As the banking crisis and collapse of Dewey fade from memory, a band of emerging giants continue their long-term push into the once impenetrable New York market. Legal Business asks if the Wall Street elite can hold out
January 2014 marked the 100th ‘birthday’ of ‘Mother Merrill’, the affectionate nickname given to New York finance house Merrill Lynch thanks to its reputation for training and taking care of its staff. That name had particular significance for Wall Street lawyers, in view of the avalanche of work the institution bestowed on its favoured local law firms.
Manhattan’s world famous banking groups have long been the best friend and most formidable defence to the city’s law firms, given their historic loyalty to their local advisers in Wall Street or Midtown, even when such banks went global in the 1980s and 1990s.
But while that loyalty has largely withstood five years of turmoil in the world economy and the substantive shifts in New York’s position as a global finance hub in the last 15 years, much has changed, even in the self-defining culture of Manhattan, as underlined by the forced 2008 acquisition of Merrill by the North Carolina-based Bank of America.
The legal industry, of course, has seen its own ‘nationalisation’, with large out-of-town law firms continuing their decades-long push into New York, most prominently and successfully in the case of Latham & Watkins and Kirkland & Ellis, twin giants with respective roots in Los Angeles and Chicago.
But then consensus on the direction of New York’s legal market is elusive. On one hand, the tight-knit Manhattan community is facing an economy in which its overwhelming dominance as the world’s top global finance centre has faded in a multi-polar world. Meanwhile, more demanding clients are taking a harder line on fees and the city’s Dewey & LeBoeuf spectacularly became by far the largest law firm collapse in history less than two years ago. Obituaries proclaiming the decline and likely fall of the classic, whiteshoe law firm have become commonplace across the pages of The New York Times, The Wall Street Journal and the major US business news wires.
Such attitudes have largely failed to convince Wall Street lawyers themselves, who remain generally dismissive of the Dewey sideshow and the industry practices it took to shocking extremes. Indeed, the worship of the star system that was such a feature of Dewey’s excesses has become more pronounced over the last decade, as Wall Street firms focus even more on retaining, rewarding and hiring a select band of rainmakers.
There is nothing new about this – the trend in the US legal industry towards paying star partners for bringing in business has been evident since at least the 1970s, at the time when the rise of Wachtell, Lipton, Rosen & Katz and Skadden, Arps, Slate, Meagher & Flom and then the 1980s’ wave of buccaneering corporate takeovers shook up Manhattan’s clubby legal establishment.
And in many regards, the rejection of the standard BigLaw critique is understandable. The decline of these firms has been falsely proclaimed so many times before. More to the point, the US has outperformed other developed economies, corporate and consumer debt is well down on the boom period and the shale gas revolution has provided a huge boost to the world’s largest economy.
Leading New York firms have also been buoyed by robust levels of disputes and regulatory work; Manhattan’s traditional elite has done fine in relative terms. Some, among them Sullivan & Cromwell, Davis Polk & Wardwell and Cleary Gottlieb Steen & Hamilton, have done a lot better than fine, continuing to plot their own course while shifting with assurance to meet the changing landscape in the upper reaches of global law.
Joseph Shenker, chair of Sullivan & Cromwell, articulates that more progressive view of the market: ‘I don’t think about New York, I think about business globally.’
Cleary Gottlieb Steen & Hamilton managing partner Mark Leddy, likewise, argues that the global viewpoint his firm pioneered is becoming mainstream at leading local practices. ‘If you are purely a domestic firm you’re not going to attract the top law school graduates that want to work in a global environment. More and more of the most gifted students want to work in a firm that has exposure to international clients and want the opportunity to work in other cultures. Over the long run, that phenomenon will affect the quality of lawyers that domestic-only firms can attract.’
But if Fortress New York is no longer as self-contained or as impenetrable as it once was, only a select band of its law firms look likely to be dominant global players in the decades ahead.
In the city: the Magic Circle
The struggle to make inroads in New York by four of the UK’s global elite – Clifford Chance (CC), Freshfields Bruckhaus Deringer, Linklaters and Allen & Overy (A&O) – has been long documented. Having first tried to move seriously into local law in the late 1990s, their ambitions have often floundered amid cultural barriers, the problem of lower profitability, lockstep partnerships falling short of Manhattan rainmakers’ expectations and, in recent years, the sharp fall in sterling further eroding their buying power.
Most significant was the fallout from CC’s ill-fated 2000 takeover of New York mid-tier Rogers & Wells, a legacy the City firm spent at least a decade trying to overcome. The Rogers & Wells takeover struggled in part because it had different strengths from CC’s finance-heavy practice and because it paid its rainmakers well above the top of CC’s equity ladder. Despite divisively offering ‘super-point’ deals to a handful of big billers at the time, many left in the wake of the merger. The US practice was also hit in 2008 by departures and the following year by a firm-wide restructuring.
With more than 400 US lawyers at the time of the deal across New York and Washington, the firm’s New York arm currently houses 55 partners and 139 lawyers. However, after a prolonged period of hunkering down, there has been a more confident mood from the firm in the US of late and it retains the largest US practice of a Magic Circle firm. Around 11% of the firm’s total revenues – currently £1.27bn – came from its Americas offices in 2013.
Part of the more upbeat mood is attached to several laterals in the last two years, including Dewey & LeBoeuf partner Gary Boss who was hired to specialise in insurance industry transactions in April 2012, and the former co-chair of Dewey’s compensation, benefits and employment department, Howard Adler.
CC’s US managing partner Craig Medwick says the past year was ‘very busy’ with deals picking up significantly from February onwards.
Some notable CC deals in 2013 include acting as issuer’s counsel on the $1bn initial public offering of the Empire State Realty Trust; representing American Tower Corporation on its $4.8bn acquisition of Global Tower from Macquarie Infrastructure Partners; and representing WP Carey & Co on its proposed $4bn merger with Corporate Property Associates 16.
The firm is currently focusing on high-profile investigative and regulatory work, and aims to build its profile in the pharma sector. Medwick says: ‘We made a push for Pfizer work to deepen our global and American healthcare practice. A few years ago they did a global panel review, and we had not done as much work for them as we’d liked, so we sought to build a deeper M&A relationship with them.’
Other longstanding clients include Morgan Stanley and global investment bank Houlihan Lokey. ‘We want to deepen our corporate and sponsor bench for transactional work without losing sight of the importance of our banking relationships. Our main priority is to grow here,’ adds Medwick.
For all its set-backs in the US – CC also made an ill-fated attempt to enter the West Coast market in the early 2000s – with a sizeable US practice, the firm has a solid foundation on which to build. A key issue for its long-term success will be if the firm can revive its global growth and profitability – profits per equity partner (PEP) at £983,000 lags its peers – to make it more attractive to potential recruits.
Freshfields’ experiences in the US have been very different to CC and its peers and in some regards the firm has been the most successful UK practice in the US since breaking into US law in 1998 with a team from Milbank, Tweed, Hadley & McCloy.
Much of that success has come from building a strong contentious practice, a profile that reflects a typical US law firm. Freshfields has been particularly successful in establishing a strong disputes offering, especially in international arbitration and global investigations work. The firm is now understood to generate nearly 10% of its revenues in the US, with more than half the practice being litigation or arbitration.
Freshfields’ regional managing partner in the US Julian Pritchard says: ‘Our US business is now acting on cases with a total of more than $80bn in disputes.’
OK, but good enough?
Despite the upheaval that has been unleashed on the New York market since the 2008 banking crisis, the local leaders have certainly outperformed expectations – generally outshining London’s elite firms whose practices most closely mirror their focus on high-end M&A, securities and disputes work.
Nevertheless, the last two financial years have unsurprisingly been relatively subdued for most leading New York law firms. Leading the field on a five-year view until the last reported financial year in 2012 are Sullivan & Cromwell, Davis Polk, Cleary Gottlieb, Wachtell and Paul, Weiss, Rifkind, Wharton & Garrison, which have all increased their turnover by more than 10% since the boom year of 2007. Paul Weiss, regarded by some as New York’s best all-round litigation outfit, unsurprisingly emerges as easily the best performer with its revenue up 35% over this period with the firm achieving current profit per equity partner (PEP) of $3.35m.
Paul Weiss chair Brad Karp comments: ‘In the wake of the financial crisis, there has been a flight to quality and a broadening divide between those firms at the very top of the market and those in the next tier. The problems clients face today are larger, more complex, and carry greater economic and franchise risk than ever before.’
That is not to say that leading firms have emerged unscathed, with many practices slimming down considerably since the boom years. This is notable at New York’s largest firm – Skadden – which has dipped from a high of nearly 2,000 lawyers to currently around 1,700.
Many firms have seen real-term falls in income and profitability once inflation has been accounted for on a five-year view, including Skadden, Weil, Gotshal & Manges, Simpson Thacher & Bartlett, White & Case, Debevoise & Plimpton and Cravath, Swaine & Moore.
Of the 17 New York-based law firms currently featuring in Legal Business’ Global 100, Shearman & Sterling, Willkie Farr & Gallagher and Cadwalader, Wickersham & Taft have suffered the worse relative performance between 2007 and 2012, with revenues falling 18%, 11% and 20% respectively.
In comparison – Kirkland, Gibson, Dunn & Crutcher and Quinn Emanuel Urquhart & Sullivan have all sustained far quicker growth through the downturn.
The trend is underlined looking further back. A 2012 article in The American Lawyer magazine, which marked its 25th year of tracking financial performance in the US, plotted a graph charting growth over a period of revenue and profits since 1986. Firms in the bottom left-hand corner showing below average growth in income and profits included Skadden, Simpson Thacher, Debevoise, Weil Gotshal, Shearman, Cravath, and Fried Frank. The top right-hand box of the strongest long-term gainers was notable by the absence of New York firms except Cleary but included Kirkland & Ellis, Reed Smith, Ropes & Gray, Paul Hastings, Wilmer Cutler Pickering Hale and Dorr, Dechert and King & Spalding. On this 25-year yardstick, Sullivan, Paul Weiss, Proskauer Rose, Milbank, Tweed, Hadley & McCloy and Cadwalader emerged as solid performers against New York peers – thanks largely to above-average growth in profit – but were outpaced by many leading ‘national’ players.
Despite the famed resilience of the New York market, the long-term trends make it clear that thoroughbred local firms have – beyond a select handful – lost ground to out-of-town rivals as the US legal market becomes truly national. The picture is replicated on the global stage, where the same kind of nationally represented firms such as Latham have made considerable ground. Likewise, the Magic Circle and a breed of broad-reach practices built via mergers such as Hogan Lovells, DLA Piper and Norton Rose Fulbright have built huge networks. The New York model effectively shuts out many domestic firms who have no stomach to dilute their profits.
‘A clear vision’
As can be seen from even the briefest glance at the above figures there is no clear divide between winners and losers in regard to historical tiers and prestige, remuneration approach or even business model. For example, the fortunes of internationalist outfits Cleary Gottlieb and Shearman have starkly divided over the last decade. Years ago, Cleary was at times dismissed for its quirky globalist view and collegiate style while Shearman was a potent brand on Wall Street. Step forward to 2014 and the sustained success and sheer calibre of Cleary’s partnership wins widespread respect while Shearman is – unfairly or not – viewed as the proudest standing New York shop to have lost its way.
A relatively underweight disputes team, which left Shearman exposed after the early 2000s downturn, combined with a loss of confidence in its corporate practice in the wake of the 2001 departure of heavyweight senior partner Stephen Volk for Credit Suisse First Boston is cited by some as the start of a tailspin from which the firm has yet to recover. Shearman disputes this analysis, but given what has been by any stretch a troubled performance over the last ten years – the firm has a lot to prove.
Of the firms that would once have been termed whiteshoe (the tag has been shunned as passé and reflective of an outmoded Waspish culture), Sullivan and Davis Polk have done the most to adapt their practice to a multi-polar world.
While the firm makes much of its continuity, it periodically makes calibrated adjustments to its practice, such as its move in the mid-2000s to focus on complex restructuring work, despite its historic aversion to big-ticket liquidations.
‘We don’t follow the flavour of the day,’ says Shenker of the firm’s strategic direction. ‘We don’t do big mergers or large groups of lateral acquisitions but we do keep our eyes on changes affecting our clients and their businesses.’
In the case of Davis Polk, the firm has undergone something of a reboot under Scots-born managing partner Tom Reid after a period in which the firm was widely viewed to have lost direction and drive during the boom years. The leadership of Reid is cited as a major force in galvanising the 800-lawyer practice – which had increased its revenues by 17% against 2007 by the end of the 2012 financial year – a stance which has also included targeted moves into local law in London and Hong Kong.
But firm-specific performance and exposure to certain practice areas has been a far larger factor than domestic-versus-international focus in separating winners from losers (White & Case and Skadden, for example, have seen modest growth since 2007 despite greater exposure to foreign markets).
One firm that also faced much-publicised challenges in 2013 was Weil Gotshal, which in June announced a severance programme cutting 60 associates – 7% of its associate base – and the loss of 110 support jobs. At the time the firm’s executive partner Barry Wolf cited the move as part of an adjustment to the ‘new normal’ of lower growth, though peers have yet to follow its lead and this explanation is generally given short shrift by rivals, who viewed the cuts as in part a response to an unsuccessful attempt to break into the Houston energy market.
Weil Gotshal’s cuts may seem surprising given its reputation as the top US bankruptcy firm and its record in securing a string of lucrative insolvency jobs, including the record-breaking wind-up of Lehman. However, it underlines what has been an uneven insolvency market in the US and why some advisers have avoided the huge chapter 11 jobs, which suck up armies of associates and generate notoriously hard-to-manage workflows.
In comparison, the continued expansion of regulatory work – particularly in the banking sector – has been a huge boon to leaders in the field such as Sullivan and Davis Polk. White-collar crime work and global investigations, has proved another increasingly key market for high-end advisers.
Litigation is obviously an increasingly key arbiter of success in New York (the only obvious exception to this rule is at Cravath and Simpson Thacher, which have both seen subdued firm-wide growth despite having top-tier litigation practices). While disputes have long been lucrative for Wall Street firms, the last five years have seen a substantive relative increase in the importance of such work – helping to drive the growth of Los Angeles-based Quinn.
Quinn has a successful New York office and, as a disputes-only practice, has effectively cultivated referrals from leading law firms who generally will not act against major banks. Its rise in recent years has made it the second-most profitable top-100 practice – with PEP of $4.2m in 2012. Its revenues increased by 122% in the previous five years.
Quinn New York managing partner Peter Calamari argues this reflects a wider shift in the market. ‘Litigation has become a much more important factor in law firm business and planning. Firms with strong litigation groups have risen while those with strong speciality areas are still strong but a little less dominant. Now, litigation is one of the dominant factors – if not the dominant factor – in law firm growth and profitability and has its own place in the market.’
If Sullivan and Davis Polk are widely viewed as positioning their institutions for challenges ahead – views remain more divided on their traditional peer, Cravath. Many still see the firm as the epitome of high-end practice, superb training and all round technical polish but there are more questions now over whether its relative lack of size and US-heavy focus will limit its options and cost it influence against more expansive peers. There are also those who ask if the firm’s collegiality is out of step with a marketplace that increasingly revolves around building firms around half a dozen big-name partners. According to this view, Wachtell looks a more convincing ‘outlier’ to buck the market than Cravath.
But, once again, it is easy to draw crass or misleading conclusions about such institutions, the strongest of which have proved able to adapt with the times despite a conservative style.
Allen Parker, presiding partner of Cravath, sums up the firm’s approach. ‘The most important thing as an organisation is to have a clear vision of what you are and live that every day. Recent events have shown us that when law firms try to be things they aren’t, they frequently stumble. Ours has always been a firm that focuses on the cradle to the grave in terms of a partner’s career – supporting each other and, when times are tough, taking care of each other.’
‘It’s not the model that’s the issue,’ observes Kirkland executive committee member David Fox. ‘It’s the quality of the firm, the quality of the people, the quality of the management that matters. I don’t think the model is the variable that makes something work or not.’
New York is often described as heavily-tilted towards an ‘eat what you kill’ style of paying partners but the reality is a blurry division between three broad camps: a relatively small group of firms, including Cravath and Cleary Gottlieb, using lockstep; a broader group using a more flexible model but one in which partners are paid within a ratio of 1:4 or 1:6 between top and bottom earners; and the ‘bar-bell’ institutions that have a huge gap between what many junior partners are paid and sums above $5m on offer to a smaller group of star performers. In such a culture, earnings are typically heavily focused on origination and billable hours and a rainmaker can earn 15 or 20 times that of the most junior equity partner. What has remained the case is that, broadly, elite firms use relatively conservative, flatter pay models (Cleary, having launched in 1946 as a six-partner break-off from Dewey Ballantine specifically because the parent firm ditched lockstep, remains near evangelical on its partnership model).
What is widely agreed is there has been a continued shift towards building practices around such star performers – reflecting a wider attempt by American law firms to lateral hire their way out of difficulties in a low-growth market. Talk in New York is of packages as high as $9m being offered to recruit partners.
Quinn’s Calamari expresses a common view: ‘The brand name has declined substantially, now the focus is on getting expertise in a particular area in selecting a law firm. Even this is getting narrowed down to particular lawyers that clients are looking for. Brand name ceased to be the trading factor years ago.’
Certainly, the fate of Dewey, whose collapse was famously in part due to its addiction to recruiting supposed stars, has led to no visible reappraisal in the profession, in part because Dewey’s tactics and governance problems were so extreme that its relevance to the wider profession has been dismissed. More to the point, in the hands of some firms, predatory recruitment has proved too potent a weapon to be easily dismissed.
Five-year view – New York v US leaders
In the city: the Magic Circle (continued)
Some key clients include Citi, ConocoPhillips, Hachette, Tiffany and United Airlines, and some representative matters include the firm advising Raoul Weil, former head of UBS’s global wealth management business, after he allegedly helped Americans evade taxes, and representing Hachette on its settlement with the US Department of Justice and state attorney general as part of a multi-district litigation, alleging it was among several companies that conspired to fix prices on e-books. Freshfields’ conservative growth has also meant that it has had a strong record on retaining New York partners, in contrast to its three UK peers.
The firm has maintained a steady rather than spectacular growth in Manhattan, roughly doubling the size of the practice over the last five years. However, with only 24 partners and 97 lawyers, it has the smallest local practice by headcount of its peers.
The big issue is when Freshfields will make a full-blooded move into corporate work befitting its reputation as one of Europe’s top M&A firms and on this there are no clear indications.
The firm’s PEP of nearly £1.4m puts it closer in reach of the going rate for top earners. Even so, there are some in the firm who believe they will have to further evolve their lockstep pay to compete. Pritchard says that the firm will remain guarded on who it recruits.
In comparison, A&O and Linklaters have struggled more to build momentum in the US despite making substantial investments. A&O has 137 fee-earners and 34 partners in New York while Linklaters is slightly smaller with 125 lawyers and 25 partners.
Despite hitting the headlines in 2001 with its recruitment of Cravath, Swaine & Moore derivatives and corporate star Daniel Cunningham, which saw A&O cut an unusual deal worth a reputed $6m a year, the firm has struggled to retain lawyers.
In late 2013, the firm saw the departure of the head of its North American leveraged finance group Mark Wojciechowski to Morrison & Foerster, and arbitration partner Benno Kimmelman joined Sidley Austin in September. Cunningham himself left in 2009 for Quinn Emanuel Urquhart & Sullivan. But despite only substantively launching in US law since 2000, the firm has built a broad practice.
A&O has continued to invest – in late 2012 recruiting well-regarded energy and infrastructure duo Kent Rowey and Dolly Mirchandani from Freshfields – and launching in Washington DC in 2011 with the recruitment of three partners.
Yet the US offering, which gains nine recommendations in the latest edition of The Legal 500, is generally acknowledged to be a distance from achieving critical mass, while the practice has been substantially loss-making through much of the last 20 years.
Linklaters remains arguably the weakest of its peers in New York, in part due to its relatively small contentious practice, though the firm has expanded this considerably over the last five years. Linklaters cites finance, especially funds and tax, as having been particularly busy.
Recent deals handled in New York include advising Citi and Santander in the inaugural issue of securities under the Trade MAPS program, worth $1bn in December 2013; acting for ThyssenKrupp in the $1.55bn sale of its US steel plant to Luxembourg’s ArcelorMittal and Japan’s Nippon Steel & Sumitomo Metal Corporation; and advising Citi on its $1.38bn sale of Banco Citicard and CitiFinancial to Itaú Unibanco.
The firm will be focusing on growing its corporate, litigation and regulatory practices. ‘Our goal is to continue to do more work for our US clients not just locally, but all around the world. We’d also like to bring more US law into our existing client base whether it’s inbound or outbound work,’ says US co-managing partner and head of banking Jeff Norton.
The progress that has been made in New York by UK firms is typically dismissed by US lawyers, though aside from managing the Rogers & Wells fallout at CC, there have been more inroads made than often conceded. What is missing is any kind of substantive breakthrough in mainstream corporate or deal finance work.
As one senior partner at a top US firm comments: ‘Our biggest opposition should be the Magic Circle firms, but for some reason they cannot crack New York.’ Another managing partner at a Wall Street firm puts it more harshly: ‘The Magic Circle firms are not players in this market. They grossly overestimated the power of their brand in this market and didn’t really understand how important talent and knowledge of the system is in New York.’
The Legal 500 US edition published in July last year underlined the continued lack of penetration by London’s top firms in the US. Based on total recommendations, the highest ranked of the group, CC, sits in 37th place, A&O ranked 68th, Freshfields was in 71st place followed by Linklaters in 84th place.
The daunting challenge in New York for the Magic Circle remains the same. Deliver year-on-year improvement, while hoping that a strengthening international market will ultimately allow them to leverage their position as global advisers into US law mainstream corporate and litigation work. The dream of the head-on challenge with New York’s top firms is long gone. The chances of a substantive merger appear more remote than ever.
Shaking the foundations
It is hard to overstate the extent that the Chicago-bred Kirkland has pushed itself into the insular consciousness of Manhattan law in recent years, trading originally off a strong national reputation in litigation and private equity. During a recent visit to the city the firm’s name appeared to be on the lips of most managing partners. Its forthright style and dramatic rise typically splits peers down the middle, with critics decrying its aggressive recruitment – Kirkland is reputed to pay as much as $8m annually for top partners – as unsustainable and destructive to the profession.
With turnover increasing by 51% to $1.937bn between 2007 and 2012, Kirkland is now one of largest law firms in the world, while its PEP of $3.25m for the 2012 financial year means those who make it to full equity are matching top Wall Street rates. The firm typically makes up large ranks of partners – it has nearly 400 salaried partners compared to 325 on full equity – but the pressure to make it to full equity status is intense.
The firm’s rise has been particularly notable in M&A where it has recruited a string of respected practitioners in recent years, including David Fox and Daniel Wolf from Skadden in 2009 and at the end of 2012, Sarkis Jebejian, a partner at Cravath – a firm renowned for rarely losing members from its tight-knit partnership.
Other noteworthy New York hires include Simpson Thacher corporate partner Sean Rodgers and Latham M&A partner Taurie Zeitzer. Meanwhile, in the increasingly important Washington DC market, last year Kirkland signed Securities and Exchange Commission enforcement head Robert Khuzami – securing the services of one of America’s most high-profile and in-demand lateral recruits. New York is now the firm’s second-largest office with 376 lawyers and 164 partners.
In December last year, the firm won a high-profile victory for Tronox Litigation Trust that was worth over $14bn. Kirkland litigation partners David Zott, Andrew Kassof and Jeffrey Zeiger led the team. The firm has also been active in the booming pharmaceutical sector, representing Bristol-Myers Squibb on the sale of its global diabetes business to AstraZeneca for an upfront payment of $2.4bn with further payments to follow.
One unnerved New York office head of a global firm expresses not uncommon sentiments regarding Kirkland’s impact and willingness to invest to lure big name partners: ‘The question is can Kirkland and Latham stamp out the last lockstep firms?’
Kirkland itself rejects claims from rivals regarding a supposed cut-throat culture but is clear that it is prepared to invest substantial sums for the best partners. Comments one Kirkland partner: ‘We’ve hired extraordinary practitioners from Cravath and other firms and, of course, they get paid a lot but that’s because they’re great people. The people we speak to say: “There’s only one other firm we’d be interested in joining and that’s Kirkland”.’
Despite such rhetoric, Fox insists that there are many misconceptions about the firm’s culture. ‘We don’t do a lot of lateral hiring at the partner-level. People want to join because it is an incredibly vibrant place to work and people like to be in this environment.’
Kirkland certainly has won plenty of admirers, with the head of one elite New York firm arguing that it now largely viewed as a local firm given its long commitment and investment in the market (the firm’s New York office launched in 1990). Critics also have to accept claims that the firm’s growth is unsustainable skirt over the fact that its above-trend expansion has been maintained for more than a decade and at a global level.
The firm that Kirkland is typically badged with, Latham, has followed a similarly expansive path from a major ‘regional’ base but has as many distinctions as common ground.
While one of the most admired and consistently upwardly mobile US law firms of the last 25 years, Latham’s progress hasn’t been without its challenges in recent times. The firm’s finance-heavy practice was badly hit during the post-banking crisis recession, leading it to cut more than 400 jobs globally in 2009. In response Latham moved to diversify its practice, including expanding its energy practice, rapidly reasserting itself after a dramatic decline in revenue in 2009. And beyond its strength in project and deal finance, the firm has widened its business to comprise well-regarded teams in equity capital markets, disputes and M&A.
While Latham has been ready to offer top dollar to make strategic recruitments, its reputation for long-term investment in staff and a strong culture means it is viewed as far less sharp-elbowed than Kirkland. Further, its ability to engage its associates has long been seen as a cornerstone of its brand.
Latham argues that its secret sauce in New York has been based on a determined cultural approach married with competitive remuneration, rather than focusing heavily on aggressive top-of-the-market deals for partners.
Latham partner Edward Sonnenschein comments: ‘We have a very transparent culture which extends to the firm’s compensation model and fosters working together. The environment and culture factor significantly on a firm’s ability to attract the leading talent in the market; culture cannot be underestimated and often sets us apart among the New York and global elite firms.’
Marc Jaffe, co-chair of capital markets, comments on the firm’s progress: ‘We are the leading firm in the world for US IPOs. That would have been unthinkable 30 years ago, it would have been the traditional New York firms.’
The fairly obvious lesson of Kirkland and Latham is that success in New York comes from a huge balance sheet, a strong practice niche to build from and long-term commitment. Oh, yes, and the small matter of sustaining Manhattan-level profitability – basically PEP of $2m-$3m, with top earners in line for $4m-$6m.
In the city: the chasing pack
Herbert Smith Freehills (HSF) became one of the last top City firms to establish a New York presence, launching 17 months ago with a six-partner team from Chadbourne & Parke, including 14 fee-earners and nine support staff, headed by managing partner Thomas Riley.
Its only US base to date, the office solely focuses on disputes work, with a particular emphasis on three areas: cross-border investigations, international arbitration and cross-border litigation.
The firm has added three partners since opening – investigations and financial services litigation head Scott Balber, who joined from Cooley in October last year; Larry Shore who re-joined the firm from Gibson, Dunn & Crutcher to lead its international arbitration team; and litigator Ben Rubinstein, who was promoted to partnership. Its New York practice now houses nine partners, six of counsel and ten fee-earners.
The firm plans to hire another team of laterals early this year to focus on white-collar, anti-corruption and cross-border investigations, a crucial element of delivering its US strategy.
While HSF is a late entrant to a notoriously hard-to-crack market, it has the benefit of sizeable resources in the wake of the 2012 union between Herbert Smith and Australian leader Freehills. But the key selling point will be heavily focusing on its contentious practice, reflecting not only the respective strengths of its two legacy firms, but also the fact that UK firms have often had more success in New York focusing on disputes over corporate work.
Riley comments: ‘The thing that differentiates us is we are able to handle litigation on a global basis but also interact locally with the courts and regulators. Those firms that focus mostly on the New York market can be successful, but most of the cases we handle are cross-border, often working with our colleagues from around the world.’
HSF’s City rival Ashurst is another firm tackling the US via a clear niche: in this case the structured finance market, which it entered in 2009 with a 12-partner team from US practice McKee Nelson. The office has since grown marginally to 14 partners and 39 lawyers in total.
The firm boosted its energy, resources and infrastructure practice when it hired A&O energy partner Charles Williams to strengthen the firm’s position in the PPP and renewables space in August last year but has remained largely focused on structured products.
The future of the US practice will be under close scrutiny at Ashurst, which late last year completed its merger with Australian partner Blake Dawson. The US practice struggled in the wake of the slump in its core market after the launch and was unpopular internally at the legacy Ashurst, but management hopes it will be a key element of an enlarged global firm.
In addition, amid the relative rebound in structured debt issuance, it is now cited as staging a notable revival, generating more than £15m in revenues. Highlight representative matters include advising Deutsche Bank on its proprietary and third-party tender option bond (TOB) worth $2.4bn, and representing Skanska and John Laing Investments on the bid for the I-4 Ultimate Highway Project in Florida, valued at $2.2bn.
As with HSF, Ashurst is realistic about its focus on the US, choosing to concentrate on a defined area. Scott Faga, Ashurst’s US managing partner, comments: ‘International firms have a unique offering in their ability to provide global regulatory advice but at the same time the old mainline US firms are well ensconced with their clients.’
An island no more?
Given the relative post-Lehman resilience of the legal industry in Wall Street, it is striking that the profession has been singled out for mounting external criticism in the last three years. The phrase BigLaw has become both common currency and shorthand for what many argue is greed, the clinging to outdated practices and crass short-termism.
Partly this is thanks to the collapse of Dewey – which provided a focal point for criticism that has manifested itself frequently over the pages of The New York Times, The Wall Street Journal and the popular Business of Law video series on the Bloomberg network.
There are also more outlets to focus on the underside of New York law, including the popular Above the Law blog and Adam Smith, Esq, while MacEwen’s book Growth is Dead makes much of the inarticulate strategic response from US firms in the face of a tougher market and more demanding clients.
Other examples last year included a much discussed cover feature in The New Republic magazine, ‘The end of BigLaw?’, and a widely-read and lengthy piece in October in The New Yorker, picking over the bones of Dewey’s collapse. (Representative sample quote: ‘Steve DiCarmine, if you are reading this, I’ll have your fucking head on a stick.’) The Belly of the Beast blog and the book The Lawyer Bubble by former Kirkland partner Steven Harper have further fed an increasingly accepted narrative about the unsustainability of BigLaw, which is practised in its purest form in New York.
But an inward focus, at times dictated by the considerations of Manhattan-dwelling rainmakers, has long been a weakness of the model. It cannot be seriously questioned that the top national US law firms and elite London firms have on the global stage used their more flexible approach to good effect over the last 20 years, to the expense of all but the very strongest Wall Street rivals.
The factors that made New York singularly well placed to defend – largely culture and profitability – also make it hard to venture far beyond the fortress. Only a small group of New York-based firms – six to ten depending on how charitable your view – currently appear to be anywhere near on course to be genuine global forces in the next ten to 20 years. That is a very low figure given the historic dominance of these firms.
There is also notably less evidence of the innovation, improving governance and the experimentation seen at major firms in London. If alternative providers of legal services become a more substantive force in the years ahead, or global banks ever stop being so steadfastly loyal to their trusted New York lawyers, responding in time will be challenging.
‘It’s a funny market,’ concludes MacEwen. ‘As cosmopolitan as it is, it is rather provincial and very slow to change.’
Dan DiPietro, chair of Citi Private Bank’s law firm group and the best-known banker to US lawyers, gives his take: ‘I don’t see dramatic change in the New York market even in the intermediate term. The dramatic trends are the ones that will kick in five to ten years down the road.’
In the end it’s hard to query the logic of Latham’s New York managing partner James Brandt: ‘With the trend to globalisation accelerating, clients will increasingly look to global firms to help them around the world. You see more and more cross-border deals and heightened regulation facing big banks on a truly international basis – we are positioned to service these clients in a way our rivals cannot. Our goal is to become the number one law firm in the world.’
How many New York-based institutions have an answer to that? LB
david.stevenson@legalease.co.uk
jaishree.kalia@legalease.co.uk