A hive of activity

Israel has the highest number of lawyers per capita of any country in the world – one lawyer for every 166 people – and so far it has managed to keep them all busy. For a country with a population of 7.3 million, a legal profession boasting 44,000 participants is quite some feat (the UK has 150,000).

In the past decade many of the top Israeli firms have doubled in size and have regularly been outperforming the wider market. The economy has flourished, international business has taken off and law firms have reaped the rewards. Now they just have to keep up the momentum.

Market buzz

Israel’s economic boom encouraged more sophisticated deals and international players fed off the market. ‘The legal practice in Israel is a mirror of the economy, which is quite strong,’ says Ofer Glusman, a name partner who practises corporate law at mid-market firm Glusman Shem-Tov Chowers Broid & Co. Between 2003 and 2007 the economy grew around 5% per year and many law firms increased their revenue by up to 15% a year. But even during the depths of the global financial crisis Israel’s economy did comparatively well, with GDP contracting by just 0.3% last year. The rude health of the economy has been good news for the legal sector: according to Dun & Bradstreet (D&B), a market intelligence service, the combined revenue of the top 20 law firms actually rose by 8% to $506m last year.

The Israeli economy has changed radically over the past 20 years, with much of its recent success due to reforms started in the 1980s to move the country away from its socialist roots. As the 1990s progressed, Israel managed to ride the hi-tech boom, and now boasts the most Nasdaq-listed companies of any country outside North America. Alan Sacks, a senior partner and banking specialist at Israel’s largest law firm, Herzog, Fox & Neeman, explains the importance of hi-tech to the legal sector. ‘All the hi-tech glamour names like Apple, Google, Microsoft and IBM are represented here in Israel,’ he says. ‘If you are using your cell phone or Sky box, then many of the components are probably designed or made in Israel. This is the engine that has been driving the economy and dragging the legal sector on its coat tails.’

‘In the past ten years the Israeli market has become more open to international players.’
Amir Halevy, GKH Law Offices

After the hi-tech boom, the privatisation of state companies, like telecoms giant Bezeq, and wholesale market reform all helped cement strong growth rates in the economy, making for a prosperous legal sector.

Israeli law firms reaped the benefits. One of last year’s biggest deals was the sale of a 30% stake in Bezeq, now Israel’s largest telecoms company, to a private Israeli investment group, 012 smile.communications. The domestic firm Zellermayer Pelossof & Co represented the Bezeq shareholders on the $1.7bn sale. In the hi-tech sector another large deal was the acquisition of Israeli company Ventor Technologies, a developer of artificial heart valves, by US medical technology company Medtronic. Israeli firms provided advice to both parties, with Yigal Arnon & Co acting for Medtronic during the $325m acquisition, and GKH Law Offices advising Ventor.

Menachem Feder, a cross-border transactions and finance specialist at top-tier firm Caspi & Co, says his firm benefited from extra work as a result of banking reforms. ‘There has been a lot of capital market reform in Israel in the past five years,’ he says. ‘That has meant very large deals for the law firms involved, including us. Banks were forced to sell off a lot of management businesses. All the pensions plans and long-term savings plans were sold off. For five years that made a huge difference in the market.’

Other large firms, like Herzog, Fox & Neeman, have also benefited from the reforms, advising private equity fund Markstone Capital on its acquisition of Bank Leumi’s pension fund.

The rebuilding of Israel’s crumbling infrastructure has been another important source of business for firms like S.Horowitz & Co, a top-tier corporate firm. Anthony Bloch, a banking and finance partner, says: ‘There have been more infrastructure projects – transport, desalination, you name it. That brings in a lot of foreign investors. All these things bring in more and more legal work. It’s widening circles.’

Bloch’s firm was involved in the financing of the construction of a light railway in Jerusalem by French engineering conglomerate Alstom. He says: ‘When a company like Alstom comes in to do a light railway project, they need Israeli lawyers for the project finance. But they also need local lawyers for all sorts of other things, like the employment aspects, and that ripples out creating more and more work.’

Less of a sting

As the effects of the downturn started to be felt in 2008, many were predicting that the Israeli economy would be sucked into the mire. But as Yehuda Raveh, name partner at small corporate firm Yehuda Raveh & Co, explains, Israel managed to avoid much of the economic pain. ‘Israeli banks are very conservative; they never got themselves involved in highly sophisticated financial implements,’ he says. ‘Israel was not hurt by the downturn, because we did not have those high-risk investments.’ Indeed, far from suffering from the international credit crisis, many Israeli businesses have benefited, taking advantage of reduced asset prices to snap up bargains across the globe.

‘Last year was interesting,’ Feder says. ‘Israel did not experience the global financial crisis the way most other Western countries did. A number of Israeli companies that we represent are now looking at opportunities abroad because asset prices have shrunk. All the deleveraging that has been going on abroad has made a number of companies attractive targets.’

‘The legal practice in Israel is a mirror of the economy, which is quite strong.’
Ofer Glusman, Glusman Shem-Tov Chowers Broid & Co

At the time of going to press, Israel’s Teva, the world’s largest generic drugmaker, was locked in a bidding war to purchase the German generics manufacturer Ratiopharm. The drugs giant, which has been advised by US firm Willkie Farr & Gallagher in previous acquisitions, has offered E3bn for the target against a competitive bid from global rivals Pfizer and the Iceland-based Actavis Group.

The resilience of Israeli business has meant more work for domestic lawyers. Instead of firing, Israeli firms have continued to hire.

Glusman says his firm was surprised when it continued to thrive during the downturn. ‘At the beginning of 2008 there were plans to dismiss lawyers in the pipeline,’ he explains. ‘But we increased our legal staff by 10% during 2009.’ His firm was not unique. The trend was for firms to increase their numbers of legal staff. According to The Legal 500, the number of lawyers at Israel’s top 20 largest firms grew by 7% last year, up from 1,613 lawyers in 2008 to 1,728 lawyers in 2009.

This trend to continue hiring has been helped by the plethora of lawyers qualifying every year in Israel (see box, ‘Swarming with young lawyers, page 72). An excess of supply has made it easy for the upper end of the market to pick the cream of the crop. ‘The big firms can grow because there are good candidates in the market,’ says Amir Halevy, a technology and venture capital specialist at 95-lawyer firm GKH Law Offices. ‘If you want to get another five or ten attorneys in your firm, you can choose the best.’

The top firms have also been getting bigger by swallowing up the competition, with a flurry of mergers in the past ten years that have seen many firms doubling or tripling in size. One of the biggest examples was the acquisition of Dankner-Lusky & Co by Goldfarb, Levy, Eran, Meiri, Tzafrir & Co in 2005, which saw Goldfarb Levy’s headcount rise from 70 to 95, making it the largest law firm in Israel at the time.

The growing involvement of international investors in Israel has encouraged firms to expand rapidly. ‘In the past ten years the Israeli market has become more open to international players,’ Halevy says. ‘We have seen more M&A transactions involving big international investors like Motorola, Yahoo!, IBM, Cisco and others. All these required the big law firms to consolidate and become much larger in order to support those large businesses and transactions in an American style. They have had to become one-stop-shops.’

Bloch at S.Horowitz & Co, which is now the sixth largest firm in Israel, says his firm has experienced rapid growth. ‘I started practising in 1992,’ he says. ‘I was the 20th lawyer to join and we were the largest firm in Israel. We now have over 100 lawyers, so we have grown by five times in the past 16 or 17 years.’

Bitter sweet

But there has been a cost to the market’s rapid expansion. Many believe the pressure on firms to grow has led to bloated workforces, while an excess supply of hungry young lawyers can arguably be said to have reduced quality and affected prices.

One partner at a top-tier Israeli firm, who did not want to be named, told LB that fierce competition may not always be good for the industry. ‘Having a good supply of lawyers is very helpful, because you can always improve the quality of your practice. But it also increases competition, which may end up driving prices down,’ he says. ‘It also tends to dilute the quality of the work across the market as a whole, because the hungrier the lawyers are, the more willing they are to take on matters that they are not expert in.’

The metaphor of the ‘hungry lawyer’ came up many times in conversations with Israel’s legal elite. In many ways it is apt: the legal market may have grown substantially over the past ten years, but there are many more lawyers fighting for a piece of the action, and some are having to make do with mere crumbs.

Tomer Maharshak, head of cross-border M&A and capital markets at commercial and litigation specialist Yuval Levy & Co, believes that the massive expansion of law firms has been at a price. ‘They need to feed all these extra lawyers,’ he says. ‘So, they still do the quality work, but also the work that maybe ten years ago they wouldn’t have done. In the last decade, you have had a race to be the biggest, with larger firms stealing partners from smaller firms. The larger firms have grown, but their profit margins have decreased. At some point the larger firms may realise that a decade ago they were making more money, but it may be too late to rethink their business model.’

‘The larger firms have grown, but their profit margins have decreased. It may be too late to rethink their business model.’
Tomer Maharshak, Yuval Levy & Co

Bloch says this is particularly prevalent in the small to mid-sized firms. ‘If you look at the pressure on prices, it’s enormous,’ he points out. ‘I just don’t know how they do it, doing work at prices that are just ridiculous. Eventually it will reach a stage when the smaller firms find it uneconomical to be around. The prices are too low.’

He says even government contracts are being squeezed. ‘Here’s an example: anyone who works for the government’s companies is put on a set tariff. A few years ago the maximum tariff was 500 shekel [£88] an hour for the most senior people. That’s very low and that tariff has now gone down by 20%,’ he explains.

But, as Glusman points out, the larger firms with more international clients have been better placed to resist the downward pressure on prices. ‘When you work with foreign customers the level of fees that you charge is such that you don’t have to reduce prices tremendously,’ he says. ‘If your [international] client doesn’t want to pay as much, you say thank you very much, but we’d rather be at the beach.’

The growing gulf between the large top-end firms and medium and small firms is well illustrated by recent data from D&B: today, 2% of Israel’s lawyers work for the top firms that take home 40% of market revenue. Yaacov Yisraeli, a founding partner and M&A specialist at corporate firm Shibolet & Co, explains: ‘Prices among the medium and small firms have gone down to ridiculous levels because of the competition. Among the bigger firms it has an effect, but not such a big effect.’ It seems that the gap between the top players, like Herzog, Fox & Neeman and Meitar Liquornik Geva & Leshem Brandwein, who scoop up the majority of the work, and the rest of the market will only continue to widen.

Golden horizons

The sun has been shining on Israeli lawyers for the past ten years, as they have made the most of a healthy economy and a raft of international deals taking place in the country. After such a prolonged boom, you might expect the storm clouds to be gathering, but as yet they do not seem to be. As long as the economy remains strong, the legal market will stay buoyant, though ultimately firms will have to make do with more modest growth rates in a market that is over-supplied and has witnessed fierce competition.

‘Prices among the medium and small firms have gone down to ridiculous levels because of the competition.’
Yaacov Yisraeli, Shibolet & Co

The intense activity of the past decade will likely be followed by a more stable phase as the market matures. The test will be whether Israeli firms can maintain their quality and not succumb to ever-dropping prices and a race to the bottom in terms of quality.

This small country still has a few tricks up its sleeve: no one expected the economy to do as well as it did during the downturn, and its performance may continue to surprise. The International Monetary Fund predicts that the Israeli economy will grow by 2.4% next year and 4% the year after. If it does, the legal market will only continue its rise. As Glusman concludes: ‘A year and a half ago, I said that the whole market will go down. But it is hard to be a prophet in the Middle East.’ LB