This year’s Legal Business 100 firms continue to grow in revenue, but how much is performance in foreign markets masking woes at home? LB finds out
Things have changed in the Legal Business 100 this year. At least seven firms have merged with others, either overseas or at home, while another three have bolted on chunks of the now extinct Halliwells. Five of these firms have seen superficial revenue rises as a result of consolidation, while it is impossible to analyse the fee income ebb and flow at Norton Rose and Hogan Lovells because of recently completed mergers.
After last year’s smoke and mirrors display, with distorted profits per equity partner (PEP) masking generally poor top-line growth, things are looking a lot better. Total revenue grew by 13% from £13.67bn to £15.5bn, while net income rose 12% to £4.65bn. The average compound annual growth rate (CAGR) for the last ten years is 7%.
Consolidation and the increasing popularity of the Swiss verein legal structure means we have created a new Major International peer group of firms this year. DLA Piper, historically ranked according to its UK revenues only because the firm operates separate profit pools, is now being considered as a single entity, in line with firms such as Hogan Lovells and Norton Rose. This moves DLA to the top spot on the table, with global revenues of £1.25bn, edging it past Global Elite firms Clifford Chance (£1.22bn), Linklaters (£1.2bn), Freshfields Bruckhaus Deringer (£1.14bn) and Allen & Overy (£1.12bn).
Hogan Lovells also enters the £1bn club, with the merger between Washington DC-based Hogan & Hartson and legacy London firm Lovells now over a year old, while Norton Rose inches closer to this exclusive group and the top of the table after merging with firms in Australia, Canada and South Africa.
Life’s a beach at the top. Revenue rose an average of 2% across the top ten law firms (excluding Hogan Lovells and Norton Rose because each has experienced inflated revenue hikes because of mergers), marking a positive change on last year when average fee income across the top ten was down by roughly 3.5%.
But across the latter half of the LB100 the waters aren’t as steady, with average revenue increase standing at 5%. There are some firms that stand out as star performers, such as Mishcon de Reya, which saw fee income rise a whopping 37% to £65m, causing the firm to leap 11 places to 47. Litigation specialist Stewarts Law enters the LB100 for the first time after posting a 42% revenue hike to £28.5m. However, others have struggled as the UK economy continues its volatile path to recovery.
There have been a few casualties this year as five firms leave the LB100. Payne Hicks Beach, which fell within the London Midsizers peer group, dropped 11 places in the table after the firm posted a 5% drop in fee income to £21m. Central firm Martineau also fell out of the LB100 after it posted a 2% dip in revenues to £20m, causing it to drop eight places in the table. Veale Wasbrough Vizards, DMH Stallard and Geldards have also made an exit. It is clear that firms in the top 50 are excelling at lightning speed ahead of those in the bottom 50. As a result, it is impossible to benchmark the top 100 UK firms against each other unless global revenue is stripped away.
As the legal sector moves to expand globally every day – in July alone, A&O, Clifford Chance and Norton Rose each announced new offices in Casablanca – focus should be on how firms are operating in their home markets.
Revenue generated outside of the UK has seen a continual uptick: just 22% of DLA’s overall turnover is generated in the UK. But huge revenue increases in Asia particularly are masking how each of the leading international firms have been faring in the domestic market, and distort comparisons between the bottom and top halves of the LB100.
That is why this year, in addition to the LB100 main table showing the full global revenues of the top 100 UK firms, we also show the UK-only revenues of the top 50 firms, which creates a slightly different picture (see ‘Top 50 firms by UK revenues only’).
Home or away
International growth has been the name of the game for the majority of the LB100. Forty-seven percent of firms in the LB100 have more than five offices, and most managing partners cite international growth as key to developing their business going forward.
‘Our London office is our largest,’ comments Sharon White, chief executive of Stephenson Harwood. ‘But we’re moving away from being London-centric. We have to think more internationally and we have to think about the importance of all of our offices.’Stephenson Harwood, which posted a 16% rise in revenue to £107m during 2010/11, has six offices outside of the UK.
‘We are happy that we have the international footprint,’ says Taylor Wessing managing partner Tim Eyles. ‘As a result nothing in our business is doing really badly because we’re not as exposed.’ The firm’s 8% rise in revenue to £192.3m can be attributed to a healthy increase across the firm’s global offices, with Germany noted as a key performer.
As the UK economy continues to struggle, firms are following their clients off home shores, putting Asia, South America and Africa at the top of the list. White notes that, for her firm, London is still the biggest revenue generator but the percentage of revenue coming from non-London offices is steadily increasing.
While the majority of the Global Elite firms would paint a different picture – A&O generates almost 60% of its revenue outside of London; for Linklaters that figure is 57% and for Freshfields it’s 64% – the reality for much of the top 50 is that, in order to maintain position in an oversaturated market, global breadth is the key.
‘We always try to improve and keep the business on the move,’ says Herbert Smith’s senior partner Jonathan Scott. ‘We are much more flat-footed at times but we will look at regions to open in and will do so if we see the strategic rationale. You have to show agility – the fact that you respond to the market and listen to clients’ needs is a big change.’ Currently 65% of the firm’s revenue is generated from its London business. Plans, however, are underway to see that shift to a 50/50 split with its 12 international offices.
Scott notes that the firm’s Asia practice has contributed a lot to its financial performance for 2010/11. His comments are echoed by a handful of firms across the LB100. ‘The firm is clearly growing rapidly in the emerging markets,’ says Clifford Chance managing partner David Childs. ‘Our offices in Asia are growing strongly, as are the offices in the Middle East.’
In July, Berwin Leighton Paisner, which climbed three places in the LB100 after a strong year (revenue was up 16% to £221m), announced it is to open in Hong Kong. In late July it emerged that Olswang had applied for a local licence to practise in Singapore. The firm’s chief executive David Stewart noted that over 20% of the firm’s £92.6m revenue came from outside London.
But with eyes overseas, is there any worry that London will lose its spot on the global stage as a major centre for finance and business? The answer is emphatically no.
‘During the financial crisis, there was a lot of concern that it would lead to London losing its place as a global financial centre but that worry has largely gone. London’s place as a financial centre hasn’t left,’ says Childs.
Staycation
While firms within the top 50 are establishing themselves as global players through mergers, new office openings and client wins, firms within the bottom 50 are beginning to look different altogether. With a primary focus on the UK market, it’s as if a two-tier system is beginning to develop.
Five-year CAGR across the top 50 came to 7% this year, but was just 4% across the bottom 50 firms.
While much of the growth for top 50 firms has been delivered by international revenues (particularly Asia), a different picture begins to develop when judging these firms by UK revenue.
For the first time ever, we’ve stripped away global fee income (see ‘Top 50 firms by revenue‘ ).
DLA Piper sits at the top of the LB100, but the firm’s UK turnover, which incorporates eight offices including Manchester, Birmingham, Leeds and London, is £285.9m, putting it eighth in the UK table.
This places the firm behind Eversheds, which has a UK turnover of £321.6m across its ten offices in the region, and the Magic Circle.
While it comes as no surprise that the likes of A&O, Clifford Chance, Linklaters, Freshfields, Slaughter and May, and Herbert Smith sit comfortably at the top of the UK revenues table, the numbers outside the top ten make interesting reading.
Berwin Leighton Paisner’s UK business, for example, is bigger than Norton Rose’s. The City firm has 178 partners in London (its only UK office) and a turnover of £204m. Norton Rose, which has a wider international reach, has a UK turnover of just £169m and 128 partners in the City.
Despite occupying a slot in the LB100 top 20, Taylor Wessing is ranked at just 27 on UK-only revenues, largely because its Paris and German businesses are stripped away. The firm’s £92.1m UK revenue is eclipsed by Squire Sanders Hammonds, Macfarlanes and Hill Dickinson. However, Taylor Wessing’s UK offering, partner-wise (98), is larger than Hill Dickinson, which has a UK turnover of £96.2m but just 57 partners. The same comparison can be drawn from looking at Macfarlanes’ numbers. Although the London-centric firm only has 74 partners in the UK, its revenue is £94.7m. Comparing Taylor Wessing to Squire Sanders, the picture is different. The former has 28% more partners in the UK than the latter, but posted £2m less in UK turnover.
A few arguments can be, and have been, made against a UK-only comparison, including some large firms’ claim that it doesn’t matter where the revenue comes from. Others argue client location is more important. But in terms of financial analysis for some of the larger firms LB’s Global 100 issue, out in June every year, is more appropriate.
‘For the top 50 firms, the majority of growth and expansion has been global,’ comments Tom Wood, corporate director of professional services at Barclays, who argues that the UK will always be the core. ‘Many UK-centric firms are dependent on the domestic economy and this has caused a lot of pain.’
Stephenson Harwood’s Sharon White agrees. ‘I think we’re still far from out of the woods. There are some small signs of recovery,’ she says.
As this is the first year LB has attempted to benchmark the larger firms against one another based on UK revenue figures, the comparison will really start to take shape next year when we are able to show UK-only revenue changes. The fact remains that, for the vast majority of the top 100 firms based in the UK, domestic revenues are still the most relevant.
Greener shores
Consolidation has caused a ripple effect across the LB100. The 2010 year alone saw three overseas mergers take place and kick-started further activity in 2011. A full financial year later, these businesses are really beginning to take shape.
The tie-up between Hogan & Hartson and Lovells has been the poster child of the new transatlantic merger. Although the firms have joined through the use of a Swiss verein legal structure, whereby profit pools are separate and risk is contained, Hogan Lovells has made a good play at integrating two large businesses into one.
Going live in May 2010, the two firms have combined to create a nearly £1.1bn business, with over 500 equity partners and more than 2,600 lawyers worldwide.
But the merger has done little to change the firm’s position in the LB100. Last year legacy firm Lovells sat comfortably in slot six, with revenue of £541.8m, just behind rivals DLA Piper. The merger has not altered this: Hogan Lovells has closed the gap on its rivals but retains sixth place.
Norton Rose, another merger-hungry firm, with 28 offices in 17 countries, has moved up three places to seven, ahead of Herbert Smith, Slaughter and May and Eversheds.
After its merger with Deacons Australia in January 2010 Norton Rose has seen its business shift dramatically. On the surface it appears as though revenue has jumped 59% from £307m to £488m, but taking the mergers out of the equation, income is up just 9% on the previous year. Deacons added 146 partners and more than £100m in revenue.
Next year, Norton Rose is likely to look very different after the firm tied Canada’s Ogilvy Renault and South Africa’s Deneys Reitz into its enlarged business on 1 June 2011.
SNR Denton is another expansive outfit. In September 2010, Denton Wilde Sapte and Chicago’s Sonnenschein Nath & Rosenthal went live with their transatlantic marriage. The merged entity will hit its one-year anniversary at press time, with overall revenue expected to sit somewhere around £445m.But this year, the merged business isn’t accounted for in the LB100 and legacy Denton’s UK LLP has had a tough time recently. Five-year CAGR for the firm is just 1%, with revenue down 8% to £154.4m and net income down 37% to just £19.8m. The Squire Sanders and SNR Denton mergers are likely to dramatically change each firm’s business and rankings in the table. When Squire Sanders Hammonds has its full year as a combined entity, turnover is expected to hit £386m. This would place the firm ahead of Eversheds, which saw revenues of £355m during 2010/11.
Although different in their approach to merger partners – Norton Rose went east before it went west, while Hogan Lovells, SNR Denton and Squire Sanders are all transatlantic – one element that unites these firms is the use of the verein.
Some firms are beginning to adopt HSBC’s model of ‘global business in local markets’, says Deloitte professional practices partner Jeremy Black.
Out of this, our new Major International category was born. The above firms, with the addition of DLA Piper now sit in this exclusive group of practices.
‘Looking back, the only way forward was one firm, one profit pool,’ notes Black. ‘Firms are now using a variety of structures so as not to go down that route [one profit pool] and that has made it easier for firms to merge.’
The challenge faced by senior management at the Major International firms (and there will be more firms to fit into this group as consolidation within the sector continues) is integrating new partner compensation systems, which are wholly unlike their own, in order to successfully expand overseas. The verein solves this problem for senior management immediately but creates a conundrum when attempting to judge firms against one another.
Local shopping
Domestic mergers don’t encounter quite the same problems. Bringing together two similar accounting systems and relatively similar compensation structures is, by comparison, a walk on the beach for UK firms. In late July, partners at Barlow Lyde & Gilbert and Clyde & Co voted through a takeover deal – the largest the UK market has seen – to create a firm with more than £300m in turnover and 270 partners. When the deal goes through in November BLG will assume the Clyde & Co brand, knocking the firm out of the LB100. The combined firm will climb close to the top ten.
Consolidation among the Insurance peer group has been rife. In July partners at Beachcroft and Davies Arnold Cooper voted through their merger. The two firms will officially become DAC Beachcroft in November, and are expected to have a combined turnover of £175m and over 2,000 staff. DAC Beachcroft will sit within the top 20, placing it just behind SJ Berwin and ahead of Addleshaw Goddard.
Meanwhile, Weightmans took over North-West firm Mace & Jones in May. Mace & Jones is expected to deliver £17m to Weightmans’ top line, creating a combined £75m firm. The growth will parachute Weightmans into the top 50 next year, ahead of Travers Smith.
But merger activity hasn’t been the only form of consolidation for LB100 firms this year. As Halliwells was in the process of collapsing, three firms stepped in to pick up the pieces.
Gateley (formerly HBJ Gateley Wareing) took over Halliwells’ Manchester commercial practice in July 2010, adding over 200 staff to its roster and, at the time was estimated to bring in £20m in revenues. As a result of the acquisition, Gateley’s revenue has risen 27% to £63m from the £49.6m it posted last year. The increase in revenues propels the firm into the top 50 this year, while its improved financial performance combined with widespread UK coverage means the firm moves into the Major UK peer group this year.
Barlows also did well to swallow up parts of Halliwells’ business and took over its Manchester insurance practice, which
was predicted by senior partner Simon Konsta last year (see LB208, page 47) to bring in £15m, pushing Barlows over the £100m
mark. The insurance-based firm only managed to turn over £95.5m for the year but this still represented a 17% hike on the previous year.
Hill Dickinson, which is the last of the trio to scoop up parts of Halliwells’ business, has pushed past the £100m mark and joined the Major UK ranks this year.
Barclays’ Tom Wood expects there to be a continual stream of consolidation in the UK legal sector ‘because there are still too many law firms competing for declining amounts of work,’ he says.
CC’s Childs asks whether further consolidation will happen between larger firms. ‘In a few years, there will be seven or eight global practice firms at the top end. Our strategy is to position the firm to lead that group,’ he says.
‘If you look at the UK, unless you have a point of differentiation, where you can take market share, you’re only likely to decline unless you offer to do it for a cheaper price than everyone else,’ says Sir Nigel Knowles, joint chief executive of DLA Piper, which has made the most of rapid international expansion. ‘This is really going to sort out the men from the boys – if you’re not in the right market segment, if you have no point of differentiation, if you have nothing more to offer than anybody else and all you have is price, then you’re completely down the can. There’s going to be a major shake out and firms are going to find that they can’t carry on anymore and they will have to consolidate.’
While the firms in the bottom 50 are figuring out survival tactics at home, the top 50 has set its binoculars on the ever-growing emerging markets, with China at the top of the list.
Ebb and flow
Predictions are that the UK’s legal sector is likely to morph even further by this time next year.
Once alternative business structures (ABS), as defined by the Legal Services Act, come into force by the end of 2011 (at the time of press, parliament had delayed making a decision on it), some firms could see third-party investors aiding growth and expansion. Already Irwin Mitchell has signalled its intent to turn to the stock markets once the LSA comes in.
Although no firm within the top ten has come out and declared its interest in external capital ABS, it’s likely that firms contained within the second 50 of the LB100 might have to.
‘As with so many businesses, the difficult place to be is in the middle group,’ says Stephen Taylor, managing director at AlixPartners. ‘The challenge for the mid-market is to what extent can they compete?’ he says. ‘The dangerous competition for the regional firm is trying to get traction in London, which has always been difficult. They usually underestimate the amount of investment required.’
While analysts say it is unlikely that the legal sector will see another Halliwells scenario among the UK’s firms, it is widely believed that more firms will have to diversify away from UK shores.
And by doing so, it will mean more mergers, more team bolt-ons and fewer players in the market. The number of firms is slowly contracting, as natural selection in the legal industry starts to take full effect. Expect the gap between successful UK-only businesses and international giants to widen again next year. LB
Legal Business would like to thank AlixPartners for its sponsorship of the LB100.