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LOS ANGELES-The Chinese stock market may have stumbled last week, but U.S. firms with offices there made great strides in 2006, with some saying their investments in China and other key foreign markets are starting to pay off. At Paul, Hastings, Janofsky & Walker, which opened its first office in China five years ago, revenue there was up by 50% in 2006, to $53 million. “Growth has been steady, but certainly in the last year, it accelerated,” said the firm’s chairman, Seth Zachary. “We see our patience being rewarded.” Though Zachary said the firm doesn’t precisely track profit margins by region, “if you look at hard expenses versus hard revenues,” China is profitable. Discounts easing Over the past decade, scores of U.S. firms have planted flags in China, but many quickly discovered that while work was abundant, profits were more elusive. Fierce competition drove down billing rates, leading to widespread discounting as firms sought to gain market share. While discounting is still common, law firm leaders say it’s easing, especially for more complex work. That’s partly because the Chinese economy has been on a tear, with a flood of foreign investment and related capital markets work, and a spike in the number of Chinese-based companies going public on the Shanghai exchange. The value of Chinese stocks has more than doubled in the last year alone. A global impact Though most firms say revenues are climbing in China, most won’t dish out profitability figures. Lisa Smith, vice president of consulting firm Hildebrandt International, said those offices are generally not expected to be profitable on their work alone, especially since American firms aren’t permitted to practice Chinese law. But having a strong presence in China helps reap rewards for the firms globally, such as when foreign clients need help with Chinese matters, or when a Chinese client lists on an overseas exchange. Billing rates are moving higher, too, partly because Chinese firms have been raising their traditionally lower rates, which had helped to keep a lid on the market. “Pricing is much firmer in China these days,” said Keith Wetmore, Morrison & Foerster’s chairman. “The IPO market remains very strong and the talent pool hasn’t gotten any bigger, so we’re seeing significantly less price pressure on IPOs.” Wetmore said “it’s counterproductive” to break out revenue and profit data for the greater Chinese market, where it has about 60 professionals. Global giant DLA Piper, which has nearly 150 lawyers in mainland China and Hong Kong, said revenue at its non-U.S. offices was up by 21% in 2006, to $788 million. Revenue was up a still respectable 14% in the U.S. The firm wouldn’t offer a breakdown for the China market, though a spokesman said those offices are profitable. “It’s the economy in China and the avalanche of foreign direct investment that’s driving the law firm revenues,” said J. Terence O’Malley, the co-managing partner of the United States for DLA Piper. Having a larger China presence-the firm beefed up there thanks to an influx of lawyers from now-defunct Coudert Brothers-results in less ebb and flow of revenue, O’Malley said. “Smaller offices are more vulnerable to special events-a single case or large transaction can materially boost or reduce revenue,” he said. Zachary said maturing Chinese companies are now bringing his firm complex intellectual property litigation, in addition to mergers and acquisitions and finance work. Recognition of U.S. firms’ abilities is improving, he said, as firms like his create larger staffs there. The growing returns from China are causing second thoughts for firms that left the market when it wasn’t as profitable-like Gibson, Dunn & Crutcher of Los Angeles, which closed its Hong Kong office in 1998. “So many of our clients are increasingly investing in China-I am well aware that the market has changed a fair amount and we’re looking at it,” Gibson’s managing partner, Kenneth Doran, said. China isn’t the only hot spot for U.S. firms. Paul Hastings said revenue at its nine-year-old London office was up a whopping 84% in 2006, to $22 million. IPOs shifting to London Many initial public offerings are shifting to the London Stock Exchange, which attracted more international IPOs than did U.S. exchanges last year. The country’s Alternative Investment Market has become a viable choice since it offers a less costly, and less regulated, IPO process for smaller and midsized companies than U.S. exchanges do. With the British pound so strong, billing rates tend to be healthy for U.S. firms there, though some law firm leaders said that hours are often less and the cost of operating there is quite high-balancing out the higher hourly rates. Latham & Watkins said its revenue in London grew by 15% last year to $136 million, and last month the firm’s chairman said Latham saw growth in Asia and Europe.

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