Global 100 – The top table

A strong economic downturn means that the stars of global law are shining ever brighter. Time to reassess just who makes the grade

The world has changed and the Global Elite needs to reflect that. To butcher a phrase: the gap between the haves and the have-a-bits is widening. By almost every measure this elite group of firms is moving ahead. The average net income at a Global Elite firm is $545.5m compared to $291.6m for the whole Global 100 – the gap in profit per equity partner (PEP) is no less marked, with the Global 100 average PEP sitting at $1.4m compared to $2.3m for the Elite firms.

Now in its ninth year, the Global Elite was set up to identify the key players on the world stage in terms of practice quality, client quality, profitability and coverage. Last year it became clear that the changing market meant the bar had to be raised even higher to merit inclusion in the exclusive club. A reassessment of all the firms’ qualities led to the removal of Sidley Austin. This year two firms are out – White & Case and Shearman & Sterling – taking the Global Elite to 15, the same size it was when LB originally formed the groupings in 2003.

There has also been a reshuffling of the group to reflect the differing strengths of the domestic elite firms such as Slaughter and May and Cravath, Swaine & Moore and the slightly more internationally focused Sullivan & Cromwell. The Global Elite has never, and will never, be set in stone; it evolves as firms do.

‘The elite law firms are those that provide unparalleled client service across key practices and geographies,’ argues Eric Friedman, executive partner at Skadden, Arps, Slate, Meagher & Flom. ‘In addition to excellent legal advice, they are able to demonstrate a true understanding of clients’ business challenges.’

Testing times

When White & Case joined the Elite in 2007 it was praised for the sheer breadth and depth of its global reach. ‘White & Case joins the band in recognition of the quality of lawyering it can bring to bear from Vietnam to the Czech Republic, from project finance and banking to international arbitration and M&A,’ wrote LB at the time. The firm still has impressive reach but something somewhere is not working.

In 2007 its PEP stood at $1.44m and its five-year compound annual growth rate (CAGR) for net income was at 16% – net income that year stood at $420.6m. These were seen as compelling reasons to include the firm. Its inclusion was based on the expectation that the firm would build on this but the plain fact is White & Case remains in exactly the same place in 2011. The firm’s business has lagged partly because it was left exposed to the effects of the global financial crisis, but also because of four or five years of internal wrangling that led to a procession of key partner departures across the firm.

Although White & Case is now in a better place than it was, at times it feels like a firm that has been cowed by the events of the past few years. In 2010 the firm’s PEP was $1.5m, marking a 7% rise on the year before. This is off the back of a shrinking equity partnership, which fell 12% from 311 in 2009 to 274 last year.

Its profit per lawyer (PPL) is just $213,000, putting it below most of its US rivals but just above Clifford Chance and Herbert Smith. The firm’s five-year revenue CAGR is a relatively respectable 4% but that number has been slowing for some time. Put into the mix its net income, at $418.6m, and the firm is straggling behind the average of the potent group of firms, which collectively stands at $786.9m.

What puzzles about the firm is that this should be its market – its coverage in emerging markets allied to its strengths in projects and energy and natural resources should play into its hands. The firm’s capital markets prowess, again in Eastern Europe, is arguably one of the strongest of the international firms. The issue for White & Case is that it has lost ground in both New York and London, while it does not boast a market-leading M&A practice on either side of the Atlantic. A year or two more in recovery mode should see the firm improve profitability levels and another four-year term for the current chair Hugh Verrier will keep the firm on an even keel. Management cannot accept the prospect of another year of declining revenues.

Gradual decline

Shearman’s removal is less clear cut; at market level the sheen has come off its once gleaming Wall Street M&A practice and its global brand has lost some of its cache. This isn’t the sort of decline that can be picked up from one year to the next. It is rather a more protracted slide away from the top of the market. As one managing partner of a Magic Circle firm told LB: ‘Five years ago they were undoubtedly among the top firms out there. They just aren’t anywhere right now.’

There are obvious areas of excellence – M&A has gained ground in London in part thanks to its leading Abu Dhabi practice and the rainmaking skills of European managing partner, Creighton Condon. The firm’s Germany practice remains a top-drawer outfit with its team of senior corporate partners. However, admittedly against a backdrop of falling M&A values (see box, ‘Corporate kings: 2010 a year of M&A deals for the Global Elite’, page 84) among the entire Global Elite, according to data provided by Bloomberg, Shearman advised on deals with an aggregate value of $130.6bn in 2010, marking a 40% drop year on year. The firm did at least increase volume by 17% to 155 deals for the year.

Shearman’s case is also not helped by its financial performance. Net income has grown by just $47m since 2003 and now stands at $288m, which is some way behind the average of the patient group of firms, and shows the lack of absolute growth in headcount terms. In 2003 the firm-wide headcount was 1,089 but the latest figures have it at 795. The average PEP of its peers in the patient group sits at $2.4m while Shearman languishes at $1.6m. By no means the lowest but compared to its Wall Street peers, it is behind the curve.

Added to that, the firm’s revenue dropped by 8% to $737m in 2010, marginally ahead of its 2003 revenues of $700m. Its five-year CAGR is at -2%, meaning the writing has been on the wall for a while. Further investment is needed in Asia and Europe to maintain its global standing let alone grow. Management seems to recognise this and recent plays in Brussels and a foray into Hong Kong law bear this out. Shearman’s senior partner Rohan Weerasinghe expects revenue growth to return in 2011 and maintains that: ‘Giving clients an integrated global model is a distinction for us and only a handful of firms can really do it well enough.’

Decreasing circles

If the Global Elite was selected on profitability alone then neither Herbert Smith nor Clifford Chance would make the list. The former in particular looks slightly out of place in the patient group now that Shearman has gone. Herbert Smith’s net income is $181m – by some way the lowest of the group, while its PPL is at $134,000, quite some distance behind the newly merged Hogan Lovells ($221,000). The large City firm also runs the lowest profit margin of any firm in the Elite at 25%.

Herbies’ management, first under senior partner David Gold and now his successor Jonathan Scott, has publicly stated that it wants to improve profitability but on this evidence little has been achieved. Why keep the firm in? In the corporate arena, it is one of the most improved City practices of the past five years, helped a great deal by an exposure to the emerging markets that few can match. Last year’s deal sheet alone includes significant matters for Bharti Airtel, BSkyB, Harrods Group, Arriva and EDF Group. Its relationships with the financial institutions have come on dramatically in the last five years. The past year saw the firm act for the banks on Prudential’s dual primary listing on the Hong Kong Stock Exchange and secondary listing on the Singapore Stock Exchange. The firm also landed a role on National Grid’s £3.3bn rights issue.

Its litigation practice may not enjoy the same edge over rivals that it once did but it’s still a formidable contentious group, and the firm has a genuine balance between transactional and disputes, which is rare outside of the US. The firm’s most pressing strategic concern remains its alliance with Gleiss Lutz and Stibbe – if all three firms were to come under one name this would turn Herbert Smith into a truly Global Elite force. However, unless profitability improves, Herbert Smith’s position among this rarefied group will surely come into question.

Elsewhere in the Global Elite there have been some other significant changes. To reflect a shuffling of the world order, it needs to be recognised that the domestic elite must now stand on its own. Therefore Slaughter and May, Wachtell, Lipton, Rosen & Katz, Davis Polk & Wardwell and Cravath now make up the prudent group.

With an average PEP of $3m among the four firms and an average PPL of $709,000, each of these practices are leaders in their respective markets and have chosen to keep the bulk of their lawyers in their home territory. On the US side, all the firms, aside from Wachtell, have a nominal UK presence but none practise local law.

The distinction also needs to be made that Sullivan & Cromwell’s and Simpson Thacher & Bartlett’s international presence has grown in recent years. For this reason, they’ve moved from the prudent into the patient group. Both fit more conveniently into the group in terms of revenue and profitability.

Simpson Thacher will never be a firm looking to open a network across Europe. But the addition of former CC heavyweights Adam Signy and Jason Glover, to go with its existing finance team in London, has significantly changed its standing in the City. Add to this the opening of a Hong Kong law practice and an office in São Paulo and Simpson Thacher is demonstrating that, like its stablemates Cleary Gottlieb Steen & Hamilton and Weil, Gotshal & Manges, it has strength, if not depth, in some of the key financial centres around the world.

‘The elite law firms are those that provide unparalleled client service across key practices and geographies.’
Eric Friedman, Skadden

The patient group sits nicely in between the potent and prudent – its average net income is $424m, some way behind the international giants but ahead of the domestic elite. Sullivan & Cromwell boasts the highest PPL within the patient group at $719,000. The second highest is Simpson Thacher at $577,000.

The group’s top performer this year in revenue growth is Cleary, which has had the best year out of all the Elite with a 9% spike in fee income to $1.05bn. With a new Hong Kong law capability, an office due to open in São Paulo and the usual diet of global mandates, including Petrobras’s $70bn share offering, it’s been quite a year for the US outfit.

Cleary has in many ways the same international DNA as the global behemoths in the group we like to call potent. Its equity capital markets group, for instance, is one of the most formidable worldwide. Where it doesn’t compare with the potent firms is in terms of scale. The potent firms aren’t judged simply on the number of lawyers they have but we do recognise that they are Elite practices that can provide depth that those in the prudent and patient groups can’t match. With the largest turnover of the Elite, this group’s average net income also dwarfs the other two groups at $783m. But for this group, due to their exposure to every whim of the international markets, top line growth has not been easy to come by.

Of the group, only Latham & Watkins and Allen & Overy increased revenues significantly, both by 6%, the former to $1.9bn and the latter to $1.7bn. Linklaters grew revenue by just 1% to $1.87bn. In dollar terms Freshfields’ net income dropped by 8% to $849m, the hardest fall in the Global Elite. The firm’s net income though is still the third largest, with Skadden trumping it at $997.6m and Latham in second with $899m.

In profitability terms CC is the weakest of the group, with PPL at $194,000 – only slightly higher than Herbert Smith – and PEP at $1.5m. The global giant needs to balance its appetite for expansion with profitability. In the first six months of this year, the firm has opened offices in Qatar, entered the Australian market through a double-merger, and now it is looking closely at South Korea. Rumours continue to do the rounds of an imminent Morocco launch. The firm has certainly rediscovered its potent form.

Changing faces

While two come out, no firm has been chosen to replace either White & Case or Shearman & Sterling. Kirkland & Ellis could be a strong contender. The Chicago-based firm, which had an outstanding year, saw revenue jump 14% to $1.63bn. Its net income is currently at $861m, while its five-year net income CAGR is 15%. Even PPL stands at an impressive $617,000, hypothetically putting it third in the group.

Kirkland’s practice mix of market-leading litigation and restructuring groups, plus its strength in private equity makes its case fairly compelling but the firm still lacks a leading M&A practice in London or New York. Given its willingness to outbid almost all of its rivals in the lateral market that can be remedied. The 2009 hire of senior M&A partner David Fox from Skadden in New York was certainly a statement of clear intent.

Paul, Weiss, Rifkind, Wharton & Garrison had another spectacular year in litigation and is now setting its sights on becoming a leading corporate practice. If the firm gets that right, then its offering becomes pretty irresistible. Debevoise & Plimpton and Milbank Tweed Hadley & McCloy also deserve close consideration, particularly for their strengths in US litigation and finance respectively. But looking outside of their home territory, the two firms have not made enough progress in terms of quality or coverage.

The Global Elite is moving further away from the rest of the market. Gaining entry into the group is getting tougher as the market moves on from the spectre of the global financial crisis. The door is by no means shut to those who have been removed or to those aiming to make an entrance but the reasons have to be compelling. Can anyone upset the apple cart? LB