Better together? – Those Anglo-Scots unions in focus

Legal Business looks under the bonnet to assess how the Scottish arms of Pinsent Masons and CMS have fared post-merger.

The ‘Better Together’ campaign, in favour of preserving Scotland’s union with the UK in 2014, maintained that Scotland was stronger as part of Great Britain, winning that particular argument by a margin of around 11%. But while the battle may have been won for now, a number of Scottish law firms are still wrestling with the decision of whether to tie-up with an English suitor – a fact most recently indicated by Maclay Murray & Spens’ aborted merger talks with Addleshaw Goddard in February.

Two of Scotland’s premier firms, McGrigors and Dundas & Wilson, decided to give up their independence in 2012 and 2014 respectively. McGrigors went first, merging into Pinsent Masons, while Dundas & Wilson opted for CMS. While both firms tout the distinct advantages of being part of a UK-wide international player, local rivals argue that both firms have since become less relevant to the indigenous Scottish market. But beyond the spin on both sides, the reality is somewhat harder to pinpoint.

The numbers

The Scottish arms of Pinsents and CMS assert that tying up with an English firm has brought in work and clients that neither legacy firm would have managed to get on their own, increasing market share in Scotland.

According to Kirk Murdoch, formerly senior partner at McGrigors and now Pinsents chair for Scotland and Northern Ireland, the merger has paid dividends for McGrigors. ‘We can deliver so much more in terms of an increasing array of legal requirements and are much more credible at a UK level. We can’t give clients a one-stop solution in every respect but we can go an awful long way. Nothing gives me more pleasure than seeing some of my Scottish partners referring work out to Munich or Melbourne. The benefits of getting inward investment opportunities are terrific.’

While Legal Business‘ Law Firm of the Year Pinsents has enjoyed a period of robust growth as a whole – it was one of the top performers in last year’s Global 100 and has announced a further increase of 5% for 2015/16, bringing total revenues up to £382.3m – it is harder to assess how the Scottish arm of the business has performed over the last four years.

Common among international law firms, the firm doesn’t provide a breakdown of revenues by office. An approximate contribution from Pinsents’ Scottish arm is around £65m for 2016, based on Business Insider’s figure of £63m in 2015 and £60m in 2014. On paper this puts it on a par with Scotland’s biggest earner, Brodies, which had another strong year with revenues up 12% to £65.1m in 2015/16. However, the Scottish arm of Pinsents would still be less than the £70m legacy firm McGrigors recorded in its final year of accounting pre-merger, a considerable drop in real-terms revenue.

‘Since the Pinsents merger we can deliver so much more. We are much more credible at a UK level.’
Kirk Murdoch, Pinsent Masons

 

 

CMS is even more opaque, refusing to provide a steer on what Scottish revenues are likely to be for 2015/16. LLP accounts for the 2014/15 financial year showed Dundas’ revenue contribution to be £47m, bang in the range of its turnover pre-merger. In 2013/14 Dundas billed £46.7m and £46.6m in 2012/13.

For a firm that generated nearly £75m back in 2008, then by far the highest revenue of a Scots-based firm, it has been a dramatic fall from grace.

While estimates suggest both firms are earning the same or less than before the merger, according to one law firm leader in Scotland the presence of both CMS and Pinsents has diminished post-consolidation, with both firms doing less Scottish work.

‘Pinsents are doing more UK work but less Scottish work. I was on a flight a few weeks ago sitting next to a Scottish partner from Pinsents and all he is doing is work for English clients in England. Oil and gas was a strength of CMS before the merger and Dundas has given it more strength. That whole Aberdeen space has been good to it in the last year. But it is a brand that is less relevant to mainstream Scotland than Dundas was.’

The clients

Another measure of the success of any merger is client wins picked up post-consolidation. Since the CMS and Dundas merger, the combined firm has seen a number of new panel appointments including The Weir Group, Virgin Money Holdings (UK), Interserve and SSE. According to Stephen Millar, CMS’s new managing partner, who took over the post in May, both firms reaped the benefits on the client side as a result of the tie-up, with CMS benefiting from Dundas’ wider Scottish presence and Dundas making the most of a more international platform.

‘CMS on its own would probably have struggled to win any of those new client appointments because we just didn’t have the scale in Glasgow and Edinburgh,’ he says. ‘Dundas historically had always punched above its weight in terms of what it had achieved on the client side – but certainly its ability to win these sorts of mandates became a lot more likely – for example, Weir Group is a very worldwide company.’

Pinsents has gained a number of new clients over the past four years as a result of the merger, including Diageo, Clydesdale Bank, UK Green Investment Bank, EDF, Steria, Ferrovial and Lone Star. In Scotland, it picked up an instruction on a major LNG project off the coast of Australia via legacy McGrigors partners in Aberdeen, and this year the firm claims to have completed the three largest private equity deals in Scotland, using local partners, including the sale of Motor Fuel Group to Patron Capital for £500m in June and the £585m disposal of assets by Total to Midstream.

‘In the past perhaps we might have been working alongside a Magic Circle firm, now we’re not. We acquire these appointments and mandates exclusively, the whole firm is involved but they are Scottish-based projects,’ says Murdoch.

But observers note that while CMS and Pinsents have remained major players in Scotland, their tie-ups have not discernibly boosted their presence in the market either.

‘We don’t really see them winning mandates that McGrigors and Dundas wouldn’t have in the past,’ says one Scottish management figure. ‘I’m sure there will be examples but it’s not had a seismic impact.’

Another senior partner adds: ‘I am seeing Pinsents and I’m seeing CMS but then I was seeing them before their mergers. It hasn’t diminished them or their influence. Whether it has made them stronger I just don’t know.’

Others accuse the Scottish arms of Pinsents and CMS of taking their eye off the mid-market in Scotland, the backbone of the Scottish economy, with suggestions that CMS is more interested in finance and energy while Pinsents has become more focused on property and construction. However, corporate deals, such as CMS advising Scottish private equity house Souter Investments on its acquisition of luxury brand Clive Christian, would suggest otherwise.

For Murdoch, both legacy firms were and remain heavily committed to the real estate sector but have increased their capabilities. ‘The ability now to transact, given the amount of overseas funds that are now investing in England, Scotland and Northern Ireland – we can offer a one-stop shop. Real estate is an example of where we have got strength in the three jurisdictions that comprise the UK.’

Similarly, Caryn Penley, executive partner for CMS in Scotland, argues that Dundas always had more of a focused approach on financial services and energy. ‘I don’t think the focus of the Scottish part of the business has changed. We run our practice groups on a national basis, so we have definitely increased our share of work from a number of clients that are Scottish-based, like RBS and SSE.’

While Pinsents scaled back its sector group focus from ten to four to take into account its merger with McGrigors, CMS – also very sector-focused – found itself with extra capabilities in government work and the university sector, which didn’t fit with the other CMS practice groups.

According to one former partner, this led to some tensions within the partnership, with the view that CMS is currently too large in Scotland. ‘I get mixed messages about the success. Some people are very aligned to CMS’ sectors and enjoy being part of the wider and bigger world. Equally there are bits which don’t fit so clearly into the wider strategy and they are bigger than CMS would ideally need to be in Scotland.’

Counters Millar: ‘The government work and the university sector – the public sector – were not areas CMS had traditionally focused on, but we see both of these as good business and also very high profile.’

Partner satisfaction

Perhaps a more objective method of judging the success of a merger is seeing how many partners voted with their feet. CMS, unlike Pinsents, had a lock-in system for a period of two years where partners had agreed roles and remuneration.

‘The two-year lock-in period just expired at the start of May,’ says an ex-partner. ‘It will be interesting to see what happens in the coming months and whether there are any changes.’

CMS said that 78 new partners came in from the combination with Dundas and the addition of ZPG Avocats in Geneva, which joined the network at the same time. Around 70 partners joined CMS from Dundas with the rest from ZPG.

Penley comments: ‘Now all the partners at Dundas & Wilson and legacy CMS are all assessed and remunerated equally on the same terms and in the same way. When the deal was done, there wasn’t any way for CMS to assess Dundas partners on their own criteria because relatively speaking we were unknown. We came in at a particular level and after a year we were assessed under the CMS regime.’

At Pinsents there was no lock-in and the firm, according to Legal Business 100 (LB100) submissions, added 39 equity partners post-merger, around two-thirds of McGrigors’ legacy equity partnership of 57. Pinsents added 470 lawyers that year, around 30 lawyers more than McGrigors’ total fee-earners for 2010/11.

There were, however, unwanted departures: an eight-strong construction team led by partners David Moss and Paul Giles to Eversheds as a result of client conflicts in March 2012. In January this year the firm also lost corporate partner Anna Brown to Scottish firm HBJ Gateley.

‘The commitment [of] the partners to the concept when they voted on it was a single partnership,’ says Murdoch. ‘Everyone was in the same boat and we have moved on from there over the last four years very successfully. We have attracted some really good talent into the business – Claire Massie [from Dundas in 2013], Paul McGoldrick [from Bond Dickinson in 2015] and Bruce Craig [from Mackinnons in 2015] for example.’

Murdoch also points to the fact that legacy McGrigors partners, including Richard Masters and Laura Cameron as well as himself, took board positions at Pinsents after the merger, while McGrigors legacy partner Bob Ruddiman is global sector head of energy and Michael Watson heads up finance and projects.

‘It would have been very easy to create an artificial or contrived management structure to make sure everyone had a voice at the table, it didn’t really pan out that way,’ says Murdoch. ‘Rather than saying: “Okay, we have done a merger we need to keep everyone happy,” these appointments were handled on a meritocratic basis and voted in.’

However, a rival Scottish management figure comments that for CMS the deal was very different. There was a sense in the market that McGrigors had more of a say in terms of the enlarged entity; Dundas did the deal two years later and the market had shifted significantly in that time, making Dundas a weaker partner going into the union.

‘Dundas only had one position on the board so from their side it certainly looked like they didn’t have as much influence in the enlarged entity compared to McGrigors. Most people in the market, if you are looking at it from a purely Scottish perspective, would say that the McGrigors/Pinsents tie-up was probably better in that the Scottish firm had more of an opportunity to influence the enlarged firm – closer to a merger than a classic takeover.’

On balance, the market view remains that the McGrigors/Pinsents tie-up was the more successful and better timed. Although Dundas had less bargaining power during negotiations relative to McGrigors, ultimately the CMS tie-up was a better deal for Dundas as turnover was down 11% in 2012/13 to £48.7m, one of the worst performances in the LB100, while its top line had shrunk 35% in five years compared to a 2008 high of £74.8m. It was in a marked decline and CMS was its white knight. Set against that, a considerable Scots influence has been evident at CMS in recent years. Back in 2013 the firm elected Penelope Warne as senior partner – Warne had personally championed and launched CMS’s Aberdeen arm – and this year appointed Millar, a Scots-born energy lawyer who was co-executive partner in Scotland and also practised in Aberdeen, as its new managing partner.

Co-publishing feature
The future for Scottish firms
Bill Drummond, Brodies

At the very least, legacy Dundas has arrested its slide with the help of its international benefactor.

But McGrigors had first-mover advantage and legacy partners would point to the fact that the other members of Scotland’s original ‘big four’ – Dundas, Maclays and Shepherd and Wedderburn – all suffered turbulent periods post-Lehman. Revenues had already started to stall at McGrigors and PEP was some way off its 2008 peak of £324,000 in 2011 – so logic would suggest it partnered up before the recession really took hold.

But for two firms that were once at the pinnacle of the Scottish legal market, it is still definitively unclear whether the mergers have ultimately worked. While partners will point to profits that are higher than they ever were (CMS profit per equity partner £469,000; Pinsents £538,000) it is difficult to measure clearly what the Scottish contribution is to these global giants. A nuanced take is that Dundas and McGrigors, the once dominant icons of the Scots legal profession, have slotted effectively into UK-driven practices… which has left an even clearer market position for the elite independents that remain. After a period of upheaval, the Scots legal market has settled into a very different shape to a decade ago. Of course, the notion of a Scots-based national practice is now dead and buried. LB

kathryn.mccann@legalease.co.uk