, typically through geographic strength and heritage in secondary regional markets. But for many the struggle to position themselves is more ominous. ‘Commoditised work is a death blow,’ observes one New York partner at a Magic Circle firm.

‘At a certain point clients have recognised that we need to get on with it. There’s not going to be clarity but there are opportunities.’
Kim Koopersmith, Akin Gump Strauss Hauer & Feld

‘Get on with it’

Regardless of uncertainty in the US, 2016 brought steady levels of work across corporate, litigation and finance. US M&A finished at $1.5trn in 2016, the second-highest value on Mergermarket’s records since 2001. Third and fourth quarters were the busiest with M&A totalling over $800bn. US M&A levels rose by 19% for the first quarter of 2017 compared with the same time last year to $300.2bn.

‘Looking back to 2016, my assessment is it was a strong market both domestically and internationally not withstanding significant headwinds – including Brexit in Europe and political uncertainty in the US,’ notes Cravath, Swaine & Moore corporate partner Richard Hall. Hall highlights as well the increasing power of three core hubs for US transactional lawyers, with Silicon Valley reflecting the growing clout of the technology industries, and the oil capital of Houston emerging alongside the traditional finance centre of New York.

White & Case’s Koschik reflects on the new-found willingness of business to adapt to uncertain times. ‘It’s a pretty confident market at this point. Usually uncertainty brings activity levels down, that doesn’t seem to have happened this time. The stock market is up, there’s broad market confidence and that seems to be driving a lot of confidence in the transactional market as well.’

US loan value increased 6% to $2trn last year according to Bloomberg, though the number of recorded transactions dipped 6% to 3,494 deals year-on-year. Total US leveraged loan deal numbers increased by 6% with value also increasing sharply to hit $964.8bn.

Many of the firms Legal Business spoke with cited considerable levels of litigation work coming through, particularly in complex litigation and regulatory-related matters. Still, it is currently a solid rather than booming market for contentious work. Without a strong cyclical push towards litigation, and banking crisis-related work having largely finished, it is harder for firms to position themselves to pick up substantive disputes work.

But at the elite US disputes shops, such as Quinn, Paul Weiss and Kirkland & Ellis, there was plenty of complex work to fire another year of rapid growth. Notes Karp: ‘It was a very busy year under every metric and that trend has continued during the first half of 2017. We’re up double digits across all relevant metrics.’

Law firm leaders are confident that work volume will be resilient, though questions remain over the future of a number of flagship commitments of the Trump administration, such as an overhaul of the Dodd-Frank Wall Street Reform and Consumer Protection Act, corporate tax reforms and a flood of promised infrastructure investment.

‘My sense is that there was a period of time where clients were holding their breath to see what was going to happen. It’s not dissimilar to what happened in London pre-Brexit,’ says Akin Gump Strauss Hauer & Feld chair Kim Koopersmith. ‘At a certain point clients have recognised that we need to get on with it. It’s not necessarily that there’s going to be clarity but there are opportunities.’

The war rages

As the battle for high-end work rages on, the most common strategy of major firms is to bring in high-billing partners. Packages for the very best performers have continued to easily outstrip average rises in profitability, with top firms willing to offer $5m-plus. The ultra-select band of true stars within this group can now command packages closing in on the $10m mark.

For example, one of the most talked about departures last year from a leading New York firm saw the transferring partner nearly triple his compensation.

£2,823m

in revenue saw Latham & Watkins top the Global 100

 

‘It’s highly competitive, the US firms take no prisoners,’ says one New York leveraged finance partner. ‘It’s talent, it’s profits, it’s fight to the death for work. If you want to play in the sandbox with a Latham [Latham & Watkins], a K&E [Kirkland], a Paul Weiss and a Davis Polk [Davis Polk & Wardwell], you have to act like them. They’re very aggressive.’

Where once predatory recruitment focused on weaker firms, now the headline-grabbing moves are those between the elite firms. Among such big money transfers, the thrusting Kirkland last year hired Cravath M&A partner Jonathan Davis as well as antitrust heavyweight Matthew Reilly from Simpson Thacher & Bartlett. The other firm to make waves was Paul Weiss, which hired Homeland Security secretary Jeh Johnson as a litigation partner. The firm also made arguably the most talked about hire of the year, recruiting Cravath corporate playmaker Scott Barshay – one of New York’s top deal lawyers – as its global head of M&A.

Competitors often argue that lockstep-driven firms, such as Cravath, Debevoise & Plimpton and Cleary Gottlieb Steen & Hamilton, are not seen to be as competitive in the market due to their inflexibility.

Cleary managing partner Michael Gerstenzang unsurprisingly takes a different stance: ‘It’s a question of how our partners, and partners at other firms, view their overall professional satisfaction. Compensation is part of it, but it’s not the whole picture. For our partners, a big part of their professional satisfaction comes from working at a firm that has our culture and values.’ The firm takes a conservative approach to lateral hiring, bringing on just one US partner last financial year and two in 2017.

Beyond New York, firms have been pushing into oil and gas-heavy Houston and Dallas as energy, mining and utilities M&A made up 23% of the US market share ($337.4bn) last year according to Mergermarket. Gibson, Dunn & Crutcher opened the doors to its new eight-partner office earlier this year, taking on a six-partner team from Baker Botts, one from Latham, and one from Apache Corporation. Orrick, Herrington & Sutcliffe similarly opened its Houston arm with a team of 13 partners, which included hires from McDermott Will & Emery and DLA Piper among others. Winston & Strawn opened a Dallas office earlier this year.

The change in administration over the last 12 months may have brought through a level of uncertainty in the market, but a large number of US firms have also made the most of Barack Obama’s departure from the White House, bringing on lawyers leaving public office.

In his conversations with both clients and legal professionals, professor of law at Maurer School of Law, William Henderson, notes: ‘Firms that jump to the top of the Global 100 are the ones who get the exceptions for the panel guidelines. Because they’re associated with extraordinary transactions they’re getting a pass. There’s going to be about 15-20 firms that pull away that have the size and scope.’

‘Top firms are pulling away. There’s absolutely no doubt in my mind.’
David Koschik, White & Case

 

 

The $3m+ club

A total of nine Global 100 US firms now have PEP which sits above the $3m mark, pulling ahead of the 17 additional US-based firms with PEP in excess of $2m. There are over 30 US firms with PEP of over $1m.

The conventional wisdom is that many in the $1m or $2m pack will struggle to thrive.

MacEwen notes the common ground between the US legal elite. ‘These firms that are pulling away are consistently treating their firms in a more business-like way. That’s found more frequently in UK-based firms and the US has lagged on that. Too many partners walk around with that image and you never have that incorporation. You wouldn’t have 500 or 1,000 managers thinking they have a veto over what the firm is going to do. That’s insanity.’

Looking at the mid-market, Karp believes one problem that firms have gotten themselves into is ambitiously trying to change direction: ‘To a very large degree law firms need to play the hands they’ve been dealt and not try to be something they’re not. The law firms that have experienced great difficulty, or even collapsed, in recent years tried very hard to transform themselves. I can’t overstate how complicated it is to transform a large law firm. I’m not aware of any firm that has successfully done so.’

But what about those that have made the move away from their US homelands? As a way of competing with the white-shoe firms who dominate New York’s lucrative legal market, firms such as Latham, White & Case and Mayer Brown have chosen to expand out their offerings. There are many sceptics of the long-term implications of this approach, with partners pointing to low profitability across international networks and a lack of quality control across offices.

But Latham’s global chair Bill Voge argues: ‘The primary reason partners move is not because of bigger pay cheques. Rather, they hold the view that some firms are better positioned for the future, have stronger platforms to deliver services to their clients and the opportunity to tap into a broader, deeper practice, among other factors.’

Henderson says global firms are playing the long game: ‘The point of building that expertise on a global scale, is that not everybody is going to make it now in execution and delivery. We’re probably four to eight years [from] having this settle out so that a handful of global players own that work.’

While the profession continues to debate the merits of various models and tactics, such as aggressive lateral hiring versus organic growth or global reach versus the profit maximisation of a US focus, the consensus is that whatever your playbook, top 100 US firms are facing unprecedented competition for clients and talent.

‘Even the firms with $4m PEP act like they’re starving. You have to have good, strong management with a vision. The death blow is doing nothing.’

And in truth, the debate over what is the dominant force in US law firms – money or the strength of the institution – is misleading, elite American firms largely succeed by using both factors as mutually-reinforcing assets against their less fortunate rivals. But within that complex equation, the power of the individual – at least the star individual – has only grown over the last decade.

Where once an elite New York institution would have never lost its partners (and rarely even clients), now even the prestige brands know they have to fight on many fronts. ‘As a firm you have to make yourself compelling and be compelling to your partners and your associates daily,’ says Koschik. ‘The firms that are doing well are using their market strength, that prestige, that money to attract practices from firms not doing so well.’

It is a battle that if anything is intensifying. The last ten years have shaken the last vestiges of privilege and complacency from the most elite practices, with many citing the successful reinvention of Davis Polk under managing partner Tom Reid as a more driven institution and the long shadow cast over the US industry in recent years by the driven and individualistic Kirkland and Quinn.

Says one New York partner. ‘Even the firms with $4m PEP act like they’re starving. You have to have good, strong management with a vision. The death blow is doing nothing.’

The world’s largest legal market has become an increasingly harsh environment for firms without a clear sense of identity and how to renew it. Concludes Henderson: ‘There are two metrics that matter: overall profitability, and long-term sustainability – that you’re locking in clients for the long term.’

Gibson Dunn chair Ken Doran puts it in starker terms: ‘We don’t take anything for granted. We are not complacent about our success. We’ve managed to accelerate when other firms flatlined or declined in the years of the great recession. We are always looking for opportunities to add value for our clients.’ LB

madeleine.farman@legalease.co.uk

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