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The 2009 Global 100: The Great Game
The American Lawyer
Soon after Simon Davies took over as Linklaters' managing partner in the fall of 2007, he brought together a group of the firm's partners for some scenario planning. Turbulence in the subprime mortgage sector hadn't yet grown into a global economic downturn, but Davies knew that the legal services market was already changing. "We had been striving to run ourselves as efficiently as possible to deliver clear value to our clients and avoid increasing rates, " he says. The purpose of the gathering was to run through some "what-ifs," determine how the firm would be affected, and consider how it would respond. Scenario three, the worst one under consideration, was the collapse of a major investment bank.
That worst-case scenario came to pass less than a year later, when Lehman Brothers Holdings Inc. imploded. The resulting contagion forced many global firms to slash head count, as they tried to compete in a world where they didn't need hundreds of associates churning out financing documents. Linklaters axed 400 lawyers and staff worldwide (around half were in London), and other global firms cut just as deeply. Latham & Watkins announced in February that it was cutting head count by 415, while in March, White & Case revealed plans to let 400 lawyers and staff go.
Our Global 100 rankings, compiled in conjunction with London's Legal Week, provide a glimpse of the impact of the financial meltdown on the world's largest firms. In many cases the effect is profound: Clifford Chance's profits per partner, for example, fell by 41 percent, while Latham's dropped by 20.5 percent.
Such results are a far cry from the steep upward trajectory that global firms have long enjoyed. Many British firms in particular led the way in developing international networks. Since the middle of this decade, those networks have appeared to give them a hedge against a downturn -- the sort of hedge that American firms have with their litigation and bankruptcy practices ["The English Advantage," October 2008].
Ten years ago, the British were almost alone in the global arena. In 1999 Latham, for instance, had just 40 attorneys outside of its home country, while Allen & Overy and Linklaters each had more than 600, Freshfields Bruckhaus Deringer had more than 800, and Clifford Chance had more than 1,300. Latham's overseas growth since then has been considerable -- it now has 533 of its attorneys overseas -- but that's still only 25 percent of its headcount, compared to more than 50 percent for the four British firms.
Early on, the U.K. firms' networks produced greater headcount and revenue, but did not create efficiencies or increased profits. In 2002 the United Kingdom's largest firms (Clifford Chance, Linklaters, Freshfields and Allen & Overy) had relatively low revenue per lawyer, closer to that of Baker & McKenzie than Skadden, Arps, Slate, Meagher & Flom, the U.S. firm that first managed to combine scale and profitability. Profits also lagged.
But the boom years from 2004 to 2008 were good to the U.K.'s global heavyweights. On a compound annual growth rate (CAGR) basis, Allen & Overy, Freshfields and Linklaters have seen five-year revenue per lawyer increases of 15 percent, 12 percent and 8 percent, respectively, better than those of White & Case (6 percent), Skadden (5 percent), Sidley Austin (4 percent), Jones Day (3 percent) and Latham (3 percent). With a five-year CAGR of 5 percent, Clifford Chance is the only one of the British giants that lags behind its U.K. competitors. In dollar terms, the British firms' numbers received a boost from the weakness of the U.S. dollar, but it's also clear that the U.K. leaders have improved the way they run their firms. "There has been a revolution in the way the Magic Circle firms are managed," says Mel Immergut, chairman of Milbank, Tweed, Hadley & McCloy.
Because the world's largest investment banks are the bedrock of many global firms' client bases, the aftermath of Lehman's collapse served as the first serious test of the international hedging strategy. Some firms' hedges, it turns out, were more robust than others.
At Linklaters, for instance, the falloff in corporate and finance work was moderated by winning some of the work created by Lehman's collapse. The firm won the most valuable European Lehman mandate, advising the restructuring administrators in Europe and Asia. At its busiest, Linklaters fielded a team of more than 300 lawyers from 17 practice areas on the project; between September 2008 and mid-March of this year, Linklaters billed 33.5 million pounds ($55.6 million) for its work, according to a report to creditors released in April. By comparison, Weil, Gotshal & Manges billed $55 million for its work on the Lehman bankruptcy between mid-September 2008 and the end of January.
"In the aftermath of Lehman Brothers, levels of activity across our international network varied significantly," Davies says. "For Lehman and similar multijurisdictional deals, it was crucial to have strength in depth across the network, but a lot of crisis work was focused on financial centers, so offices away from those centers were not as busy."
Outside of main financial hubs, other firms also watched work dry up in jurisdictions like Moscow and Dubai, both of which had thrived in the boom. But many firms found some relief in the slow spread of the meltdown, which left some markets strong while others collapsed. "An international hedge is about timing -- it reflects the way the downturn spread internationally," says Lovells managing partner David Harris. "New York and London were hit first, while Asia was still performing strongly." It's a view echoed by Steven Davis, chairman of Dewey & LeBoeuf. "From our perspective, geographical diversification has been a huge positive," he says. "While this recession hit globally, we've seen different regions experiencing different economic conditions."
That said, the success of an international hedge is not only about geographic diversity. "It's about business mix rather than just scale," says Freshfields chief executive Ted Burke. With some crisis-related work, particularly advising governments on rescue measures, drying up, Freshfields is preparing for a tough spell. Burke says he thinks the firm's current fiscal year, which runs from May 2009 to April 2010, will end with decreases in the major financial metrics.
The managing partner of a top 10 Global 100 firm who asked not to be identified says that some firms were destined not to maintain their successful runs, regardless of the economy. "During boom markets, there's so much low-hanging fruit that some firms were moving into markets and practice areas where they shouldn't really be and ramped up their hiring," this managing partner says.
Of the four global Magic Circle firms, the one that turned in the best financial performance, Freshfields, has the smallest bank finance practice. The firm benefited from picking up a significant chunk of crisis-related work and also by having restructured its partnership before the downturn hit (the firm has 415 equity partners now, down from a high of 521 in 2005).
Although Linklaters received the Lehman mandate and other crisis work, Freshfields enjoyed a similar run, picking up mandates from the Bank of England and the German government on rescue packages for Germany's banks. While Linklaters and Freshfields have the strongest corporate practices of the global U.K. firms, the Magic Circle practice with arguably the mightiest finance franchise worldwide, Clifford Chance, saw the largest fall in profitability. Its profits fell to $1.36 million in 2009, from $2.3 million in 2008.
The recession may force firms to assess their presence in some markets, but no one is expecting the expansion that dominated the past 10 years to unravel. "The globalization of the last few decades may have slowed, but I don't see the trend now moving in a different direction," says Shearman & Sterling senior partner Rohan Weerasinghe. Like Harris, he notes that for his firm, the impact of the downturn was blunted by the slow progression of the crisis from the United States to Europe and finally to Asia.
The same slow rollout is expected to mark the end of the downturn. A growing number of forecasts suggest that Asia will emerge first, led by China. Citigroup Inc. recently revised its estimate for economic growth in China from 8.2 percent to 8.7 percent for 2009, and from 8.8 percent to 9.8 percent for 2010. Linklaters's Davies, who spent four years as managing partner of the firm's Asia practice before becoming managing partner, predicts that Asia's contribution to his firm's top line will increase, driven by deals coming out of China and India. (Asia currently provides about 11 percent of Linkaters's gross revenue.)
But for the vast majority of Global 100 firms, Asia is not a significant revenue generator. Of more importance is whether the U.S. or Europe rebounds first. Since the American economy has historically emerged first from global downturns, the American firms may have an advantage. In addition, the depth of the U.S. litigation market gives American practices a valuable cushion. Privately, Magic Circle managing partners look enviously at such firms as Paul, Weiss, Rifkind, Wharton & Garrison, where 55 percent of gross revenue was derived from litigation last year.
In mid-September 2009 Linklaters' senior management was again scheduled to meet for strategic planning. Interviewed in late July, Davies predicted some clear themes arising out of the current global economy: "Government-related work is going to become more important, there will be more regulation; with banks having less leverage, the volume of financial product work will be at a lower level; and, with continued volatility in the markets, law firms will have to increase the flexibility of their lawyers, partly by broadening training." No word on this year's worst-case scenario.
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