Can Shearman finally get ahead of the curve after 15 years of diminishing returns?

Georgiana Tudor assesses the New York-headquartered firm’s sluggish development

Like all major global law firms, Shearman & Sterling has had its reverses in recent years, albeit a few more than most. The fundamental question that has dogged the firm in Wall Street, London and Germany, is whether this proud US outfit is prepared to move quickly and decisively enough to convincingly get past those setbacks.

Or as one rival City law firm leader puts it: ‘Shearman was unable to attract partners of the level of the hires at White & Case, Latham and Kirkland, as it is unwilling to put its hand in its pocket to hire the top teams in London.’

Over the past few months, Shearman has agreed to cut its equity partnership and has seen a series of departures, including private equity (PE) head Mark Soundy, who left in October along with UK tax head Sarah Priestley. Add to this the departures of Paris buyout duo Arnaud Fromion and Frédéric Guilloux and persistent claims that the bulk of its Brussels partnership is to jump to Quinn Emanuel Urquhart & Sullivan, and it has been a trying year in Europe for the US law firm, even if there are some exits that will not be mourned.

Shearman’s European grouping, led by project finance partner Nick Buckworth, did not hire any new partners in Europe in 2016. Shearman’s most recent external arrivals were M&A partner Frank Miller from Freshfields Bruckhaus Deringer and Jeremy Sharpe in international arbitration from the US Department of State, both announced in September 2015 – two credible names but not the CVs to excite the market in isolation. Shearman did promote 12 partners in January 2016, with five appointments in London.

‘Shearman is doing what partners have been yelling about with desperation for a long time – dealing with the large number of under-performers.’
A former Shearman partner

Perhaps most worryingly, the word internally is that Shearman has clearly failed to hit three-year growth targets set after a change in senior management in 2012.

Once considered to be in possession of arguably the top European practice built by a US parent, Shearman has over the last 15 years been in at least relative decline. In London, the practice has remained more than solid – revenue in London grew 3% last year, while over five years the City office has grown revenue by 43% from $104.2m in 2010 to $148.6m in 2015. UK partner headcount is sharply up from 25 in 2010 to 39 at present. But many US rivals have been far more aggressive in the Square Mile since the banking crisis. In Germany, Shearman’s much vaunted transactional practice is a shadow of the glories it could boast at the end of the 1990s, leading to the rationalisation three years ago of its three-office national practice to just a hub in Frankfurt.

One City partner says while Shearman has a clear strategy in Europe, the challenge is that ‘it lacks profitability in the US and without that you fall behind, because the US can often draw management time and investment’. Indeed, globally the firm has struggled, profit per equity partner (PEP) for the 2015 financial year was down 4% to $1.83m. Last year worldwide turnover increased by only 2% to $860.3m, up 17% in the last five years from $737m in 2010. The bottom line is that a New York firm of this heritage is expected to comfortably generate PEP of over $2m.

In order to address profitability, the firm has decided to cut its equity ranks, via de-equitisations. It is expected this process will be completed by the end of the year. While the numbers impacted are unclear there is talk of the firm aiming to hike underlying profits per point by as much as 15%, which would require a robust shake-out.

Shearman currently has 162 equity partners and 26 non-equity globally.

But then Shearman has reached the point where it can hardly afford half measures. The firm made a series of partner cuts a decade ago – dubbed ‘Shearminations’ – with Shearman having 20 salaried partners in 2006, against 176 full equity. The number of salaried partners peaked in 2012, at 43 against 158 full equity. There has hardly been a ruthless shake-up of its business as of yet.

London partners respond that tough measures are required to keep disillusioned top performers from quitting. There is also a school of thought that the instincts of the driven and highly-regarded global managing partner David Beveridge have been too often tempered by the more cautious senior partner Creighton Condon (Beveridge was a major force in last year pushing through a deal to contain Shearman’s unsustainable pension liabilities).

One former Shearman partner agrees: ‘Shearman is now doing what partners have been yelling about with desperation for a long time, which is dealing with the large number of under-performers and getting to grips with its problems. It is now doing the right thing.’

They add: ‘A number of under-performing partners will undoubtedly leave, but there have been some strong-performing partners who have left.’

 

The broader picture

When Beveridge and Condon were elected to leadership in 2012, the team made PE one of its priority investment areas. PE has also seen global co-head Jeremy Dickens depart to McDermott Will & Emery in July. Shearman, however, says in London it brought over Paul Strecker, who relocated in September this year from Hong Kong, as global co-head of its private capital industry group, while the firm retains City partner Simon Burrows. While PE remains a thorny issue, the firm’s wider corporate practice has been far more successful despite some retrenchment in Europe; from the outside it often looked as if Shearman would have done better to build in mainstream deal work rather than be the latest in a lengthening queue chasing the sponsor shilling (or for that matter perhaps it should have tried to further upgrade London arbitration to counterbalance its heavyweight Paris team).

‘We’re not going to rush out and hire multiple M&A partners in multiple jurisdictions. What is key is the strength and depth of our global M&A footprint.’
Laurence Levy,
Shearman & Sterling

With 15 corporate M&A partners in Europe, led by the well-respected Laurence Levy (pictured), the department boasts clients like Liberty Global and Dow Chemical Company. With a strong run of mandates in recent years the firm was named Legal Business‘ Corporate Team of the Year 2016 after advising the Qatar Investment Authority on a complex £2.6bn acquisition of Canary Wharf owner Songbird Estates.

Levy says: ‘It has been a busy year. The M&A market has been affected by Brexit, and many deals either died or went on hold initially, but since the summer deals have been coming back. Yes, it is fair to say that the PE market in the UK is still slow, but we have a large cross-border practice which softens the impact of UK domestic issues.’

Levy argues – with some justification – that Shearman has done a good job of building a productive practice built around lean teams across a few key hubs. ‘We’re not going to rush out and hire multiple M&A partners in multiple jurisdictions. We have a large team deployed across the world and looking at the size of teams in specific locations only misses the point – what is key is the strength and depth of our global M&A footprint.’

Shearman’s finance practice remains substantial with big-billing European high-yield specialist Apostolos Gkoutzinis and regulatory head Barney Reynolds both respected operators. And even if it is a hard market to operate in profitably, Shearman still carries weight on global projects. The firm brought over US-qualified Ronan Wicks to lead its City finance team in September 2015. While a strong player on the bank side, with a respectable leveraged finance offering, critics note that with the retirement at the end of 2016 of Anthony Ward, one of its leading London lawyers, Shearman needs to cultivate its younger generation. Certainly, the competition in leveraged finance is getting brutally tough in the Square Mile for any team not moving forward.

As such, high hopes are resting on the recently-promoted partner Korey Fevzi, who specialises in cross-border financings for private equity pension funds and hedge funds, and more established partners such as Mei Lian and Peter Hayes.

As part of their mandate when they were elected in 2012, US-based leaders Condon and Beveridge and regional managing partners have until now focused on strengthening litigation and consolidating the M&A practice. Of course, improving in disputes has been a long-term aspiration for Shearman – and progress has by consensus been made, though whether enough to position Shearman for a softer US disputes market is debatable.

Put simply in the words of a former partner, ‘the firm should have got to grips with its problems years ago’.

As one City partner concludes: ‘[Shearman] has a strong culture and frankly a lot of firms which have experienced similar decline and profitability issues would have faced a real challenge. The fact that Shearman has managed to keep many of their key partners shows there is a fundamental glue there underwritten by true partnership values.’

Such qualities go a long way, especially during tougher times. Given Shearman’s challenges in the US, in London the firm has generally played a so-so hand well in recent years. But in the long run Shearman cannot keep leaving so much space between itself and its peers, in both Manhattan and the Square Mile. At least not if it wants to compete at the highest level.

georgiana.tudor@legalease.co.uk