When US outfit Orrick, Herrington & Sutcliffe entered the London market in 1998, chairman Ralph Baxter had a dream of competing on the global stage.
But 13 years on, that dream looks to be souring. LB investigates what is going wrong.
Orrick, Herrington & Sutcliffe was once seen as one of the most successful and promising US firms resident in London. Achieving rapid growth and performing well financially, it seemed that nothing could go wrong. But a string of departures since the start of 2010 and a lack of strategic direction has left many asking if chairman Ralph Baxter’s sheen has come off. Added to the mix is the reputational damage done by its involvement in at least two very public and ultimately failed merger talks with SJ Berwin and Akin Gump Strauss Hauer & Feld. Orrick does not look like the unmitigated success story it purports to be.
For much of the first part of the 21st century Orrick has been the face of a new generation of successful law firms with international aspirations. Capitalising on its West Coast technology roots, the firm effectively spread its wings across the US, Europe and Asia from the early ‘90s. In the process of expanding it grew global revenues by a staggering 130% from $367.4m in 2002 to $848.4m in 2010. The firm’s five-year compound annual growth rate between 2006 and 2010 hit 9%, with only seven LB Global 100 firms posting higher growth. At the forefront of the firm’s success is the ultimate showman and ever-present Baxter.
Even Baxter’s fiercest critics say that Orrick’s achievements, since he became chair in 1990, are down to his vision and his alone. In the process he has not only become a very rich man – he is understood to earn as much as $5m a year – but he is also the de facto spokesperson for the West Coast law firm. His unconventional ambition has him nipping at the heels of the established elite.
‘You are either friends of Ralph, former friends of Ralph or a fucked former friend of Ralph.’
With two years left in his term, Orrick’s situation is perhaps not quite as rosy as it was pre-global financial crisis. The numbers have held up well in light of the market conditions; revenue came in broadly flat from 2009 to 2010. However, the firm’s profit per lawyer was $251,000 for 2010, putting it in the lower end of the Global 100. Headcount has also taken a hit, with total staff numbers in decline from a high of 1,224 in 2009 to 1,127 today, while partner numbers have dropped from 410 to 370 over the same period.
Described variously as ‘a great leader and thinker’; ‘a charmer and a go-to guy’; and ‘a control freak, cultish and vain’, Baxter splits opinion like few others in the legal sector. The suggestion is that if you cross swords with the man then you will suffer. As one former Orrick partner tells LB: ‘You are either friends of Ralph, former friends of Ralph or a fucked former friend of Ralph.’
But with Orrick having experienced tougher times of late, the question remains: does Baxter have the gumption to secure the legacy he craves, or is it time for Orrick to stop being a one-man show and make the move from mid-market international firm to global leader?
City Limits
Baxter rejects the notion that London has stuttered in recent years. He says: ‘I don’t think anything has gone wrong in London, we are stronger pound for pound than we have ever been.’ He suggests that the global financial crisis has had a profound effect on all law firms, including his own, and that flat economics should be considered a success in these markets.
This is a fair point but strategic tinkering, including redundancies that globally accounted for almost 20% of Orrick associates, and a pay freeze in London, have caused damage. The recession cannot be the only factor.
‘The financial crisis cannot be blamed for what went wrong in the office. Decisions were made that did the office no favours,’ says one former partner. ‘Decisions were taken that were contrary to growing the business and the economics.’
For a while London looked to be going the same way as the rest of Orrick’s international offices. It officially opened its doors in 1998 and appeared to be in expansionist mode.
Baxter admits the first mistake was not hiring a local London partner in 1998 to build the business from scratch. ‘You cannot build a new office with people who are not of that region,’ Baxter says. ‘So in those early years our growth was very slow and it was very hard for us to find quality partners who were willing to move from successful practices. We learned the importance of being patient and the perils of not being patient.’
The point at which fortunes began to change was with the 2004 arrival of eight partners from Coudert Brothers’ London office. The hires of highly regarded structured finance partner Martin Bartlam (who took over as London head in 2006) and restructuring partner Hazel Miller from Jones Day that same year saw a sea change, signalling the firm meant business. Furthermore, the hire of competition partner Douglas Lahnborg from the now defunct Heller Ehrman was symptomatic of a business that had become an attractive proposition to lateral movers.
‘London is a key part of our new strategy and is undoubtedly an essential market to be in.’ – David Syed, Orrick
The firm quickly became one of the most active lateral hirers and in 2008 alone brought in seven partners, including ex-Heller Ehrman partners Richard Eaton, Chris Grew and Struan Penwarden to boost the corporate practice, as well as Denton Wilde Sapte project finance partner Elisabeth Gaunt. The arrival of Jones Day’s corporate veteran Hilary Winter was a significant fillip to its City M&A practice.
That year, the London office achieved record revenues topping $40m, up from $35m in 2007. Not only was the office performing well under the managing eye of Bartlam and European head Stuart McAlpine, it was accelerating. In fact, the office’s growth was enviable. From just 20 lawyers in 2004, the office was employing over 70 by 2009.
When Bartlam took over, partners present at the time recall an office that was a ‘positive place’. One Orrick partner says: ‘The economics weren’t great, but there was a desire to reverse that and also to build an international base.’
Despite the crumbling global banking system in 2008, the firm’s City office was in good shape. Baxter made public pronouncements that London would grow to several hundred lawyers. Inevitably, it seemed, a bigger office was needed. In fact Baxter still recognises that the office needs to be bigger and the idea of several hundred lawyers in London is still very much on the agenda.
The 2009 move to a new office at 107 Cheapside was a signal that there was heavy investment from the US into London. Bartlam struck a good bargain for the firm, scoring a £47.50 per sq ft deal with an 18-month rent-free period and a reverse premium of £6.5m that paid for the fit out. The premium itself is not that unusual; however, partners do point to the fact that the US was not paying for the fit out as a worrying sign of things to come.
It was at this point that the momentum was lost. Former partners say that the pressure to grow never relented despite a drop in work and a total collapse of the structured finance markets for which the firm is particularly well known.
The firm then began to clamp down on partner pay. Partners were unconditionally entitled to 80% of their headline salary, with the remaining 20% being performance-based.
Whereas the 20% performance element had always been paid out before, the firm began to use it, with little explanation to those affected, to effectively cut partner pay. As one former partner recalls: ‘A few people took it very badly. They felt stabbed in the back. They felt that management was rewarding itself but punishing others.’
These issues are understood to have been the undoing of Bartlam, whose attempt to stand up to Baxter resulted in his being demoted from the office management role. The official line from the firm is that he stepped down.
Bartlam stepping down is emblematic of London’s friction with Baxter. He was well liked by his partners and was seen as having done a decent job of running the London office. An ex-partner says: ‘We were set up in the office and basically just told to get on with it. We were saying: “We need more resources, we need more administrative support, we need promotion and PR,” but they weren’t interested.’
If Bartlam’s stepping down surprised some then the appointment of real estate partner Anne O’Neill as his successor in 2010 was greeted with some severe head scratching. Although she runs a respected and busy real estate practice, it is domestic and does not really chime with Orrick’s world view.
These issues saw a growing disconnect between London and the firm’s US base, and resulted in an exodus of partners and deteriorating morale. First Eaton and Penwarden left for Bird & Bird in mid-2010, then McAlpine jumped ship to Mayer Brown in early 2011.
The biggest losses came when corporate partner Dean Poster left for Mishcon de Reya in 2010, and Miller and co-European restructuring chief Mark Fennessy departed for Dewey & LeBoeuf in September 2011. The loss of the restructuring team is damaging to the firm’s business as it is understood to have brought in around 30% of Orrick’s London revenues.
Since 2010 the London partnership has shrunk to around 15 partners from a high of roughly 22 in 2009. The finance core of Orrick’s business now effectively has two partners in Bartlam and Alexander Janes. Although European head and finance partner Janes sits in the London office, he is in a management role. More shocking, however, is that the firm only has one dedicated finance associate in the City.
On the corporate side, the firm will argue that it has three or four English-qualified partners, but in effect it only has Hilary Winter. While Winter has an excellent reputation, she has had limited success in growing a practice because of a lack of resources. Orrick sources indicate that she brought in about £1m in fees last year. Not the sort of numbers expected of a ‘rainmaker’. Grew sits in the corporate practice but he is a registered foreign lawyer. Similarly, while Kolvin Stone is tipped by insiders as a future star and does do some corporate work, he predominantly focuses on intellectual property.
It is also understood that project finance partner Gaunt is set to leave the firm. When she does go ten partners will have left the City office since the beginning of 2010.
Orrick’s London office is not in the best of health despite protestations to the contrary. ‘The London office has made very positive contributions to the firm’s profitability, and we look forward to building upon the great group of people there,’ says senior partner for Europe David Syed. ‘London is a key part of our new strategy and is undoubtedly an essential market for us to be in. We have not been as successful as we would like – but we have a core of great people and we need to keep building on that. It already forms a key part of many global deals and that is crucial to being able to build effectively.’
The firm has made a recent push to build up numbers. It recently hired regulatory lawyer Sam Millar and fellow legal counsel Tony Katz, both former Financial Services Authority staffers, from liquidity provider Liquid Capital in a bid to move into the regulatory sphere – sensible given the current climate, but not a huge money maker.
The bottom line is that Orrick is now underweight in all of its core practice areas and it has let a number of key revenue generators, like Poster and Fennessy slip away. There is much to be done and a bout of goodwill is not going to cut it.
A former partner says: ‘In my first ever meeting at Orrick many years ago, the topic of discussion was succession. Yet here we are and Ralph Baxter is still at the helm.’ Another chimes in, explaining that, in a meeting in 2008, the ‘message was conveyed to Baxter that the partnership wanted to look into finding a successor’. Baxter’s response was to stay on. While this was a problem for many disgruntled members of the global partnership, it only served to exacerbate the already fraying relationship with the London office. Baxter says: ‘My personal focus at the moment is on making this the best term of my eight.’
What the firm needs in London is the one thing it has yet to achieve: scale with quality. The only way that this can happen is with a large team acquisition or a full-scale merger. Time for a new strategy.
New Directions
Orrick is due a tune up. Beginning in the New Year, the firm will refocus its global business, which will see it do some tinkering around the edges. The review will initially focus on a number of the firm’s global practice areas (energy and infrastructure, global finance, cross-border M&A, dispute resolution, including international arbitration and IP) rather than its global offices as it currently does.
As part of the strategy review, management is also going to overhaul the make up of the executive board. For each practice area, a global head will be appointed and will sit on the executive committee along with Baxter. The firm is additionally planning to appoint a global managing partner, something it hasn’t done since Baxter’s early 1990s’ appointment.
‘The legal sector has been dramatically affected by the world economy and we are now reacting to changes that are starkly negative,’ says Baxter. ‘I have never had a year that was more challenging and more intensely demanding than 2009. We are going to be global and local – we need to be authentic wherever we are.’
With Baxter nearing the end of another term as chair this is a sensible move and may be the answer to the firm’s succession issues.
Syed, who will become global head of finance, enthuses: ‘We want to be genuine market leaders in a few practice areas and then we can go on to tackle the global elite. This is a very positive move for us. We have an excellent group of people in the new management team; the targets we have set ourselves are very realistic.’
This imminent refocus has already meant the firm’s partnership is beginning to look different. A 10% drop in global partner numbers since 2009 (from 410 to 370) is not alarming, but it is thought more will come by the end of the year.
‘’We are going to be global and local – we need to be authentic wherever we are.’- Ralph Baxter, Orrick
Stateside, there have been some eye-catching departures. This year two former executive committee members, Cam Cowan and Daniel Thomasch, left the firm. The pair exited because of disagreements with Baxter over strategy. Cowan was long tipped as the next in line. He joined King & Spalding in August, and said in a press release at the time: ‘I am thrilled to join K&S. The firm’s strategy and culture are completely aligned with my own.’ Thomasch left for Gibson, Dunn & Crutcher with three other partners.
‘It is felt that the partnership does not have much of a voice,’ reflects one former partner. ‘There were not many opportunities to engage with management, and there was certainly a disconnect between the two tiers.’
However, a current partner who wished to remain nameless counters that: ‘The firm is not just about Ralph anymore. We are much more unified. I guess it is worrying that people leave because they don’t agree with something, but I would rather they did leave if they were that unhappy.’
The World is a Stage
To understand Orrick in 2011, one has to travel back to 1990, when Baxter took over as chairman. At the time, the firm had 254 lawyers in Sacramento, New York and Los Angeles and a turnover of $85.5m.
Baxter says he never sought out being chair but was appointed to the role on the basis that the firm would change in shape and size. Sitting in San Francisco, he tells LB: ‘We clearly knew we had to change and part of why I was elected is that I think the firm saw that I was committed to change and to growth and to adapting to a changing world.’
That vision has seen the firm open a string of largely successful outposts in Japan, China, Paris and, most recently, Germany. It has seen its New York office grow to over 200 lawyers, while it has become a market leader in Silicon Valley.
‘We decided to change, but always with recognition that we must hold onto our culture and our values and the strengths of the firm while we add to it and adapt to a changed world,’ Baxter continues. ‘As we become French and we become Chinese we have to be faithful to our core. You cannot make a great law firm out of just trying to cobble things together that make commercial sense.’
In particular the 2002 tie-up in Paris with a seven-partner team from Watson, Farley & Williams led by David Syed is indicative of the firm’s success. The team settled in immediately, bringing with it clients like Vivendi and France Télécom. This was bolstered in 2005 by the merger with a 50-lawyer team from Paris M&A leader Rambaud Martel.
‘We started from a much bigger base in Paris with a strong core team which had a decade of development together, and in that sense Paris was much more advanced than London when we started,’ explains Syed. ‘We have grown from ten lawyers to 350 in ten years. Paris is the template we want to develop across Europe.’
In June 2008, Orrick signed a deal with Düsseldorf independent Hölters & Elsing, which handed the firm 22 partners and a decent German corporate practice spanning three offices.
September 2011 saw the acquisition of an eight-lawyer team based in Munich from US technology firm Holme Roberts & Owen. The move gifted Orrick its 23rd global office, 13 of which are outside of the US.
Japan was the firm’s first foray into international waters, opening in 1997. It now has over 30 partners. Similarly, the firm’s Chinese practice is also strong. In 2005, Orrick continued to do well from picking apart defunct firm Coudert and hired its entire Chinese practice, which included nine partners and over 40 lawyers.
‘We have grown from ten lawyers to 350 in ten years. Paris is the template we want to develop across Europe.’ – David Syed, Orrick
On the face of it Orrick is in robust health. It is one of the few global firms to avoid a serious drop in revenue during the last few years, particularly when most firms were struggling financially. It counts the likes of Credit Suisse, Morgan Stanley and Microsoft among its key clients, and claims to act for half of the Fortune 20 TMT companies. A third of the Fortune 100 use the firm for litigation. In 2009 the firm acted on the largest M&A deal in its history where it advised Norway’s Telenor in its venture with Russia’s Altimo to combine their holdings in OJSC VimpelCom and Ukrainian Kyivstar to create VimpelCom Ltd in a deal worth $23.8bn. According to mergermarket the firm has acted on 52 M&A transactions globally in 2011 worth $12.2bn and is on course for its best performance since 2007. Still, in volume terms this is some 42 deals below Cleary Gottlieb Steen & Hamilton which placed 20th by volume in the year to the end of September.
Management will say its international growth has been a great achievement, but there are also rumours of an unsettled partnership on the Continent and as one former partner says: ‘The Germans are always falling out with the US over something.’
Wolfgang Hölters, a Düsseldorf-based M&A partner, is understood to be suing the firm while still practising. The firm declined to comment on the situation, but there is a suggestion that it is over pay. ‘We have an exceptional team of lawyers in four locations in Germany,’ counters Baxter. ‘The timing of the merger, on the eve of the world financial crisis, has slowed the pace of development, but we are quite confident about the future.’
Orrick’s problem outside of the US is that it appears to be slightly lopsided. While a top performer in Paris and Hong Kong, the firm is struggling to make its mark on the London and New York markets.
EMERGING TRENDS
Orrick chairman Ralph Baxter steadfastly refuses to believe that anyone at his firm leaks merger talks. ‘It is unfortunate many of our discussions with other firms became public, and the leaks and rumours about the talks never came from Orrick,’ says Baxter.
The statement is a surprise given that historically a disproportionate number of Orrick’s merger discussions somehow made it into the press. Its failed attempt to combine with Dewey Ballantine in 2006 was widely played out in the press, as was 1999’s talks with Bird & Bird. More recently, talks with Akin Gump Strauss Hauer & Feld and SJ Berwin have dominated the news. In an impressive piece of spin, Orrick hurried out a statement saying it walked away from merger discussions after the talks with SJ Berwin collapsed. However, partners at SJ Berwin see it very differently.
One SJ Berwin partner tells LB: ‘The Orrick situation was unfortunate. We thought they were a serious candidate. The story that they turned us down was not how we saw it. We took advice as to whether we should counter them, but we rose above it. It was being misreported; it wasn’t the way it worked.’
Orrick’s reputation is so badly damaged in this regard that consultants say it is difficult to get firms to talk to them in the City now. Partners at the firm talk of embarrassment each time a merger story leaks.
Senior partner for Europe David Syed is slightly more realistic. ‘We have been unfortunate and there is no doubt it causes some disruption. I think, however, it also shows how ambitious and open to change we are as a firm, and those are great things,’ he says.
But there have likely been many more talks that never made the news and, given Orrick’s penchant for buying up maturing practices, there will be more. However, a London deal at the moment looks like a distant possibility. There is a school of thought that Orrick uses its merger forays to glean as much information as possible from rival firms to scope out the best practices and highest-performing partners before walking away. This is exemplified in the failed talks with Coudert that eventually saw the firm pick up large teams in China, London and Moscow when it was unravelling.
Last December, five years after Coudert’s dissolution, a court-appointed administrator in the US filed a lawsuit against Orrick, accusing the firm of poaching partners while holding merger talks at the same time.
‘We have always understood the importance of scale and size,’ Syed continues. ‘There has never been an emphasis in the firm that we must merge or that we can only grow through merger. But the firm’s culture is such that we look at such opportunities with an open mind. The firm is determined to grow – but our strategy is not that we will grow by merger.’
Fairest of them all
It would be unfair to depict Orrick as a firm in free fall. Baxter has unquestionably been a good leader. Even opponents concede that he brings a vision few can match. But Orrick does have some very serious issues to address.
The to-do list is long: London needs to be sorted out; Winter needs to be able to develop a stronger English corporate practice; the finance practice is crying out for investment at all levels; and with around 45 lawyers in the City, the firm’s London office is significantly underweight. Without a major team move it is very difficult to see how it can get out of this rut. Recruiters say the firm is almost impossible to hire into.
New strategy or not, these are major concerns for the firm and, until London is seen as an equal member of the Orrick machine, aspirations to be seen as part of the global elite will never be met. The change in focus is a sensible refresher but to ask it to deliver real change is a big presumption.
Most worrying of all though is Baxter’s blind belief that all is well at his firm and his continual shifting of the blame on to the changed world; it is this more than any metric or headline story that underlines why Orrick’s future fortunes may be in doubt.
Baxter is as much the solution as he is the problem for the firm. By the time he finishes his next term in 2013 he will have spent a quarter of a century as chairman. He has an admirable record of bringing Orrick to the international playing field, but there must come a point where he relinquishes control. LB