In June, shortly before he became the British prime minister, Gordon Brown announced, “[This is] an era that history will record as the beginning of a new golden age for the City of London.” Meanwhile, New York was digesting the findings of a McKinsey & Company report, commissioned by Mayor Michael Bloomberg, on how the Big Apple might respond to London’s resurgence as a financial center.
More and more, investment bankers, hedge fund specialists, and private equity dealmakers are being drawn to the city of sky-high rents, creaking infrastructure, and lukewarm, $7-a-pint beer. M&A across Europe has soared�in 2006 more deals were done on the continent than in North America, according to data from mergermarket�and more typically than not, the finance for these deals is raised in London. Fleeing Sarbanes-Oxley, more international companies are increasingly looking to list on Europe’s equities markets. Last year, more money was raised by companies on London’s junior AIM market than on America’s Nasdaq.
These new market dynamics have all played into the hands of the United Kingdom’s leading law firms�more specifically, the elite Magic Circle quintet. Allen & Overy, Clifford Chance, Slaughter and May, Freshfields Bruckhaus Deringer, and Linklaters dominate high-end corporate work in London and most of Europe’s major jurisdictions. In the last financial year the five Magic Circle firms all reported growth in profits per equity partner (PPP) of more than 20 percent. In the process, they have dispelled some views of the U.K. market held stateside�that the Brits are soft on underperforming lawyers, are blindly wedded to inflexible locksteps, and take too many holidays. As a group, the Magic Circle firms are gaining ground and in some cases surpassing their U.S. rivals.
In this issue, we pay special attention to two Magic Circle firms, longtime rivals Linklaters and Freshfields. This year Linklaters’s soaring profits have put it among the ten most profitable firms in the world. Slaughter and May still has the Magic Circle’s highest PPP at $2.495 million, but most of its lawyers remain based in London. Linklaters has defied predictions that a firm could not grow a global practice of breadth and depth and still be as profitable as all but the richest New York firms. Under the guidance of managing partner Tony Angel, Linklaters has left its British competitors playing catch-up�especially Freshfields.
In separate profiles, we look at the driving forces shaping Linklaters and Freshfields today. Both have undergone significant change in recent years, transforming into integrated global businesses. But they have done so under starkly different management styles. To find out more, please turn to “Touched by an Angel” and “ A Break with Tradition.”
In the print edition, we look at the Magic Circle as a group, comparing their financial performances since 2000 with those of their U.S. competitors and some U.K. rivals. We chose two comparison groups of U.S. firms: one comprising the ten most profitable New Yorkbased practices, from Wachtell, Lipton, Rosen & Katz to Cleary Gottlieb Steen & Hamilton, and a second group made up of the ten U.S. firms with the most lawyers based overseas, including White & Case and Latham & Watkins�although not Baker & McKenzie, because its global model remains unique. Our financial data is drawn from The Global 100, which is based on The Am Law 100 and reporting by our sibling publication Legal Week and other sources. For details, see our methodology.
These are not perfect comparisons. With the exception of Slaughter and May, the Magic Circle practices have globalized far more than their U.S. counterparts�Freshfields, for example, has 68 percent of its attorneys outside of the U.K., compared with 16 percent for Skadden. (Only White & Case with 63 percent of its attorneys outside the United States has the same kind of international exposure.) So Wachtell’s New Yorkcentric business model is far removed from the multijurisdictional approach of Linklaters or Freshfields. However, we wanted to assess how London’s most profitable practices compare with their New York counterparts and with those U.S. firms that have most closely followed them down the global path.
The most striking finding is how much, in terms of profits per partner, the Magic Circle has pulled away from the U.S. global firms and narrowed the gap with New York’s elite. “Some of the Magic Circle firms have made some almost astonishing leaps in the last few years,” says Milbank, Tweed, Hadley & McCloy chairman Mel Immergut.
The resurgence of the Brits since 2004 owes much to Europe’s buoyant markets (which recovered from the postmillennium slowdown later than the U.S. market) and the rise of China. Of the Magic Circle firms, none but Clifford Chance has a significant presence in the U.S.�but that didn’t seem to matter over the past year. The investments that Linklaters, Freshfields, Clifford Chance, and Allen & Overy made in opening overseas offices during the past two decades have paid off, giving them first crack at the biggest corporate deals outside America. As the deals chart, “Where the Work Was,” on page 111 of our print edition shows, Magic Circle firms played key roles in Europe’s largest recent M&A transactions announced between July 1, 2006, and June 30, 2007. Allen & Overy, Clifford Chance, Linklaters, and Freshfields worked on Dr. Ing. h.c. F. Porsche AG’s bid for rival car company Volkswagen AG, while Slaughter and May, Clifford Chance, and Allen & Overy comprised a triumvirate of Magic Circle advisers on competing offers for Dutch bank ABN Amro Bank N.V.
In addition, the U.K. leaders have taken better control of their global costs, introducing tighter management of their back-office functions and starting to explore savings from outsourcing support services. A few years ago, Clifford Chance had more support staff than attorneys�now it has just over 3,000 nonlegal staff compared with more than 3,500 attorneys.
The British firms have also reined in equity partnerships. In the most dramatic illustration of this, Freshfields slashed its equity partner numbers from a high of 526 in May 2004 to around 420 today and became the last Magic Circle practice to introduce nonequity partners to its ranks.
For the Magic Circle firms, the average revenue per lawyer (RPL) figure has improved, but still lags far behind the New York elite and has only just passed the average for the most global U.S. firms. On this figure, however, all the U.S. practices benefit from having the majority of their lawyers in America, where hourly charge-out rates tend to be higher than in most markets in Europe and Asia.
The weakness of the dollar has also helped the performance of the U.K. firms relative to their U.S. competitors, points out law consultant Partha Bose�who in 2005 predicted the Magic Circle’s prospects would ultimately decline ["The Tragic Circle," November 2005]. Earlier this year the U.S.U.K. exchange rate hit $2 to the pound for the first time since the early 1990s. “A lot of the Magic Circle firms’ increase in profitability and new growth has to do with Gordon Brown,” says Bose, referring to the rise in the value of sterling during Brown’s tenure as chancellor of the exchequer.
“The big jump in profits has been driven by the pound.” However, for our charts, we used the average exchange rate from calendar year 2006�$1.8434 to the pound�which tends to minimize the impact of the pound’s 2007 surge. (As recently as 2003, the average exchange rate was $1.6347 to the pound, but for the three years ending in 2006, the average exchange rate remained steady at around $1.82 to the pound.) What’s more, the Magic Circle is easily outstripping its crosstown rivals, who also tally their finances in pounds. Five London-based firms that rank just below the Magic Circle in reputation and profitability�Ashurst, Herbert Smith, Lovells, Norton Rose, and Simmons & Simmons�all have established international networks, though typically not as extensive as those of the four global Magic Circle firms. Yet the gap between the very top of the U.K. market and the second tier is growing, as measured by both RPL and PPP. Of these second five firms, only Ashurst and Herbert Smith, with PPP of $1.76 million and $1.51 million, respectively, have profitability levels approaching Magic Circle levels. “We think there’s a top seven in the U.K. market and that we’re distancing ourselves from the rest,” insists Ashurst senior partner Geoffrey Green.
How the U.K. elite weathers any downturn in Europe and Asia will be the true test of the Brits’ resurgence. As American partners like to point out, the Magic Circle cannot rely on litigation to make up for a decline in corporate or finance. “Even though they are leaner and meaner than in the past, they don’t have the support of a large litigation practice,” Milbank’s Immergut says. “But there would have to be a global recession to really impact the Magic Circle firms.”
Additional reporting by Emily Barker.