US law firms remain publicly committed to expanding their London offices despite wider concerns that it could take until 2010 for current economic conditions to improve. This is the key finding of Legal Week’s annual US law firms in London survey, which reveals that 86% plan to increase their headcount over the next 18 months. This is only slightly less than in 2007, when 91% of US firms earmarked further growth for their London operations.
Continuing the theme, few of the 51 firms that responded are scaling back on their ambitious growth targets, with the predicted rates of growth almost exactly the same as in the 2007 survey — even though the economic outlook has worsened considerably since then. The figure is significantly down on 2006, however, when 96% of US firms in the City pledged to increase headcount. Whether US firms’ London managers are blind optimists or market opportunists is up for debate: according to firms’ survey responses, dispute resolution, corporate and finance lawyers are the most likely to be pursued by US firms. Andy Russell, director of recruitment consultancy Abrahams Russell, explains that one of the reasons for this has been the shortage of potential lateral hires of the right quality and experience. “There have not been enough of the right people moving around in areas such as acquisition finance, M&A and private equity,” he says. “A number of firms have been chasing the same pretty small pool of people, who have been hard to prise away. Until now, these individuals have been making good money where they are, they are well looked after and have been very busy.”
The survey results show almost two-thirds (64%) of the US law firms in London aim to expand by up to 25% over the next 18 months and just under a quarter (23%) plan growth of 25%-50%. Two firms — Nixon Peabody and Winston Strawn — say they plan to grow by more than 50% although, admittedly, from a low base of five and four partners respectively. Both firms say they would merge with a UK firm as a way of achieving their growth targets. Just four firms — Mayer Brown, Reed Smith, Simpson Thacher & Bartlett and Weil Gotshal — said they plan to increase their headcount by less than 10%.
Morrison & Foerster is one of the US firms that plans to grow its headcount in London by 10%-25%, following a year in which it has made six lateral hires in the City. The San Francisco-based practice’s most recent foray into the recruitment market saw it hire three litigation partners from national firm Irwin Mitchell in May. Julian Thurston (pictured below left), managing partner of Morrison & Foerster’s 19-partner London office, says the firm as a whole has not been exposed to the types of work that have seen a major drop-off in instructions, such as private equity or collateralised debt obligations.
“Every slowdown or recessionary period gives opportunity to certain firms,” he argues. “Many people now think that 2009 could, if anything, be worse than 2008 and [the tough conditions] could drag on until 2010. We are quietly confident and moving forward in a positive way.”
Thurston believes these cycles are very important. “We had our own tough times around 2000 and 2001,” he says. “We were not that exposed to the dotcom bubble but it was a difficult time for technology-driven law firms. Now is a time when we are going to move up the pecking order.”
However, he believes that there could be fallout in other US firms’ London arms. “A lot of these 20-30-lawyer offices are just not sustainable,” he says. “My own view is that you need to get to 70 lawyers to be sustainable.”
Scott Burns, managing partner of 12-partner Brown Rudnick, plans to grow its London team by 25%-50%, despite the strained market conditions. The Boston-based firm’s most recent lateral hire, in May, was Roger Gregory, former head of private equity at Nabarro. “I have seen a number of these cycles already,” says Burns. “In our judgement the prudent thing to do is strengthen our team.”
One factor that Burns believes will stand his firm — and indeed other US practices — in good stead during the slowdown is that they develop well-rounded lawyers. “We are not rigidly compartmentalised,” he says. “Our lawyers are trained to do a broad range of things and are able to move between different areas. For example, the insolvency team here has been able to keep other lawyers busy with spin-off work.”
Arbitration in demand
According to this year’s survey, the most sought-after practice areas for recruitment are (in descending order): international arbitration and litigation (13 firms); finance (12 firms); corporate (11 firms); mergers and acquisitions (seven firms); and financial restructuring and insolvency (five firms). There is even demand to increase headcount in real estate — one of the hardest-hit parts of the market. Significantly, one in five firms (20%) also plan to launch new practice areas in the next year, the same percentage as in 2007. What is notable about this is that some US firms remain determined to grow in those practice areas that are suffering the most from the downturn — finance, corporate and M&A — and not just those considered to be counter-cyclical such as litigation and restructuring.
Jonathan Glass, founder of search business Glass Consultancy, says: “In areas such as patent litigation and life sciences there may be 10 US firms looking but there are only 10 good operators,” he says. “They are targeting the same individuals again and again. It is a similar story with international arbitration.”
Both consultants believe that the tougher market conditions at least mean it is easier to engage people in conversation about a potential move to a US firm. “We have about 20 partners on our A‑list for one particular search and 16 are meeting us,” Glass says. “If I had done the search 18 months ago, I would not have got that number.”
Russell suggests that US firms — and some UK firms — certainly see the current slowdown as a buying opportunity. “They also accept that lateral hires may not hit the ground running as fast as they would have done, say, a year ago,” he adds. “If the message from firms is ‘come and join us, we appreciate business levels are down but we will tough it out over the next two to three years’, then people will listen.” The problem is, it is one thing to have conversations and another to persuade a leading player to make the switch. Target partners may be happy to talk but they may also be more cautious about whether now is the right time for a move. They may not, for example, feel as confident about the value and exportability of their practice.
Russell also believes that in the current climate it is inevitable that central management at US firms will scrutinise more closely any lateral hire proposals made by their London offices.
But it is not just in their determination to raise their headcounts through lateral hires at a senior level that the top US firms are showing their commitment to London. Some two-thirds (65%) now run their own trainee programmes — compared to 57% in 2007 and 51% in 2006.
This percentage is set to rise further still with Chadbourne & Parke and Nixon Peabody taking on their first trainees this September, while Kirkland & Ellis will follow in 2009. Brown Rudnick and Bracewell & Giuliani both say they plan to launch their own schemes in the near future, while such a move is under consideration at Morgan Lewis and Crowell & Moring. Orrick is meanwhile expanding its intake from eight to 10.
Brown & Rudnick’s Burns believes it is a logical progression to start a programme as its office grows and more lawyers join with experience of working with trainees. “We will still be considering lateral recruitment at associate level, but we would like to train our own,” he says.
It could be argued that continued investment in London in the current climate does not make much sense and that US firms would be better off directing their resources to locations where the immediate opportunities for growth appear more tangible.
Tony Williams (pictured left), founder of management consultancy Jomati, suggests that while US firms may have invested heavily elsewhere, London remains their number one priority. “Despite the presence of interesting and developing markets in China, Moscow and the Middle East, the US firms realise they need a strong and credible presence in London as it is such a major business and financial centre.”
Martin Bartlam, partner in charge of Orrick’s 20-partner London office, stresses that while market conditions have changed, the strategic drivers have not. “The market changes may affect some of the parameters but the objectives remain the same,” he insists. Orrick’s finance practice is a key part of its London offering and Bartlam remains optimistic about its future, despite the credit crunch. “Organisations still need to fund themselves,” he says. “Often in difficult climates you need to do more complex financing arrangements.”
Bartlam agrees that the volume of finance deals will be smaller but adds that the market has not collapsed — Orrick having just completed a collateralised loan obligation deal. But the firm has also adapted to the change in circumstances by recently hiring a restructuring team from Hunton & Williams, led by partner Mark Fennessy.
Peter Kalis, chairman and global managing partner of K&L Gates, meanwhile argues that investment in London is compatible with growth elsewhere. “These things are not mutually exclusive,” he says. “As we develop our platform elsewhere, London and our London office is exerting a gravitational pull on work that is outbound from the US, Asia and the Continent. We have to build out to properly address the demand as it exists and as we anticipate it will grow.”
K&L Gates recently sealed a merger with Carolina firm Kennedy Covington Lobdell & Hickman and the combined firm now has 1,700 lawyers across 28 offices. “Every time we open or expand one of our portals in a significant US market, the ripples almost immediately begin to be felt in London,” Kalis suggests. The firm has been one of the most active in terms of lateral hires over the last 12 months, with new partners recruited in areas as diverse as projects, tax and hedge funds. Kalis points out that following its merger with City firm Nicholson Graham & Jones in 2005, it was already a full-service practice — something he argues only a handful of US firms in London can justifiably claim.
Intriguingly, the percentage of US firms reporting in the 2008 survey that they have a full-service London office is just 41%, down from 49% in 2007; a sign, perhaps, that some have decided to narrow their focus.
The key question, however, remains whether all US firms will be able to deliver on their investment plans for the City or even maintain their commitment to the market. “US firms are still looking to develop their offices in London but in some cases for how long, I am not so sure,” says Williams. “I have already heard management at some firms saying they are not planning to launch new practice areas and are looking very hard at partner performance. However, other US firms see the current downturn as an opportunity to develop London at a time when partner remuneration expectations may be becoming more sensible.”
Williams adds that many London offices of US firms deliver relatively low profitability or even lose money, once overheads such as central management, IT costs and headhunters’ fees are taken into account. If the performance figures remain dire over the next 12 months, attitudes are likely to harden considerably, he predicts. This may well be accelerated because while transactional activity in banking and corporate in their home market is down, US firms are yet to see an expected upturn in their litigation and insolvency practices.
The merger question
Such a change in attitude may in turn lead firms to review their strategic options, including merging with a UK firm. The percentage of US firms saying they would consider such a tie-up is almost the same as last year: 45% compared with 47% in 2007. The figure has gradually risen over the last few years: in 2006, 39% of respondents said they would consider a merger and in 2005 just 29% said ‘yes’. But there has been a significant fall in the number of firms who rejected the idea outright — with 26% answering ‘no’, compared with 34% in 2007.
The only significant transatlantic merger so far in 2008 has been that of Edwards Angell Palmer & Dodge with City firm Kendall Freeman, but there may be more to come.
“A downturn might make mergers easier rather than harder,” says Williams. “Law firms rarely merge when both are in a strong position. We might well see more US/UK merger activity in 2009 and 2010. The question is how far up the food chain this will happen.” Williams adds that the growing size of US firms — there are now more than 20 firms in the AmLaw 100 with more than 1,000 lawyers — means that their partnerships may be more receptive to a merger with a 200-400-lawyer practice in the City.
The narrowing of the gap in profitability between UK and US firms in recent years may also stimulate further merger activity, although issues such as different approaches to accounting will remain hard to overcome.
One US firm very much open to a tie-up is K&L Gates. “There is an extraordinary collection of very good law firms in London,” says Kalis, who has completed seven mergers while the firm has been under his watch. “But you do not have to go very far down the list to see which ones are ‘platform challenged’.”
“We are not shy about merger opportunities,” he adds. “It is all about doing what is best for the business. If there were the right configuration of practices and we were able to grow our critical mass and enhance our groups, of course we would be open to that.”
Whether they opt for growth by merger or not, US firms appear — for now at least — to be prepared to tough it out in London. As Kalis says, the City remains a key strategic centre for any firm that takes itself seriously as an international law firm.
Click on the link below for the full table of results.
US Firms In London 2008
USFirmsInLondonJuly2008
