Neither political nor economic uncertainty in Scotland is dampening enthusiasm for law firm tie-ups across the border
With a listless economy, an oil and gas industry decimated by low commodity prices, and uncertainty over its future relationship with the EU and the rest of the UK, Scotland is lacking both clarity and optimism over its future.
Alistair Carmichael, who was returned as Liberal Democrat MP for Orkney and Shetland in the general election on 8 June summed up the current political sentiment following the Scottish National Party’s loss of 21 seats in the House of Commons: ‘The people have spoken, but it’s not yet exactly clear what they’ve said.’
Against this backdrop, it would be understandable for Scottish law firms to retrench and for English firms to retreat southwards. Yet Addleshaw Goddard’s merger with Scotland’s HBJ on 1 June is another example of a long run of English-headquartered firms seeking to develop a credible Scottish presence.
Speaking to Legal Business on the day the merger went live, Addleshaws managing partner John Joyce said: ‘We are an international firm, but most of our work has been and still is UK-centred. A lot of our clients have a footprint right across the UK, and don’t always want to work with us in England and a separate firm in Scotland.’
Joyce says that the firm was facing increasing pressure to establish a Scottish presence and was losing business without it. ‘Ten years ago that dynamic didn’t really exist, but in the last two to four years it has become a matter of convenience for clients to deal with one firm rather than two. For us, not having a footprint there was becoming a problem.’
The advantages of the union became immediately obvious: on day one of becoming an Anglo-Scots entity, international pharmaceutical business Celesio appointed Addleshaws as its preferred legal adviser on all Scottish real estate matters.
HBJ was formerly part of Anglo-Scots hybrid HBJ Gateley, before deciding to separate its business after Gateley became the first UK firm to list on AIM and become a plc in 2015. In May, Legal Business reported that Gateley was looking to establish a ‘best friends’ relationship with a Scottish firm and was close to signing an agreement with Anderson Strathern. A Gateley spokesperson confirmed that it was considering its options, but had nothing further to say at this stage.
‘There’s nothing new about change and constitutional questions in Scotland. None of the doom-laden predictions have really come to pass.’
Bill Drummond, Brodies
Addleshaws is the latest English firm to cement its UK business through a Scottish presence or through a relationship in Scotland, which has been a major trend over the past five years. Clyde & Co merged with insurance-focused firm Simpson & Marwick in October 2015. ‘We didn’t need to do the merger,’ comments Gordon Keyden, the former managing partner of Simpson & Marwick who stepped down as Clydes’ managing partner for Scotland in June, handing over to David Tait. ‘Neither side was struggling, but it was defensive in the sense that we needed a UK-wide capability for major insurance clients. That is the way the market is heading. Clients do not want one firm in England and Wales and one in Scotland.’
As a result, Clydes now advises Travelers and XL Catlin on both sides of the border, and has won more work from AXA. Turnover for the Scottish employment practice was up 60% in the first financial year following the merger.
Ewan Alexander, head of Pinsent Masons’ Edinburgh arm, says that while Scotland has its economic and political hurdles, these should not detract from the overall strength of its business sector, particularly in financial services and technology. The firm’s Glasgow office advised long-term client Skyscanner on its £1.4bn sale to Ctrip.com, China’s largest travel agency, in 2016. Alexander suggests that the firm’s Scottish presence has also been vital to developing UK and global client relationships, such as its exclusive arrangement with Balfour Beatty and E.ON to provide all their day-to-day legal advice in the UK.
He believes that Pinsents’ presence in Scotland is not just about having greater UK-wide credibility, but also tapping into high levels of expertise and resource north of the border. ‘We have a great university system in terms of producing good lawyers that are very outward-looking. If you go back to before Pinsent Masons’ merger with McGrigors, Scottish firms were already looking out onto a wider stage.’
At the time of the merger in 2012, McGrigors had offices in Belfast, Manchester, London, Qatar and an unusual satellite office in the Falkland Islands.
DWF is another English firm to reap the rewards of a Scottish merger, in this case with Biggart Baillie in 2012. Paul Pignatelli, executive partner at DWF in Glasgow, says that the Scottish operations have been integral to the development of national retail relationships. Homebase, which was acquired by Australian company Bunnings last year, is a long-term client of DWF in Scotland and is now a key client across the UK. Marks and Spencer has also evolved from a Scotland-based client to one that now provides additional engagements for construction and property work in England. Pignatelli adds: ‘Scottish Power and Capita, both Scottish-based relationships, have equally grown across the business and we are now providing routine advice across several service lines in England, Northern Ireland and Germany in particular.’
‘We’ve been through this before. Clients have developed contingency plans and are getting on with it.’
Stephen Millar, CMS Cameron McKenna Nabarro Olswang
Shoosmiths entered Scotland in 2012, through a merger with Archibald Campbell & Harley. Despite the tough economic climate, Janette Speed, a real estate partner and head of the Edinburgh office, finds no reason to be downbeat: ‘We have continued to grow our market share in Edinburgh, particularly in areas such as corporate and real estate, and our strategy remains to be one of investing in our people and relationships to gain results.’
Getting on with it
‘When I look out of the window, I can see city-centre offices full of people working hard,’ says Bill Drummond, managing partner of Brodies. The senior figures interviewed for this feature argue that Brexit and the possibility of Scottish independence are no cause for hysteria.
On the latter point, at least the industry can take heart from last month’s general election, which saw the Scottish National Party (SNP) shed 21 seats in what has been interpreted as a major setback for the SNP’s drive to secure another referendum on independence.
While there continues to be much debate concerning its future relationship with the EU and the UK, Drummond’s view remains consistent: ‘There’s nothing new about change and constitutional questions in Scotland. We have lived with constitutional change for a long time now. None of the doom-laden predictions have really come to pass during that period.’
He also believes that uncertainty does not necessarily hinder business growth. ‘It creates opportunities,’ he says. ‘In the lead up to the 2014 referendum [on Scottish independence], there was lots of economic activity.’
CMS Cameron McKenna Nabarro Olswang managing partner Stephen Millar, whose firm Dundas & Wilson was absorbed by CMS in 2014, is confident that the firm’s Scottish operations are not overly vulnerable to an unclear future. ‘We’ve been through all this before in 2014. Most clients have well-developed contingency plans and are getting on with it.’
Scotland’s economic performance lags behind the rest of the UK, but Drummond notes that once you strip out population growth there is little difference between Scotland’s GDP and other better-performing regions in the UK. In April, the Office for National Statistics stated that Scotland’s unemployment rate of 4.5% was the lowest of the four UK home nations. Edinburgh International Airport reported that 12.4 million passengers flew through the capital in 2016, an 11% increase on 2015. Similarly, Glasgow Airport experienced an increase of 8%. A new section on the M8 route between Glasgow and Edinburgh was completed in April, meaning the entire stretch between the nation’s two largest cities is now motorway. This forms part of a number of infrastructure improvement initiatives around the country.
In Edinburgh, the £1bn redevelopment of Edinburgh’s St James Centre got underway in 2016 after years of delay that developers blamed on difficulties in attracting international investment after the financial crisis. As one of the largest redevelopment projects in the UK, it is expected to create some 3,000 jobs. The 1970s shopping centre will be replaced with 850,000 sq ft of retail space, a luxury hotel, up to 150 new homes, 30 restaurants and a multi-screen cinema. Brodies is advising the Dutch pension asset manager APG on its joint venture with Janus Henderson Investors, the existing owners of the St James Centre, on the £1bn redevelopment.
Shepherd and Wedderburn chief executive Stephen Gibb also asserts that ‘uncertainty does create opportunities’ and points to the devaluation of sterling causing an ‘investment spike’. In 2016, Scotland received a record number of overseas investments with 122 foreign direct investment transactions. The EY Scotland Attractiveness Survey indicated that the region was the second-most popular target for foreign investment behind London.
This has been especially important for a real estate sector that has suffered from the increased caution of UK institutional funds and investors due to Brexit and potential Scottish independence. Alexander says that overseas investors simply do not share the same concerns: ‘UK funds have taken a step back, which could be due to the constitutional position. They might well be concerned if Scotland separates from the UK, but foreign investors are dealing with different countries everywhere. They have a diversity of investment that means that they are less concerned about whether we are part of the UK or just Scotland.’
The new economy
The financial services sector still accounts for a significant proportion of business for Scotland’s leading firms, not least the impending £3.8bn merger between Standard Life and Aberdeen Asset Management that sees Maclay Murray & Spens as the Scottish adviser to Aberdeen, alongside Freshfields Bruckhaus Deringer and opposite Slaughter and May, which is advising Standard Life.
‘Uncertainty creates opportunities.’
Stephen Gibb, Shepherd and Wedderburn
But while there has for some years been a slow movement towards London by some of Scotland’s more storied financial institutions, others have suggested that they could yet move the bulk of their operations south in the event of a vote for Scottish independence. Earlier this year, Standard Life chair Sir Gerry Grimstone also indicated that it was looking to Dublin as its primary EU hub. Constitutional change is already having an impact, yet Philip Rodney, chair at Burness Paull, says a recent conversation with a director of a fund management group has reassured him. ‘I have every confidence that financial services will remain a strong sector in Scotland. We have the talent and technical ability here, and it is difficult to start from scratch and establish operations elsewhere. Businesses thrive where the talent is. You only have to look at Silicon Valley.’
The Silicon Valley comparison is apt given the growth of the fintech sector in Scotland. A new hub was launched in May, based at the Entrepreneurial Spark business accelerator centre housed at The Royal Bank of Scotland’s Edinburgh HQ. Callum Sinclair, who now heads the technology sector group at Burness Paull after joining from DLA Piper in 2016, says that tech innovation in the Scottish economy is not limited to financial services but is integral to growth in other industries, such as oil and gas, where players have already done all they can to generate better margins. ‘The oil and gas sector has sliced and diced as much as it can. There is nowhere else to go but digital transformation.’
Sinclair has noticed that although many jobs have been lost in the oil and gas sector, many redundant workers have found new jobs in the technology industry. Innovation and greater collaboration is helping the oil and gas sector to operate more efficiently. Peterson, the oilfield logistics company, is working with Google to develop specialist logistics software and a logistics pool for rival companies to share access to ships.
The Scots are typically sanguine about the future, though it is hard to ignore the stark facts about the oil and gas industry’s decline, and the risks to the economy driven by Brexit and possible Scottish independence. For its law firms, the climate is challenging and this was demonstrated by the demise of blue-blooded Scots firm Tods Murray in 2014, which was subsequently bought out of administration by Shepherd and Wedderburn. Semple Fraser, another prominent player, went out of business in 2013 and Martin Darroch, chief executive of Harper MacLeod, believes that the Scottish profession is not out of the woods yet: ‘The Scottish legal industry’s turnover is about 25% lower than it was pre-financial crisis. From a pricing perspective, firms are nowhere near the levels they could achieve before.’
Harper MacLeod has continued to grow, with turnover rising to £26m and profits to £9.3m in the year ending April 2016, up from £22.1m and £8m in 2015. Such performance saw the firm make the Legal Business 100 for the first time, while perennial high-achiever Brodies was named National/Regional Firm of the Year at the 2017 Legal Business Awards following another year of double-digit turnover growth.
Yet Darroch is not so sure that this warrants unbridled optimism across the profession: ‘The statistics show our economy is continuing to perform considerably lower than the UK economy. If Brexit puts us in reverse, we don’t have much of a gap. That is my bigger concern. For the Scottish legal industry, it will be interesting to see whether firms’ balance sheets are strong enough to deal with what is coming.’ LB
Can Aberdeen emerge from the oil-price slump?
As a major oil and gas centre, Aberdeen has not come away unscathed from a brutal period for the energy industry.
Yet things may be changing for the better. According to The Royal Bank of Scotland Business Monitor, some businesses in the north east are preparing for an upturn for the first time in two years. House prices in Aberdeen had slumped by 10.2% in the year to January 2017, but valuations have been inching up since.
A rise in oil prices to around $50 a barrel has released some pressure. Aberdeen-headquartered energy services company Wood Group’s £2.2bn proposed acquisition of London-based Amec Foster Wheeler – a consultancy, engineering and project management company – shows that a deal climate remains.
In another boon to the local oil and gas sector, Hurricane recently discovered the largest undeveloped oilfield in UK waters, 60 miles west of the Shetland Isles. In February, Israel’s Delek Group agreed to acquire North Sea oil producer Ithaca Energy as part of its efforts to expand its North Sea operations. Shearman & Sterling advised Delek with Pinsent Masons representing Ithaca.
Firms have largely taken the decision to remain committed to Aberdeen, not least because it also serves as a major renewable energy centre. The Scottish government is committed to a low-carbon economy and expects half of Scotland’s heat, transport and electricity energy to be provided by renewables by 2030.
This focus on a low-carbon economy should help to offset the economic impact of a struggling oil and gas sector. Offshore oil and gas expertise, in particular, is being applied to offshore wind farms and other sources of renewable energy. Philip Rodney, chair at Burness Paull, says that Aberdeen is moving towards a much more stable economy that is ‘less dependent on the vagaries of the price of a barrel of oil’. He adds: ‘We have a strong renewables practice, and until now we have looked at oil and gas and renewables separately, and now we see synergies between the two and are looking at a combined energy offering.’
Last year Shepherd and Wedderburn acquired The Commercial Law Practice, an Aberdeen firm, demonstrating that the Scottish legal profession is still very much enthused by the north east of the country. Chief executive Stephen Gibb says that the north east is a wealthy area, and the firm is ambitious about gaining work in industries including food and drink and agriculture, in addition to renewables and oil and gas. He points to the Silver Fin Building and The Capitol office developments as signs that business is certainly not in total decline in the city.
Caryn Penley, CMS Cameron McKenna Nabarro Olswang’s executive partner for Scotland, says that the Aberdeen team is ‘holding its own’ and has a much wider focus than on the immediate locality, with fee-earners frequently engaged in matters in the Middle East, Latin America and elsewhere.
Stephen Millar, CMS UK’s managing partner, believes that Aberdeen’s oil and gas industry has been through multiple boom-and-bust lifecycles before and survived, and has worked hard to reconcile itself with a future of more modest oil prices: ‘There is an understanding that costs were very high and businesses were able to pay higher costs because of high oil prices.’
He concludes that there are opportunities for smaller independent companies to develop new fields in locations where some oil majors have pulled back.