Sum of its parts: can King & Wood Mallesons match the hype?

After a promising first year for King & Wood Mallesons/SJ Berwin, its UK practice saw a bruising 12 months. Tom Moore reports on its efforts to regain the initiative.

The first 12 months of SJ Berwin’s merger with King & Wood Mallesons (KWM) seemed plain sailing. The expected fallout that often occurs after such a transformative merger hadn’t materialised, with just a handful of partner exits amounting to no more than the average churn at a big law firm. The partnership was supportive of the merger, which went live in November 2013. There were few abstentions and disputes partner Tim Taylor QC even starred in a high-energy dance routine in a Dubai swimming pool to celebrate the merger, becoming a minor viral hit in the process.

But the honeymoon is over. The past year has seen a succession of senior exits in the City that have hurt the Hong Kong-based giant’s bottom line. High-billing private equity (PE) partners Steven Davis, Tim Wright and Richard Lever were among the ten partner departures in London over the past year, with London litigation head Alex Leitch also exiting.

Current and former partners talk about the lack of referral work across the firm, particularly from China to the UK, and a failure to recapture pre-financial crisis levels of profitability as dealbreakers for some high-profile exits. Profit per equity partner in KWM’s European and Middle East business fell to £440,000 at the end of the 2013/14 financial year, almost half of what legacy SJ Berwin partners were drawing in before the financial crisis, and less than partners at Scottish firms Brodies and Burness Paull. Although this recovered by 39% to £610,000 in the last financial year, the impact of this drop, combined with aggressive hiring by US firms in the City and the waning loyalty of the London partnership following its absorption into a global legal giant, has seen a steady stream of high-profile London partners leave.

Two years on, senior partner Stephen Kon and global managing partner Stuart Fuller talk at length about the need to kick-on and fully integrate the Asian and European businesses, both functionally and financially, for the firm to challenge the global elite. But there are structural and operational issues to address before presenting the firm as a cohesive unit.

One recently departed partner says: ‘There was a lot of enthusiasm as, superficially, the merger looks like a really good idea. It wasn’t forced down anyone’s throat, but the problem was in the detail. When you don’t share profit, it’s not really a merger. People have now realised that the concept is flawed. It’s not truly merged so it’s not in the interests of Chinese partners to maximise billings for London. When you see people regarded as relevant to the organisation leaving, it’s not a great sign. They’ve lost an ex-head of corporate, an existing co-head of corporate and head of litigation. That’s a lot in 12 months.’

King & Wood Mallesons in Europe: in numbers

Firm	Year	Revenue	PEP
King & Wood Mallesons Europe/Middle East	2014/15	£191m	£610,000
King & Wood Mallesons Europe/Middle East	2013/14	£178.5m	£440,000
SJ Berwin	2012/13	£184.6m	£563,000
SJ Berwin	2011/12	£180.1m	£635,000
SJ Berwin	2010/11	£179m	£630,000
SJ Berwin	2009/10	£171m	£443,000
SJ Berwin	2008/09	£184m	£410,000
SJ Berwin	2007/08	£215m	£802,000

Sense of loss

Senior figures at KWM in London concede the exits of Leitch, who departed for Covington & Burling in March, and Lever, who stepped down as co-head of corporate to join Goodwin Procter in April, were serious blows as they were big billers and seen as long-term practice leaders. The departure of PE duo Davis, who Lever had replaced as co-head of corporate, and Wright in 2014 to Proskauer Rose and DLA Piper respectively also came as big knocks as the experienced pair were two of the most productive partners in London.

Wright, Lever and Davis controlled swathes of client relationships in the PE sector and debt finance partner Simon Fulbrook’s decision to join Lever at Goodwin Procter came as another reverse to what was once an envied practice. Clients have shifted work as a result, with Lion Capital, Duke Street Capital, Lime Rock Partners and European Capital all following these partners to their new homes and reducing their reliance on KWM’s London office.

‘It’s not a credible PE team anymore. It just isn’t there and it’s very sad,’ argues one former partner.

Unfortunately, it would appear that SJ Berwin’s unsuccessful pursuit of a US merger in 2010 has come back to bite as US rivals in the City building PE mass in the last two years have found asset-stripping the Sino-Australian-Anglo giant relatively easy.

The response, says Kon, is to set aside investment for five corporate hires before the end of the year. While KWM is less reliant on PE in Europe than SJ Berwin was – with Eversheds’ former head of real estate William Naunton arriving as part of a recruitment drive that has seen six real estate laterals arrive in the past two years – the firm is prioritising rebuilding its corporate offering in the City. One move in that direction was the hire of Fried, Frank, Harris, Shriver & Jacobson City PE partner Laura Brunnen in July.

Kon says: ‘Our biggest priority is to renew that corporate group, focusing on our sector strengths and renewing our PE deals team. We have a very clear goal, which is that we want to recruit five new partners to our corporate M&A space, with at least a couple of those being senior leaders. Five is not a limit, it’s a target.’

Kon has the backing of Fuller, who adds: ‘London corporate and London PE are core to the firm, always have been and always will be, so the global firm is supportive of that and there is strategic intent.’

Managing momentum

While those departures have damaged the firm, it has brought more partners in than it has lost in London since January 2014 (see box, ‘Revolving doors’, page 19) and not all the partner exits this year were unexpected and unplanned. Managed exits as part of a three-pronged restructuring of the legacy SJ Berwin practice, while disruptive in the short term, could prove transformative. The plan, put forward by Kon in October 2014 – when KWM jettisoned SJ Berwin from the combined firm’s name – was much needed but destabilised the partnership at a time when US rivals were circling its PE and funds teams.

Kon had just been re-elected for a three-year term, with then [KWM SJB] managing partner Rob Day stepping down from his post. William Boss, who was confirmed as Day’s successor but didn’t take up the post until the start of 2015, says: ‘Stephen had just signed up to another three years as senior partner and that had given him fresh impetus. In my first board meeting in October [before taking over the post in January], Stephen presented three key projects to be delivered within the next six months, around governance, strategy and partner expectations. I started the role halfway through those projects so, although typically with taking on a big role you have your own 100-day plan, we already had major projects in action so my focus was on implementation.’

The first of those to be executed was a change to the partnership deed of the Europe and Middle East verein to incorporate aspects of legacy Mallesons Stephen Jaques’ deed in Australia. With 85% of the partnership in Europe and the Middle East voting in favour of Kon’s changes to the partnership deed, surpassing the 75% required to push ahead with the plans, KWM’s senior partner had the backing to make changes the partnership believe will add rigour, drive and accountability to management.

‘As with all law firms, the market has changed and competitor tensions have changed too, so we can’t just bury our heads in the sand and not do anything,’ says Kon.

He adds: ‘We looked at all aspects of our firm, looking at both the structure of the partnership and realignment of the partnership deed so that we could modernise a deed that originates back in 1982. There are a number of innovations, which fall quite heavily from the Australian deed, but we didn’t slavishly copy the Hong Kong or the Australian deed and just apply it here. We looked at them and the journey to global integration ongoing within the business and what made sense for the region.’

The changes completed in July made it easier to manage-out underperforming partners, which has led to a full review of the firm’s 165-strong partnership in Europe and the Middle East. Up to 10% of the partnership is expected to be managed out, with the process expected to be completed by April 2016.

This restructuring will help to push up profitability and reassure high-billing partners that bigger drawings are imminent. One ex-partner says: ‘The reality is that it happens in all businesses and Berwins has had far too many people underperforming for far too long.’

The changes to the deed are also described as a ‘warning shot’ by Boss to underperforming partners. The most practical change came in the form of reduced notice periods for partners that resign or are asked to leave. Partners who leave by their own volition had their notice period reduced from six to three months, with underperforming partners being managed out having their notice period reduced from a year to six months. The consensus among the KWM partnership is that this change was much needed, as ‘those leaving would just sit around doing nothing and people felt it would be better for them to just go’.

For Boss, the changes that allowed for the partnership review to take place endeared him to the younger generation of partners, who had felt that the firm’s previous managing partner Rob Day had been too lenient on underperforming lawyers and not done enough to boost profitability. One ex-partner says: ‘It worked well when things were going smoothly, but when things were going badly Day wasn’t the right man. How it usually works is that the senior partner represents the old guard and the managing partner represents the next generation. Rob was not seen as having thought about the future of the firm enough. William is firmer in his approach and has already carried out a restructuring. He wanted to send a message to the less-productive partners that it would be easier to get rid of them.’

One unintended consequence, however, was that the shorter notice period also made it easier for the firm’s best partners to exit too. As one ex-partner says: ‘With many of the firm’s London rivals circling its top talent, the shortened notice periods made it a lot easier for those the firm didn’t want to leave to jump.’

Revolving doors: 2014-15 London laterals

IN:

Campbell Forsyth	2014	Olswang	Intellectual property
Andrei Yakovlev	2014	Winston & Strawn	Litigation
Ian Hargreaves	2014	Addleshaw Goddard	Litigation
William Naunton	2014	Eversheds	Real estate
Clive Jones	2014	Eversheds	Real estate
Cornelius Medvei	2014	Eversheds	Real estate
James Douglass	2015	Linklaters	Energy and infrastructure
Ian Wood	2015	DLA Piper	Energy and infrastructure
James Walsh	2015	Eversheds	Commerce and technology
Simon Burson	2015	Eversheds	Real estate
George Burrha	2015	Eversheds	Real estate
Jeremy Brooks	2015	Eversheds	Real estate
Laura Brunnen	2015	Fried, Frank, Harris, Shriver & Jacobson	Corporate
Adrian Brown	2015	Nabarro	Financial regulation

OUT:

Nick Brocklesby	2014	Reed Smith	Litigation
Tim Wright	2014	DLA Piper	Corporate
Steven Davis	2014	Proskauer Rose	Corporate
Robert Guthrie	2014	Osborne Clarke	Intellectual property
Alex Leitch	2015	Covington & Burling	Litigation
Richard Lever	2015	Goodwin Procter	Corporate
Duncan Woollard	2015	Paul Hastings	Funds
Ray Black	2015	Mishcon de Reya	Intellectual property
Gregg Beechey	2015	Fried, Frank, Harris, Shriver & Jacobson	Financial regulation
Simon Fulbrook	2015	Goodwin Procter	Finance
Chris Fanner	2015	N/A	Finance
Giles Bavister	2015	K&L Gates	Tax

Making ground

KWM is now applying more rigour to assessing its partnership and tackling its cost base, with space sublet at the firm’s offices in London, Paris and Frankfurt in the past 18 months. Importantly, programmes have been put in place with the aim of boosting the amount of work flowing between Asia and Europe. To date, many partners feel that there simply hasn’t been enough return from Asia to justify the combination and concerns over the economic volatility in China this year will only exacerbate this issue.

The recent economic downturn in China and its stock market crash knocked the FTSE 100 index down from just over 7,000 points this year to little above 6,000 in early September. While global economic health and cross-border transactions have been aroused by China’s consistently robust fiscal performance, the world cannot dissociate itself from China’s setbacks. While the flow of Asian money into Europe has had a perceptibly positive effect on the European real estate practice, it has yet to materialise in corporate transactional work. Furthermore, outbound Chinese corporate work is typically characterised by low fees, making it difficult for firms to make decent margins.

But Fuller says: ‘All of these things affect client confidence; there’s no doubt about that. The freeze on some IPOs can have a business impact for us as we have a big securities practice. That’s the one more likely impact in the short term. Real estate, corporate, infrastructure and litigation haven’t seen any change in workloads or client attitudes.’

Global management has also rolled out a plan to get marquee clients through the door with low fees to boost its cross-border corporate practice and hopefully build long-term relationships. Fuller says KWM has adjusted its remuneration system to incentivise referrals across the firm to support this. ‘Even if we need to bid a low price to get a deal, we will do it to grow our deal book,’ he says. ‘What we do is give partners financial credit for the difference. We’re a relatively new firm so we need to build the brand and build the recognition and profile as well as react to our competitors. We make a strategic decision to say this is the type of deal we’re prepared to invest in and, frankly, support the partners to do it in the best way without having a consequence to themselves.’

There is an irony, in London at least, that KWM has to resort to low-balling to ‘build the brand’ when the SJ Berwin name was once so strong in the City for funds and buyout work.

One funds veteran derides the quick move to ditch the SJ Berwin name following the merger: ‘It used to be that you couldn’t sponsor a private equity conference because SJ Berwin had booked it up. You get these clients who don’t know who King & Wood Mallesons are. Why would you ditch a brand you spent so much building?’

Big spenders

Matching the drive by the largest UK-based firms to break their locksteps to retain and attract talent, KWM has established a new remuneration pot that allows the firm to pay above local rates. The scheme, which was introduced in February without the need for a vote, has no upper limit in terms of packages offered but will only be available to incoming partners. While a limit has been placed on the number of so-called ‘global partners’ that can be hired into any of KWM’s 30 offices, the move means the firm can pay more than double the top of its equity in London. Currently, the Europe and Middle East verein employs a 20-60 points ladder with a large bonus element, which has in recent years topped out at around £1m annually.

Tellingly, Kon confirms that the global partner role will allow KWM to match the remuneration packages that other firms have paid to take corporate partners away – around £2m.

Fuller comments: ‘This gives us the flexibility to compete. Where it’s a global firm priority about recruitment and the compensation is higher than the top of our lockstep, the global partner concept in KWM allows the firm to meet the market. The global firm is saying: “This is how we want to play and we want top talent.” It is deliberately very flexible as the markets are quite flexible.’

This bold move will be a new concept to legacy SJ Berwin partners, with the firm only breaking lockstep once in its last decade of trading to bring in former Asia head Daniel Liew. The move was never repeated and Liew left for SNR Denton in 2011.

Another former partner comments: ‘It’s a bizarre concept. Frankly, why would someone that big a biller want to go to KWM? It sounds desperate and will cause considerable internal dissention. You’ve got some seriously big egos, like in any firm, and they won’t like that at all.’

But higher remuneration is probably needed if KWM is to compete for City corporate and funds work. Heavyweight laterals will help, but in a firm with 2,400 lawyers, only meaningful integration will yield the results first expected by SJ Berwin partners on wholeheartedly agreeing to the merger. Verein firms have generally struggled or been reluctant to truly integrate their different platforms, but KWM and its management are determined to succeed where others are failing.

Fuller, who has wide support across the KWM partnership, concludes: ‘The question now is over what timeframe we achieve full integration, and that means full functional and financial integration, and that drives everything that we do. You improve the value of the merger from more cross-border work. I don’t know if it will be x years or y years, but we will achieve it within ten years.’ LB

tom.moore@legalease.co.uk