Almost half the respondents to this years’ US firms in London survey would consider a tie-up with a UK firm. Helen Mooney reports on London’s enduring appeal
US Firms in London
London’s growing band of US law firms are once again in the market for serious expansion. Legal Week’s annual survey of US firms in London reveals 47% of respondents would consider a merger with a UK firm in the future, up from 39% last year and 29% in 2005.
This greater willingness on the part of US firms to state their merger ambitions to the UK legal community perhaps comes as recognition of how hard it is for foreign firms to grow organically in the expensive City of London legal market, which by some measures is now the most costly in which to operate in the world.
This year’s headline US-UK firm merger bid is between London’s Watson Farley & Williams and New York’s Chadbourne & Parke. The two firms are hoping for a December deal, with the US firm focusing on Watson Farley’s established project finance and energy practices — Chadbourne’s energy client list includes Russian giant Gazprom. If successful, the merger would increase the size of the New York firm’s London practice, which currently houses just 40 lawyers.
A number of firms say that although they are not in ‘active’ talks, they are definitely open to approaches. One London managing partner of a US firm admits that “in order to be able to service clients in the London market we need to have bums on seats, and we would actively consider a merger — we are having talks and there are one or two irons in the fire at the moment.”
He argues that in order to reach a critical mass in London it is much easier and quicker to merge than attempt to build through lateral hires. With the struggle US firms have on their hands — hampered as they are by the weakness of the dollar and a consequent disadvantage in attracting heavy-hitting City partners — there are many who would agree with that assessment.
Despite a clear willingness by US law firms to merge, frustrated by slow City growth, the lack of viable UK merger opportunities looks ultimately set to dash such hopes. “Although I am sure there are talks going on out there, this period of mergers has calmed down for the time being and we could see a period of abeyance,” predicts Anil Shah, managing director of recruiter LPA Legal.
The results of the survey show that the number of firms prepared to be open about their merger ambitions may have grown, but that there is a slight dip in the number of US firms planning to increase headcount in the next 18 months. Ninety-one percent of US firms say they will increase headcount in the capital before 2009, compared with 96% last year. Although many firms describe the market as ‘buoyant’, with some unabashedly claiming it has been their best year ever, respondents were fairly modest in their stated growth ambitions: 53% say they plan an increase of 10%-25% — a similar figure to last year’s 55%.
However, the proportion of firms planning to boost their London office numbers by 50% or more has shrunk on last year’s figures. Just 8% say they plan to grow by half their size again, compared with 12% last year.
This may in part be explained by the nature of the recruitment market in London — hundreds of law firms are chasing a finite number of fee earners, and the US firms in London are seen by many potential recruits as short-term sweatshops. Likewise, the initial surge of US law firms in London has long since lost its power to impress jaded City lawyers. Where once top Wall Street brands could be relied upon to shock and awe, many UK lawyers now see such firms as provincially-focused, albeit very successful, businesses unprepared for the global legal age and certainly not ready to do serious business in the Square Mile.
The aforementioned sweatshop tag also clearly jars with the current drive among younger lawyers for work-life balance. Recent jitters in the international money markets may also have contributed to a scaling down of growth ambitions — steadying the ship taking priority over expansion.
However, there remain plenty of firms in bullish expansion mode. Squire Sanders & Dempsey and Paul Hastings Janofsky & Walker say they are planning to ramp up their London practices by 50%-75% this year, while Mintz Levin Cohn Ferris Glovsky and Popeo is planning on 75%-100% growth. Also sure to be in growth mood is San Francisco giant Heller Ehrman, which this year recruited a three-partner corporate technology team from Wilmer Cutler Pickering Hale and Dorr to launch in the UK.
In a sign that US firms in London are taking a longer-term view of their growth strategy, many of the US firms’ London offices are increasingly focused on boosting headcount through raising the number of homegrown associates and trainees they take on. They are taking a longer-term view to recruitment in the UK, with 57% of the firms surveyed saying they already take on trainees in their London practices, compared with 51% last year.
Of the long-established US practices in London, White & Case — the largest US firm in London by fee earners — is the most active, taking on 38 per year since 1998. Others with substantial in-takes include Sidley Austin and Dechert, which take on 17 and 15 respectively per year.
Among the firms planning to take on trainees for the first time are New York’s Fried Frank Harris Shriver & Jacobson, while Crowell & Moring is considering such a move.
Morrison & Foerster (MoFo) London managing partner Julian Thurston explains the motivation for his firm to launch its own trainee programme last year. “We did not want to keep hiring newly-qualified lawyers from other firms; we would rather train our own so they know the culture of this firm.”
Taking on trainees annually could be seen as a coming-of-age for some of the medium-sized firms in London which have been in the UK for several years. Junior lawyers well past qualification will draw negative conclusions regarding any US firms not committed to its own trainee programme. In a similar move to MoFo’s, Hogan & Hartson hired two trainees last year and two this year. London managing partner Gary Pegg hopes this will increase to three or even four next year.
He comments: “The fact that we have now started to bring trainees in is a sign of our maturity — we are a firm with a history and a culture in London now, we want to start bringing people through the firm, and having a trainee scheme has a lot of advantages.”
Dewey Ballantine’s Fred Gander says his firm had also planned to launch its own trainee programme in 2009 to demonstrate maturity and introduce good lawyers early on. However, the firm’s current merger talks with New York rival LeBoeuf Lamb Greene & MacRae has brought forward this process as LeBoeuf already has a trainee programme in London taking on 10 trainees per year since 1996, which will rise to 17 per year from 2010.
This is a considerable cultural shift, and a recognition for US firms once obsessively focused on lateral hiring that the ‘book of business’ school of recruitment still dominant in the US — where pools of clients typically move between firms along with partners — does not translate easily to London.
Aaron Balfour, of recruiter Hudson Legal, agrees. Where US firms offer salaried partnerships to associates, he says: “There is no need for these associates to make any assurances of client following — they are after the most commercially-minded and technically-gifted associates.”
Perhaps the limits of the ‘book of business’ style of hiring were best illustrated by the departure this year of Cadwalader Wickersham & Taft rainmaker Andrew Wilkinson for Goldman Sachs. The restructuring specialist was certainly one of the most productive partners in the City, at one time being cited as the London’s most highly-paid commercial lawyer, but his largely standalone practice is in itself regarded by some as having failed to build Cadwalader as a brand in London. In the wake of his departure, the firm has made it clear that it is refocusing its practices away from Wilkinson’s bondholder client base towards a more traditional bank-driven insolvency practice backed by a broader commercial finance push.
This year’s US firms in London survey canvassed firms on the measures they have taken to protect London associate salaries from the weak US dollar, which, hovering around the $2/£1 level is at a 25-year low. Nearly 30% of the firms surveyed said they used this kind of measure. Some adjust dollar payments in line with London rates, others pay in dollars but make adjustments for the cost of living in London, and some use a fixed dollar-to-sterling exchange rate to pay their lawyers. Most firms, however, pay their associates in sterling, removing the need to introduce such measures.
One thing that is clear from the survey is that the London practices of US firms are far from homogenous. Firms plan to increase headcount this year across a wide range of practice areas. Corporate and finance were unsurprisingly the most popular, with 23% of firms saying that they will look to increase these practice areas over the next 12 months. Other practice areas firms are planning to step up include intellectual property (IP) and litigation (14%) and dispute resolution and real estate (11%).
Yet strategies are widely divergent — a reflection that successful foreign entrants increasingly play to their domestic strengths rather than attempt a land-grab of Europe’s deal market. MoFo, for example, is focusing on what it sees as its global centres of excellence: corporate, finance and IP. In January the firm beefed up its London technology practice with the hire of Chris Coulter from Ashurst, as well as bringing in Peter Green and Jeremy Jennings-Mares from Freshfields Bruckhaus Deringer to launch the firm’s new capital markets group in London. The firm plans to set up new practices in both real estate and capital markets with the Freshfields partner hires, as well expand its finance capability.
At K&L Gates, global managing partner Peter Kalis is confident that the firm’s increased growth is set to continue in London. “We have had a fantastic year with Alternative Investment Market listings, and the M&A market is good; our IP and IT practices in London have also had a banner year,” he says. “It is important to recognise that the London market is becoming more and more central to the global marketplace for legal services and it is exerting a gravitational pull over the global markets.”
For the New York blue-bloods, whose mainstay in London is still structured products and Securities and Exchange Commission-related securities work, recent years have been less fruitful as broader-service US rivals and leading UK firms edge into their work.
The mid-Atlantic merged firms such as Reed Smith Richards Butler and Jones Day may fare better as they have concentrated their efforts on mid-market M&A, private equity and corporate work.
However, the sector of the market from which most US-based firms will take their cue — and that UK rivals take most seriously — is the handful of firms that have combined transactional muscle with broad service support and proven City commitment.
Opinions vary somewhat regarding which firms to put into this select club but general consensus would probably include Weil Gotshal & Manges, Shearman & Sterling, White & Case, Skadden Arps Slate Meagher & Flom and Cleary Gottlieb Steen & Hamilton.
Though the strategy of the above firms, which all hail from New York, differ to a considerable extent, this pack has increasingly set the tone for what ambitious US firms that are not afraid to move outside their domestic comfort zone can achieve in Europe.
Issues facing this group include whether White & Case can maintain its dramatic momentum of recent years and whether Weil Gotshal’s audacious attack on Europe’s private equity market can sustain itself. It will be just as interesting to see whether Shearman — for some still the bellwether US firm in London — can maintain its position in the face of increasing competition and several years that have been turbulent for its US parent.
Others firms being closely watched include Kirkland & Ellis, which this year followed up the 2006 recruitment of Linklaters’ two UK buy-out partners with a highly-rated three-partner private equity funds team from sector leader SJ Berwin. Other firms to pack a punch include Sidley’s structured finance-driven practice and Baker & McKenzie’s well-balanced full service practice.
But despite the many proud pedigrees of US firms operating in London, the market keeps foreign entrants continually on their toes. Notably, McDermott Will & Emery’s London arm, which was launched with much fanfare eight years ago but has since struggled to find its stride, has recently lost a number of partners, including high-profile founder William Charnley, who quit this month for Mayer Brown.
Mike Francies, Weil Gotshal & Manges
“This year has been pretty incredible for us for three reasons: the additional private equity team we recruited in 2006 has been a success; the rest of the office has also performed extremely well; and finally, the market has been very buoyant and, as a strong transactional firm, we should be very busy in that kind of market — and we have been. I am particularly proud of the new team coming in and doing so well and of the old team for adapting and ensuring the integration went so smoothly — the net result is that we have an extremely strong practice — I hope it carries on.
“We are building a fantastic transactional practice, but we have the balance that many other private equity firms do not have — our restructuring and litigation strengths make us well-placed for any downturn. We suffer from the same problems as other firms when it comes to recruitment and retention. Everyone says they move for the challenge and not for the money, but that does not mean that money is not an important factor. People will be less inclined to move when their firms are doing well — particularly at the junior partner level where you may do better in the first few years in a magic circle lockstep than a US firm. Increasing our associate salaries this year to £90,000 for newly-qualifieds has had the effect we wanted, however. We wanted to reposition ourselves with firms we regarded as our peers and the recruitment market and the number of applicants since has shown this has worked.
“The 'US firms in London' tag is a myth — every firm has its own strategy and you can no more generalise about US firms in London than you can about the UK-headquartered firms. We are succeeding in our aim to break into the UK market for complex transactions, whether they be corporate, finance, litigation or restructuring, but others do not necessarily have that aim.
“A lot of the US firms here are now more mature — they have been part of the scene for a long time. People such as [class action specialist] Cohen Milstein Hausfeld & Toll may still be coming in but I do not believe anyone significant to our markets is still to come. One of the most interesting developments has been Sullivan & Cromwell recruiting UK magic circle partners — if they suddenly build a big UK practice that would change a lot, as would Cravath Swaine & Moore or Davis Polk & Wardwell moving into UK law in a major way.”
Matthew Hudson, Proskauer Rose
“Our London office will be in Berkeley Square in Mayfair. It is close to the clients we want to work with — private equity, hedge funds and other alternative assets — and it is part of how we will differentiate ourselves. All firms find it hard to differentiate, but being in Mayfair and concentrating on those clients and all their needs from funds through to deals and the alternative asset space convergence will make us different.
“We will have 10 lawyers in quite soon and should be at 20 within 18 months. It is an exciting opportunity as Proskauer is essentially the last major US law firm without an office in London.
“The firm wanted to become more global and to do that you really have to be in London. It is also client-led — working with the clients Proskauer does means you do need an office here.
“The correct strategy for a new office is to focus on a niche, become exceptional at it, and then cautiously expand from there. What is the point in setting up another Linklaters? It will take you 100 years.
“Overall, the big challenge for US firms in London is still being accepted by UK institutions. I think there will be many more transatlantic mergers as firms try to grow here. The combination of UK firms catching up in profitability and the dollar exchange rate means a London office is no longer dilutive to earnings. In addition, UK firms have already built up their European networks which US firms now want.”
Peter Sharp, LeBoeuf Lamb Greene & MacRae
“The merger with Dewey Ballan- tine will give the combined firm approximately 190 lawyers — including 50 partners — in London from day one, which will make us one of the strongest US law firms in London. It expands practice areas and skill sets such as corporate and finance as well as expanding our European network. It means we will be increasing our trainee intake too — Dewey has never had an intake before and we will be increasing numbers from around 10 to 15.
“Even before the merger we have grown significantly over the last year. In the middle of last year we were in the mid-eighties in terms of headcount, but then we added partners in environment, real estate, capital markets, employment and projects and that took us to around 130 lawyers. They have all fitted in from day one and now it is about building a well-rounded full-service practice and adding strength and depth.
“The challenge for us is unchanged — we live and work in a very competitive environment where we are competing not just against US firms but big UK firms as well. The big challenge is to go on being competitive — having the right lawyers and teams.
“There are clearly some US firms with smaller London offices that have not found that magic to make it work. Some will plug along, but others may call it quits, or could be pushed into deciding the only way to succeed is through a merger with a London firm — like Chadbourne & Parke and Watson Farley & Williams.
“I would have thought there would be a lot of US firms in that bracket who say: ‘this is not working, doing it ourselves — we will have to team up.’”
Kenneth MacRitchie, Shearman & Sterling
“The big achievement for us has been the bounce-back we have had in M&A. We have had a strong year advising on deals including the London Stock Exchange bid for the Italian Stock Exchange, for Credit Suisse First Boston as financial adviser on the Delta Two bid for Sainsbury’s and advising Royal Bank of Scotland on its approach for ABN Amro.
“Over the last year our corporate team has had James Comyn come through as a new partner and we brought in Lois Moore from Freshfields Bruckhaus Deringer; we have not lost any partners. Our deal success confirms that when we have a steady M&A team in London we have a franchise that can attract major transactions.
I always knew we would be fine, but there were obviously questions about us. We have shown we are not only surviving but prospering — it is nice to have a stable ship in London.
“From our perspective it is now about building on what we have got — there are no areas where we feel exposed, although we want to grow project finance — which has had a fantastic year — and leveraged finance.
“What will be interesting is if we move into a situation where business conditions are not as good for law firms. How will US firms in London survive? If clients retreat back to their basic UK relationship firms does that mean US firms will suffer?”
Drew Scott, Sidley Austin
“Our growth has been very significant — not just in terms of adding numbers to the firm but also in growing into new areas — notably the insurance practice, which we started in the last two years, and is already making a significant contribution.
“In our structured finance group we have 70 lawyers and we still want to grow significantly. We are proud of the fact that so many of our partners in the London office have come through the associate ranks. Some 23 out of 41 partners in the office have come through internally, so associates and trainees can come to Sidley and see it as a place to have a fulfilling long-term career.
“There will be more UK/US mergers but I am not expecting anything spectacular in the short term. We have always wanted to be bigger in London and organic growth is a long-term plan. We seriously looked at alternatives a few years ago. In many ways, it would have been a lot easier to do the second phase of our growth though a merger, and we had a number of approaches but there was no perfect fit. For us, I do not believe that has changed. There are so many people at all levels in the firm, support staff, trainees, associates and partners who have made a major commitment to and investment in the London office. You could never settle for second best on this. It is just too important.”
Punching above their weight: US firms’ top mandates in 2007
Weil Gotshal & Manges underlined its deal credentials this year with two highly-coveted mandates, both for private equity house Terra Firma. The first saw the firm advise on the unsuccessful bid for FTSE 100 giant Alliance Boots, which ultimately fell to Kohlberg Kravis Roberts & Co. The firm was to have more luck on Terra Firma’s £3.2bn acquisition of EMI. Though much of KKR’s work on the Alliance Boots acquisition was handled by Clifford Chance, the London arm of Simpson Thacher & Bartlett was also heavily involved on financing.
Skadden Arps Slate Meagher & Flom and Shearman & Sterling both hit the headlines in July after winning key roles on the £12bn bid by Qatari investment group Delta Two for supermarket giant Sainsbury’s. Former UK Shearman partner Adrian Knight secured the mandate for Skadden. Shearman’s London chief, Peter King, gained some consolation for the firm with a role for Delta’s financial adviser, Credit Suisse.
Kirkland & Ellis’ London arm took a major role on the $3.5bn (£1.7bn) acquisition by key client Bain Capital of African retailer Edgars Consolidated Stores. The firm’s UK insolvency team has also been active this year secured a mandate on the closely-watched restructuring of Sea Containers.
What will Dewey & Leboeuf mean for London?
Last month Dewey Ballantine and LeBoeuf Lamb Greene & MacRae announced their surprise merger talks, which looks almost certain to create a combined firm with 210 (CHECK) lawyers in London — one of the largest foreign-owned legal practices in the UK.
The move looks set to reunite Dewey’s London arm with former capital markets head Camille Abousleiman, who left following the firm’s turbulent bid to merge with Orrick Herrington & Sutcliffe, which fell through in January. And the merger looks like it might succeed on the London stage. Although Dewey’s 40-lawyer London presence had, until now, been relatively small, it has an interesting portfolio of clients in M&A and banking including Japanese investment bank Nomura. According to LeBoeuf London managing partner Peter Sharp, the firms will fit well together in London because “there is very little overlap in the two firms’ practices”. He says that a major part of the rationale behind the merger talks, which are still awaiting a final partner vote, is to create a strong platform for London and European expansion.
Dewey London managing partner Fred Gander is also very optimistic about the synergies the two firms will bring together in London. He says Dewey’s London practice had reached a stage where to service clients effectively they needed a lot more people. A merger was the quickest way to ramp up capabilities, hence the tie-up with LeBoeuf, which has 140 fee earners in London. Although Dewey has hired litigation partner Alastair Crawford from Freshfields Bruckhaus Deringer to head up the London office’s litigation practice in April and recruited capital markets partner Carlo Kostka, also from Freshfields, Gander says that the firm needed a lot more critical mass to move forward.
“We have been hampered this year by our inability to provide a full-service office to our clients,” admits
Gander. He is particularly enthusiastic about the tie-up securing full-service support for the firm in the areas of litigation, environment, real estate, and tax practices.
