It’s been a bumpy ride for many of the UK’s largest firms, fighting battered profits with consolidation and increased global expansion. Welcome to the Legal Business 100, where headline revenue increases hide a tougher reality
When the UK’s 62nd largest law firm by revenue is suddenly wiped off the face of the earth, despite posting a 2% revenue increase in 2011/12, you’d expect a little nervousness within the profession. Cobbetts, which went into administration in March, posted a profit per equity partner (PEP) increase of 16% in its last-ever LB100 appearance, something that many of the firms occupying the list today would gladly take. But, as it would turn out – as has been the case ever since the 2008 collapse of Lehman Brothers – when it comes to law firm financials, all is not what it seems. And, as the demise of Halliwells proved in 2010, it takes more than the collapse of a regional stalwart to seriously unhinge the market.
Taken at face value, revenue growth in the UK legal market feeds the tentative hope that the country is on its way out of the post-recession doldrums. Or, depending on your viewpoint, gives rise to disbelief as to how the legal sector manages to consistently outperform many sectors of the economy. In total, the top 100 UK law firms have increased revenue by 8% up to £19.1bn this year. But, as with last year, the top-line figures flatter to deceive.
Although not as dramatic as the merger-fuelled 17% growth the UK legal market saw at the end of 2011/12, the counter-cyclical increase suggests a sector that is making money hand over fist. Total profits are up 8%, standing at £5.8bn after breaking the £5bn barrier last year.
But while total revenues are up across the board, the number of lawyers enjoying that revenue growth has risen disproportionately by 10% to 61,299. Despite many UK firms being dogged by more internal cutbacks and a swathe of new redundancy programmes being announced in 2013, international mergers at a number of top-ranking firms over the last year have swelled headcounts, distorting real market growth. The top 25 in particular has seen exaggerated headcount and revenue increases with the emergence of new global giants Norton Rose Fulbright, Herbert Smith Freehills (HSF) and Dentons. Then there is the highly acquisitive DWF, which consumed the largest part of Cobbetts’ business (as well as taking on four other smaller firms in under two years) to launch a full-scale assault on the upper reaches of the LB100.
As such, a better barometer of performance comes from analysing revenue and profits on a per capita basis, looking at revenue per lawyer (RPL) and profit per lawyer (PPL). On these measures, the climate for the UK law firm is less benign: average RPL is down by 2% to £312,000, while PPL, likewise, has fallen by 2% to £95,000. PEP has dropped 4% to £622,000.
The upshot? While the LB100 continues to grow in headcount terms globally, the profession remains overstaffed and overlawyered at home. At Eversheds, which saw PPL dip by 23% due to a 36% leap in total lawyer headcount against a 3% increase in revenues, chief executive Bryan Hughes says: ‘If you look at some of the issues that the sector as a whole faces, the prime one is there are too many lawyers and too little work. The transactional work has declined dramatically on the corporate side as have the bigger real estate transactions. It’s not there – therefore [there are] too many lawyers.’
Of course, these days it’s not just diminishing UK work for which firms are having to fight tooth and nail. Size and breadth are a necessity in a market where hard-won (and then hard-kept) clients require legal capability robust enough to service their international business – hence the recent moves made in 2013 by Norton Rose joining forces with Fulbright & Jaworski; Salans, SNR Denton and Fraser Milner Casgrain merging to form Dentons; and SJ Berwin’s recently announced tie-up with King & Wood Mallesons. But while increasing global expansion of UK law firms is set to continue, reactive tie-ups due to economic uncertainty could begin to ease, according to Nabarro senior partner Graham Stedman, whose firm was briefly linked to merger discussions with top-25 firm Addleshaw Goddard earlier this year. ‘It’ll be interesting to see, if the economy begins to improve, what effect that has on consolidation and, if firms are feeling a bit stronger, whether they put consolidation to one side,’ he says. ‘Mergers happen for different reasons but if you’re in a low growth market, one way to increase your options is to merge, leveraging economies of scale and reducing overheads.’
It is also worth noting that from a client perspective, the fervent merger activity is of little consequence in the final analysis. ‘When you boil it all down, what really matters is the actual people you’re dealing with,’ says Liz Kelly, general counsel of Nationwide. ‘Some firms have different cultures to others, but it comes down to the people you have that face time with that matters. If a firm decides to move to a merger, then clearly you do have an issue, but I think there’s a lot of hype around this stuff and we need to just get back to basics and work out what’s really important – that’s not only being technically excellent but having great people with high emotional intelligence, and good influencing and interpersonal skills.’
‘What’s becoming apparent is that law firms will have to deploy flexibility towards the way they manage clients they never have before,’ says Tom Spencer, senior legal counsel at GlaxoSmithKline. ‘It comes down to those firms that don’t embrace that, who stick with tried and tested methods. [They] will ultimately be the ones that fail – I mean failure as in they’ll cease to be business operative.’
Case study: Freshfields Bruckhaus Deringer
After taking centre stage as principal legal adviser to the London 2012 Olympic and Paralympic Games last summer, it has been a welcome return to form for Freshfields Bruckhaus Deringer, moving up two places following a relatively fallow period, ahead of Magic Circle rival Linklaters. While this year’s revenue of £1.221bn is up just 4% from the £1.178bn the firm recorded five years ago, it does represent a 7% year-on-year improvement.
‘We benefit from our spread in transactional work, litigation, dispute resolution, antitrust and regulatory,’ says chief executive Ted Burke. ‘Although we haven’t expanded geographically, we have invested a lot in our global disputes practice and we have particularly grown in the US. Clients have a need for investigation and compliance advice.’
The expansion in the US includes the hire of the former acting head of the criminal division at the Department of Justice (DoJ), Matthew Friedrich, to bolster its US white-collar practice from US litigation leader Boies, Schiller & Flexner.
Profits are also moving in the right direction: profit per equity partner (PEP) is up 8% to £1,398,000 and close to the £1,434,000 equity partners enjoyed in 2007/08, although equity partner numbers are down around 5% on last year. Profit per lawyer (PPL) has remained static at £235,000 despite a slight increase in total lawyer numbers, and this PPL is the third-highest in the entire LB100 behind Slaughter and May and Sacker & Partners.
But the firm recognises it faces considerable challenges in regions outside of the UK, particularly in Asia and the US. London managing partner and corporate partner Mark Rawlinson says: ‘Asia is a challenge – there are law firms coming over from there. The US is also a challenge; we have grown our disputes side really well there but I think we need to do something on the corporate side as well. For the firm to continue to be successful, it will need to expand its businesses successfully in the US and Asia.’
In 2012, the firm reopened an office in Singapore, five years after shutting down its two-partner operation in April 2007 in a move to refocus its efforts on China and Japan. The new office came as part of the firm’s wider strategy to boost its offerings in Asia.
As ever, Freshfields features regularly on some of the biggest global mandates, not least advising Xstrata on the largest M&A deal of the year: its $70bn merger-of-equals with Glencore. The firm also demonstrated its versatility beyond M&A, advising the EU co-ordinator for the Hellenic Republic Asset Development Fund (HRADF), which is overseeing the Greek government’s €50bn capital raising programme to meet its bailout needs.
Other key deals for the firm include representing Pfleiderer, one of Europe’s largest wood-panel producers, on its restructuring under Germany’s brand-new insolvency rules, and acting for the Department for Transport on the Thameslink Rolling Stock Procurement Project – the largest, most ambitious and complex rail procurement to date valued at approximately £1.6bn.
In recent years the sense has grown that Freshfields is increasingly focused on just two peer groups and little else: its old sparring partner Linklaters and a select band of Wall Street competitors. As such it has pursued a leanly stripped down approach, eschewing the broad international expansion and ‘corporatisation’ seen in the upper reaches of the UK top 25. For the moment, its strategy is delivering.
Silent Elite
This year sees a change in the pecking order of the Magic Circle, with Freshfields Bruckhaus Deringer moving up to second place among the five elite firms, with a 7% increase in revenues up to £1.22bn from the previous financial year (see ‘Case study: Freshfields Bruckhaus Deringer’). This was by far and away the best year-on-year showing from London’s legal elite, in what was otherwise a very flat performance.
The combined revenue of the Magic Circle was barely up by 1% at £5.3bn, with total net profit flat at £2.15bn. With overall lawyer headcount across the five firms largely unchanged, RPL across the group stays flat at £473,000, as does PPL at £191,000. Average PEP, however, has edged up this year thanks to a 1% decrease in equity partner headcount across the five firms: PEP for 2012/13 stands at £1,212,000 against £1,200,000 last year – a difference of 1%.
While Freshfields is the star turn this year, the undoubted success story of the last five years has been Allen & Overy (A&O). Against last year’s 6% growth in revenue the firm came in slightly flat this year with revenues of £1.19bn, a 1% rise on the previous financial year, while its PEP fell by 1% to £1.05m. But in the last five years A&O has grown its turnover by 17%, some 11 percentage points higher than Slaughter and May. Both Linklaters and Clifford Chance (CC) have seen revenues slide over the last five years, by 7% and 4% respectively. According to A&O managing partner Wim Dejonghe, the outlook for the current financial year is healthy.
‘The firm reported a 2.7% drop in half-year revenues at the end of October 2012, but has seen activity pick up since the start of 2013,’ he says. ‘In the last few weeks, the global markets have gotten a little nervous again on the back of stock markets dropping and quantitative easing stopping, so the early signs of recovery have been shaken. But based on the initial months, we are confident we will have an encouraging year in terms of performance.’
The profitability of the Magic Circle remains materially higher than the rest of the LB100, with an average profit margin of 41%, compared to 30% across the LB100 as a whole. Slaughter and May’s margin of 47% is eclipsed only by that of über-profitable pensions boutique Sacker & Partners. The firm’s reputation for profitability is further illustrated by its PPL, which tops the entire LB100 at £305,000. But despite being the UK’s top M&A house, even Slaughters has had to evolve to changing market conditions.
LB100 total revenue and profits: the past ten years
LB100 headcounts: the past ten years
The division of wealth: 2003 and 2013
‘All firms have a degree of counter-cyclical hedging,’ says Paul Olney, practice partner at Slaughters. ‘Our avoidance of over specialisation perhaps enables us to redeploy our lawyers a little bit more easily than some. For example, a lot of our corporate lawyers (and not just junior lawyers) have been doing investigations work.’
CC remains the largest Magic Circle firm by revenue, despite posting a 2% fall in turnover to £1.27bn. PEP is down by 9%, falling below £1m to £983,000 – the lowest of London’s top law firms. Chief financial officer Stephen Purse puts this down to the firm’s exposure to continental Europe and the weak euro, which makes up for 37% of the firm’s revenues – £467m. UK revenues were flat on last year (see table ‘Which firms have the biggest UK business?’), at £443m, 35% of total revenue.
‘Given the slow transactional market, our corporate practice has had a difficult year. We still managed to make good progress against our strategic goals and won extra mandates, including advising EADS on the proposed merger with BAE and Shell on its acquisition [of Repsol’s LNG portfolio],’ says CC managing partner David Childs.
As the domestic market remains sluggish, firms continue to look further afield for profitable income. Nonetheless Simon Davies, managing partner of Linklaters, says: ‘There is no stronger firm in London [than Linklaters].’ Strange then that the firm refused to confirm UK revenues, although estimates suggest that they account for around £514m, or 43% of global turnover.
Overall, with virtually flat turnover of £1.195bn but an increase in PEP of 7% to £1.26m and PPL up 3% to £208,000, Linklaters has had a solid performance handling some of the largest mandates of last year, as well as winning Legal Business Corporate Team of the Year for advising longstanding client Glencore on its $70bn merger with mining giant Xstrata, which is reported to have attracted legal fees in the region of £18m.
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Linklaters has also seen US revenues exceed $100m. The firm opened an office in Washington DC in 2012 and bulked up its offering this May with the hire of Bingham McCutchen tax partners David Brockway and Jasper Howard. It also entered into an exclusive alliance with Australia’s Allens, which went live in February 2013, and this followed another alliance signed with South Africa’s Webber Wentzel that began in December of last year. Davies says that the firm has already gained 340 referrals due to these alliances, which may fill the gap left by the end of the firm’s relationships with Lefosse in Brazil and Allen & Gledhill in Singapore.
However, the big gamble for the Magic Circle, facing strong competition in home markets from increasingly expansive New York rivals, is whether to stick or twist: whether to continue to look for new markets or consolidate what they have. The post crunch trajectory of the ‘big four’ international firms strongly indicates that Freshfields and Linklaters have elected to pare back their offerings and network to focus relentlessly on premium work, while A&O and CC have continued on an expansionary path. ‘It’s important to bed down what you’ve got and make it work,’ says Davies.
‘We believe that we are the leading firm in Asia-Pacific and over the last few years we’ve grown stronger in the region,’ says Childs. ‘As well as being the first major firm to open in Seoul, we also achieved a more important step in Singapore in 2012 with our formal alliance [with litigation boutique Cavenagh Law] allowing us to practise Singapore litigation. There’s no doubt that Asia-Pacific is critical to our long-term business and you can expect us to make further investments in the region.’
But even firms in growth mode know that it would be folly to ignore their traditional markets. Despite A&O opening in Hanoi, Ho Chi Minh City and Istanbul in the last 12 months, Dejonghe says: ‘Our largest revenues are from our existing clients and Europe is the main market for our total revenues.’
Case study: Simmons & Simmons
With City rivals such as Ashurst, Herbert Smith Freehills and SJ Berwin making bold expansionist plays in recent years, Simmons & Simmons has found the market tough post-Lehman. But while the firm did not have a standout financial year in 2012/13, in a difficult market, broadly flat revenues and more importantly near static profitability looks a credible result in the context of the top 25. Revenues were down by less than 1% to £250.3m, while profit per equity partner (PEP) dropped by £4,000 to £525,000. Profit per lawyer (PPL) is down 5% against a 4% increase in total lawyer headcount but remains competitive at £81,000.
However, it is still a far cry from the firm’s performance five years ago. In 2007/08, Simmons recorded a turnover of £289.2m – 13% higher than now, while the average equity partner was £122,000 better off when PEP was £647,000.
The firm indicated signs of a revival in 2011/12, posting a revenue increase of 4% to £251.7m while its PEP soared by 18% to £529,000. Simmons has been in expansive mode during the last financial year, opening offices in Munich and Bristol together with a greenfield operation in Singapore in May. The firm has entered these markets focusing on its five key sectors – asset management, energy and infrastructure, financial institutions, life sciences and TMT.
The firm’s new Bristol base, opened in September 2012, is a way of offering clients London-standard lawyers at a reduced cost, although there were some teething problems. ‘Some people incorrectly thought we were competing in the local market, but it is not why the office was set up,’ says Colin Passmore, the firm’s senior partner. The firm has three partners based in the city, covering financial services and real estate, and recently hired funds specialist Mahrie Webb from Burges Salmon.
Simmons also made 29 lateral hires in 2012/13, making it one of the biggest lateral recruiters in the LB100, and was not among the throng of firms to engage in redundancy rounds this year. ‘One of the things I’ve been thrilled about is the calibre of the partners we can bring in, it’s a measure of our client base,’ says Passmore.
These hires include pensions partner Danny Tsang and employment partner Ian Fraser, who both came from K&L Gates in London in March. The firm also bulked up its China offering in 2012 with the appointment of Lesli Ligorner, who chaired the employment law and anti-corruption practices in China at Paul Hastings.
The firm’s strength in its hedge fund practice was given a boost last year by entering into an alliance with US firm Seward & Kissel. Not only does this give Simmons much needed US coverage, according to Passmore, it cements the firm’s position as having a world-leading hedge fund practice. Ranked tier one by The Legal 500 the practice has clients including Brevan Howard, BlueCrest, and Marshall Wace.
Looking ahead, Passmore says: ‘The challenges are to expand our offices in Asia, including integrating our new Singapore office, and grow our practices in Africa.’ The firm does most of its Africa work out of its Paris office, with partner Yves Baratte having a particular focus on Sub-Saharan Africa. The Singapore office should fit into Simmons’ network well, as its joint venture partner in Japan, TMI, already has offices in South-East Asian countries such as Myanmar.
Though the firm has in recent years been linked with abortive US merger discussions – current indications are that Simmons will go it alone in the short-to-medium term but not longer. In the meantime, management touts a highly-focused sector push and an increasingly disciplined approach to concentrating on Simmons’ chosen hunting ground.
Size is everything
Outside the Magic Circle, the remaining 20 of the top 25 firms in the LB100 are dominated by international behemoths.The top 25, excluding the Magic Circle firms, comprises 30,517 lawyers, with total revenues standing at £9.5bn and profits equalling £2.6bn. Overall, these 20 firms enjoyed 14% revenue growth on last year, by far the most significant increase of any group in the LB100 and the result of a wave of merger activity that has skewed the top-line figures of the LB100 as a whole. These 20 firms account for half of the revenue and half the headcount of the entire LB100 and, of those 20, almost half have been involved in transformative mergers in the last three years.
But an overall increase of 19% in lawyer headcount usually results in a reversal of profit growth and this is true of the group, although not by much. Across the group, average PEP decreased by 4% to £557,000 and PPL fell 3% to £85,000. However, the £106,000 gap in PPL between the Magic Circle and the rest of the top 25 would seem insurmountable.
Following the trail blazed by DLA Piper, Hogan Lovells and Squire Sanders, the last 12 months has witnessed the three-way marriage that created 2,400-lawyer Dentons in March. The new entity chose to announce combined financials despite being only a couple of months old, consisting of the 2012/13 results of the three legacy firms combined. The net result is broadly flat figures of £829.7m with PPL standing at £95,000 while PEP was £451,000.
HSF will celebrate its first birthday in October. While legacy firm Herbert Smith sat within the top ten firms last year, its combined offering with Australia’s Freehills has substantially narrowed the revenue gap between it and the top five firms, having increased revenue from £480m in 2011/12 (as solely Herbert Smith) to £796m this year. This is an extrapolated figure for the full 2012/13 financial year, as HSF itself decided to only announce financials for the post-merger period of October 2012 to April 2013.
Other firms will post even bigger revenue increases over the next two years as their global mergers start to bed down. Norton Rose has decided to wait until it has completed even part of a financial year before announcing combined financials following its union with Texas-based Fulbright & Jaworski in June that should increase its turnover to nearly $2bn. Norton Rose last year posted turnover of £845.3m, up 3%, placing it comfortably in the top ten UK firms before the merger. Add the roughly £370m that Fulbright recorded last year, and Norton Rose Fulbright should be in a position to split the hegemony of the Magic Circle in the top five next year.
How much have profits gone up or down by each year?
The success of the Magic Circle
Other firms likely to rise significantly within the upper quartile include SJ Berwin, which has just confirmed its union with Asia-Pacific giant King & Wood Mallesons in November.
As potentially a game-changing union, the deal is critical in securing the future of SJ Berwin, which fell two places in this year’s LB100 to come close to dropping out of the top 25. Although its revenue is up 2% to £184.6m year-on-year, this is a 14% drop since grossing £215m in 2008, while PPL and PEP have also seen sizeable decreases during that period – down 25% and 30% respectively. The City firm will now become part of an entity with combined revenues of over $1bn and 2,223 lawyers, including 553 partners, essentially boosting the firm into the top ten of the LB100 table next year.
Domestically, two firms have made major strides up the LB100 tables in 2012/13 – DWF, whose run of mergers throughout the UK, including the acquisition of the majority of the collapsed Cobbetts, has seen the firm increase revenues by 85% to £188.2m, and Pinsent Masons, which has increased revenues by 40% after acquiring McGrigors in Scotland last May.
Top-ten firm Hogan Lovells’ co-chief executive, David Harris, believes the joining of firms eases the pressure of working within a turbulent economy.
‘The consolidation in the market is generally giving clients greater choice, leading to increased competition,’ he says. ‘And the economy has also been challenging of course. We have found that the balance of our practice areas and geographic reach result in us being less susceptible to economic fluctuations in markets and variations in transactional workflow.’
He adds: ‘I would expect to see further consolidation in the industry, as we are seeing in most sectors – some in order to compete effectively, others simply to survive. Firms are developing their geographic reach, scale and depth in response to increased client demands from globalisation.’
However, CMS Cameron McKenna senior partner Dick Tyler says: ‘Consolidation has been international. It’s a shrinking market. The benefit of merging with another UK firm may simply be to take a competitor out of the market. Reactive mergers are even harder to pull off. Clients will see a merger for what it is. For a firm to throw itself into bed with another – there has to be a lot of magic to it.’
Appetite for growth this year has also contrasted with financial turmoil endured by others. Berwin Leighton Paisner (BLP), which completed its major UK merger over a decade ago, dropped two places in this year’s LB100 to 19th, posted a 5% drop in revenue to £233m although turnover has grown since 2008. More worrying is an emphatic 35% fall in profits, by some way the worst performance in the top 25. (In fact, the firm for the first time refused to confirm its profit figures.) The City firm also embarked on a redundancy consultation that cut 102 jobs placed under review in May, with 58 legal staff and 44 secretarial jobs being lost.
BLP wasn’t the only top 25 firm to announce layoffs – DLA Piper, Taylor Wessing, DWF, Eversheds and Clyde & Co all announced consultations of their own. Taylor Wessing, despite a 7% revenue boost to £228m, confirmed 22 secretary job losses, while DWF, having to take stock after the acquisition trail that led to a remarkable 85% increase in turnover, had a net reduction of 38 roles across its practice groups. Eversheds confirmed in May that 116 staff would be made redundant across the firm after a redundancy consultation that placed 166 jobs at risk, including 82 fee-earners, at the beginning of the year. This was the UK law firm’s sixth redundancy round since 2007. Clyde & Co, which produced a healthy 17% rise in turnover to £336.6m – one of the strongest in the LB100 – also cut eight support staff from its roster after a consultation earlier in the year.
BLP managing partner Neville Eisenberg is emphatic, however, that recent tough times will not make the firm consider a union like so many of its peer group.
‘We are not considering a merger such as the KWM merger because we are pursuing a different strategy. We have been through a difficult period of addressing our cost base including a redundancy programme, which is now over and we are now focused on the future.’
Fine sentiments, but BLP is operating in a turbulent, competitive and fluid section of the legal market. While many law firm leaders note a modest upturn in confidence since the spring, few expect a rapid change in underlying trading conditions to rescue struggling firms. In this environment, a couple of years of poor performance is all it takes to leave firms twisting in the wind. LB
Distribution of lawyers by region