Legal Business Blogs

Benchmarking global law firms is getting harder – HSF issues partial post-merger results suggesting PEP down to £750k

Pity the reporters covering the legal industry as the rash of international mergers and differing profit structures has seen law firms increasingly attempt an ad hoc approach to disclosing their financial performance.

Very much in this spirit, Herbert Smith Freehills (HSF) today (17 July) took the unusual step of releasing its financial performance for just seven months – the period since the union between Herbert Smith and Australian leader Freehills went live on 1 October – but refused to disclose the proceeding five months of the legacy City firm’s financial year.

The issued seven-month figures appear to support claims that the firm has seen an effective 10% fall in its profitability, at least judged by the rough ‘n’ ready formula of a pro-rata reading of the results over a 12-month period.

The seven-month results show revenues of £471.2m, with net profits of £137.2m, to be shared across 316 equity partners. On a 12-month extrapolation – admittedly a very rough guide – this equates to a profit per equity partner (PEP) of £753,000, against a legacy figure for Herbert Smith of £840,000 for the 2011/12 year. The legacy Herbert Smith PEP figure is on the basis of 131 equity partners.

The same calculation would give the combined 450-partner firm an income of £812m, though that is likely a modest over-statement given the pronounced weakness most corporate law firms saw in the market during the summer of 2012. Herbert Smith generated revenues of £480m during the 2011/12 financial year. Legacy financial results for Freehills for 2012 equate to roughly £360m – suggesting HSF has seen a modest contraction in revenue since the union went live.

David Willis, managing partner of HSF, told Legal Business that a straight financial comparison is not realistic. ‘You’re not really comparing like-for-like with the old firm. We’ve bought together two firms,’ he said.

Announcing the results, Willis highlighted the firm’s post-merger achievements, including office launches in New York, Seoul, Frankfurt and Berlin.

HSF UK managing partner Ian Cox commented: ‘We haven’t been able to fully take advantage of the merged firms because we are still in the process of the merger. The achievement we’ll look back on most favourably is putting the two firms together as seamlessly as we have done.’

The post-merger performance of HSF is being watched closely by rivals, in part due to the number of senior departures that have been seen in the UK since the deal was agreed.

General sensitivity about the yardstick by which law firms are judged has been increasingly notable over the last five years thanks to a run of international mergers, which has made comparisons more difficult, and the sustained pressure on the global economy.

A number of law firms have attempted to resist providing standardised measures of financial performance in favour of partial or selective disclosure, a development that has arguably put transparency in the legal industry backwards.