The legal sector used to be such a nice, calm place to do business. Partners and clients would occasionally come and go. The odd practice would falter, while a few firms would make slightly more money than everyone else. But the market historically lived up to its reputation as a bastion of sleepy conservatism and resilience. Then came the financial crisis. Spanner, meet works. The legal elite has been forced to adapt to the most turbulent market conditions for a generation. As firms tussle for position in this new world order, the pronounced uptick in law firm merger activity has transformed our Global 100 rankings.
New giants are emerging to dominate the charts, thanks in part to the increasing use of looser organizational structures that have facilitated these combinations. Vereins and verein-like firms now constitute five of the top 25 positions on the revenue chart. Five years ago there was just one: Baker & McKenzie, with the U.S. and international arms of DLA Piper still appearing as separate firms. (A verein is a holding structure, utilized by DLA, Baker & McKenzie, and the majority of recent global tie-ups, that lets participating entities maintain their existing forms without integrating financially.) Three new verein-type firms join the rankings this year: Squire Sanders, SNR Denton, and Europe’s CMS Legal. As the market continues to evolve, there are likely to be more. And with demand for legal services remaining broadly flat across much of the United States and Europe, the biggest international practices have continued to push the geographic envelope by investing in faster-growth markets such as Asia and Africa.
The net result of all this change is that the Global 100 has become more top-heavy. Put simply, the upper echelons of the international legal market, as measured by revenue, are becoming increasingly dominated by a smaller number of larger firms. And the gap is widening. The last year in which we excluded vereins from our survey was 2010. (Baker & McKenzie, a verein since 2004, was the exception.) Over the two-year period that’s followed, the total revenue accrued by the top 25 firms has increased 15.5 percent, to $38.1 billion. That’s almost twice the $19.4 billion generated by the second quartile of firms, which contains two vereins, Squire Sanders and SNR Denton, and which has seen aggregate revenue increase by just 4.5 percent during the same time frame.
The most dramatic moves on our revenue chart reflect the spate of recent mega-combinations. The last fiscal year saw Squire Sanders complete its deal with U.K. firm Hammonds and rise 23 places on the chart, to number 41, as its revenue increased by more than 40 percent, to $741.5 million. Norton Rose continued its international trailblazing with not one but three combinations: in South Africa, with Deneys Reitz, and in Canada, with both Ogilvy Renault and MacLeod Dixon ["Taking On the World," March 2011]. In 2010 Norton Rose placed 67th; in 2011, 34th. Following the completion of its Canadian and South African acquisitions, it sits this year in 14th place with revenue of $1.32 billion—a whopping 175 percent increase in two years. In another notable piece of consolidation, U.K. insurance giant Clyde & Co breaks into the top 100 this year on the back of its November 2011 combination with historic London rival Barlow Lyde & Gilbert—the largest-ever merger between two U.K. law firms ["When Opportunity Knocks," October 2011]. Revenues of $460.5 million sees the 800-lawyer firm, which continues to practice as Clyde & Co, enter the list at number 79.
The rapid, merger-linked growth of the vereins is so significant that it has artificially boosted the average revenue growth for the entire Global 100. While total revenue across the top 100 grew 6.8 percent, to an all-time high of $81.9 billion last year, without new entrants Squire Sanders, SNR Denton, and CMS, the average increase in revenue for the remaining 97 firms would have been just 5.3 percent. Remove Norton Rose from the equation and revenue growth drops further still, to 4.6 percent.
Clyde & Co is joined in the rankings by another new British entrant, technology-focused Bird & Bird, which in recent years has established itself as one of the United Kingdom’s most consistent performers. It scrapes in at 99th place, with revenues of $377 million. The new names gain admittance at the expense of Venable, number 98 last year, which had only featured in the rankings since 2010; and Dewey & LeBoeuf, which collapsed earlier this summer.
The CMS Legal group of 10 European law firms also joins the survey as the result of a subtle amendment to our methodology. CMS, which brings together practices such as the United Kingdom’s CMS Cameron McKenna and Germany’s CMS Hasche Sigle, is structured as a European Economic Interest Grouping, or EEIG. There are slight differences between EEIGs and vereins—EEIGs do not separate the respective members’ liabilities, for example—but operationally they are very similar. Both ensure that participating entities remain distinct from a legal and fiscal perspective, and both prohibit the sharing of profits but not of costs. Ronnie Fox, founder and principal of specialist U.K. partnership law firm Fox, says there is “no logical reason” why EEIGs shouldn’t enjoy the same status as vereins in our rankings. So, following consultation with Fox and several other law firm management and partnership experts, CMS gains entry this year.
“We have a unified strategy, shared matter management, conflict checking systems and legal documents, and a central budget by which we share costs,” says CMS group chairman Cornelius Brandi. “We are not a group of separate businesses, we are truly one firm.”
The methodology change has had a profound impact on CMS’s showing within the Global 100. Its British component, CMS Cameron McKenna, actually broke into the top 100 individually last year, placing 98th, with revenues of $347.5 million. In this year’s survey, the combined CMS sits just behind Sullivan & Cromwell in 22nd place, with revenues of $1.1 billion. Brandi adds that the group is now looking at expanding its reach beyond Europe into both Asia and the United States—either by opening new offices or bringing new member firms on board—so its position is likely to improve in the coming years.
But vereins and recently merged firms aren’t the only practices to have enjoyed an upwardly mobile 2011. A conventionally structured practice, business litigation powerhouse Quinn Emanuel Urquhart & Sullivan continues the successful streak that raised it 21 places in the rankings between 2010 and 2011. Gross revenue leaped 31 percent, to $723.5 million in 2011, enough for the firm to climb another 16 places to 42nd in this year’s Global 100, while average profits per equity partner (PPP) grew 15 percent, to $4.16 million. Managing partner John Quinn says that a “significant amount” of the litigation firm’s increased revenues came from contingent fee and other alternative fee arrangements, both on the plaintiffs and defense sides.
At the other end of the cyclical spectrum is elite corporate boutique Wachtell, Lipton, Rosen & Katz. With premium transactional work still in relatively short supply, the firm slipped 12 places—second only to Australia’s Minter Ellison, which dropped 16 places following a 4.8 percent dip in revenue, to $552 million. (Minter’s tumble came after the firm changed its accounting methods and stopped including revenue from associated offices.) As it has in all but two years since we first ranked global firms by PPP in 1999, Wachtell still comfortably tops our profits chart, however, with average PPP up 2.6 percent, to a heady $4.46 million. Another stubbornly local firm, Cravath Swaine & Moore, also had a relatively tough year, dropping nine places, to 60th—although still four positions higher than it was in 2009.
This year’s survey also highlights the continued globalization of the top 100. With most mature markets such as North America and Western Europe offering precious few opportunities for growth—U.S. GDP is set to rise just 2.3 percent this year, while the OECD warned this May that the 17-country Eurozone could shrink by as much as 2 percent in 2012—the world’s largest law firms are expanding internationally in search of fresh revenue streams. There has been a marked increase over the past 12 months in both the number of firms with offices in 10 or more countries (from 20 to 24) and the number of firms that have at least 50 percent of their lawyers based outside the firm’s home country (from nine to 14). Much of the action has centered on Australia.
Norton Rose got the ball rolling in 2010 by combining with midmarket firm Deacons; Clifford Chance launched in Sydney and Perth through mergers with local boutiques Chang Pistilli & Simmons and Cochrane Lishman Carson Luscombe in February 2011; and DLA Piper integrated financially with its Australian ally Phillips Fox that May. More recently, Ashurst combined its Asian operations with Sydney-based Blake Dawson in March 2012, ahead of a proposed full merger in 2014, while Linklaters formed an “integrated alliance” with 876-lawyer Allens—the Australian “best friend” of Magic Circle firm Slaughter and May. (Since they are joined in an alliance, rather than an integrated merger or verein, Linklaters and Allens will remain separate in our survey.)
Just this month, Herbert Smith became the latest international entrant to Australia, securing a tie-up with Freehills, which is widely regarded as having one of the country’s top corporate practices. Unlike most other global law firm unions in Australia, Herbert Smith’s combination with Freehills is a full, financially integrated merger. Herbert Smith managing partner David Willis says his firm opted against a verein structure partly because of its previous experience with looser affiliations. Herbert Smith had for many years an exclusive alliance with Germany’s Gleiss Lutz and Benelux leader Stibbe, but the relationship ended last year after the two European firms rejected its merger advances.
“We put a lot of effort into that alliance, so it was disappointing that we weren’t able to take it to a final, fully integrated stage,” Willis says. “Psychologically, we didn’t want to go through that again. We were also mindful of clients’ growing preference for their advisers to be integrated, so we knew that if we were going to do a deal [in Australia] it would have to be a full merger, rather than creating another halfway house and risk finding out later that the two sides don’t see things playing out the same way.”
With Herbert Smith already the world’s 37th-largest firm by revenue, the addition of Freehills—which rose 12 places to 58th this year, thanks partly to an improvement in the U.S.–Australian dollar exchange rate—should see the combined business power up the rankings. According to each firm’s most recent results, aggregate revenues of $1.35 billion would put the merged Herbert Smith Freehills in 13th place, just ahead of White & Case.
International firms see Australia as providing a gateway into Asia, and in particular, China. (It is not an unattractive domestic market, however: The three-largest increases in PPP last year were all seen at antipodean firms. Minter Ellison jumped 37.9 percent, to $1.31 million; Freehills 30.4 percent, to $1.27 million; and Blake Dawson, which now practices as Ashurst Australia, 30.1 percent, to $1.21 million.) One Australian firm has gone even further in cementing its ties to the region. Mallesons Stephen Jaques in March completed a shock merger with China’s King & Wood—the first combination between a Chinese and an international firm. Boasting almost 1,700 lawyers—enough to tie Greenberg Traurig in 17th position in our head count charts—the combined firm is likely to feature prominently in next year’s Global 100. King & Wood’s 687 lawyers means that the legacy business was already the world’s 84th-largest firm by number of attorneys, sandwiched between Proskauer Rose and Arnold & Porter. In fact, no fewer than five Chinese firms made it into the head count rankings this year, including some of the biggest law firms you’ve (probably) never heard of. Heading the list is Dacheng, which debuts in 10th place, with just over 2,027 lawyers. That’s bigger than either Freshfields Bruckhaus Deringer or Latham & Watkins. Dacheng is followed by Beijing-based Yingke in 18th, with just under 1,600 lawyers; Zhong Lun enters at 74th, with 740; and Zhongyin at 81st, with 706.
But even in the midst of all this disruption, there are still constants to be found. Baker retains its position as the world’s largest law firm by revenue, with gross revenue inching up 2 percent in the fiscal year ended June 30, 2012, to $2.313 billion, putting it $66 million ahead of second-place DLA Piper. (DLA, which tallies its revenue on a calendar-year basis, recorded $2.247 billion in gross revenue in 2011.) Baker has now topped the charts for three consecutive years. Some things change; others stay the same.