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They’re ready and waiting. They’ve made it perfectly clear, in a roundabout British way, that they’re there for the taking. Nearly a decade after Britain’s Magic Circle firms launched their U.S. expansion drive, Linklaters, Allen & Overy, and Freshfields Bruckhaus Deringer accept that ultimately they need to merge to get where they need to be in the United States. Clifford Chance merged with second-tier New York firm Rogers & Wells in January, but its international rivals are not content with this strategy. Instead, they are waiting for New York’s top firms to wake up to their idea of a global firm. Fresh, so to speak, from completing two German mergers this year, Freshfields’ chief executive Alan Peck says, “We are convinced that we need to do more in the U.S. than we [are] at the moment. This network is going to throw up a heavy demand for top-quality U.S. legal services. We’ve made no secret of the fact that an American deal is our next step.” Linklaters has even turned its New York managing partner into an “Americas managing partner.” Caird Forbes-Cockrell, the man with that evolving title, says his new job includes watching the merger market so that Linklaters is aware of the intentions of its rivals and favored partners as it monitors its U.S. strategy. But how does the urge to merge square with the heavy investment that the British firms have made in U.S. lawyers in their New York offices since the 1990s? At first glance, they have been making steady progress in the key areas of recruitment and deals. The main selling point in recruiting is, of course, the international glamor of their global networks, although a former partner at a Magic Circle firm’s New York office says that associates who did buy the global message joined the firm to work abroad or on international deals. That’s great for your international network but does little to build a domestic U.S. practice. All three firms are targeting U.S. law school students. For instance, Linklaters, which has 72 lawyers in New York, now runs a summer associate program, and there are signs these efforts are paying off. Jon Lindsey, managing partner of headhunter Major, Hagen & Africa’s New York office, says U.S. law students are increasingly mentioning the Magic Circle firms. Irene Dorzback, assistant dean in the office of career counseling and placement at New York University School of Law, says, “If the question is whether these firms had full schedules when they interviewed on campus, the answer is yes. [The students] were the same people who were interviewing with the major New York firms.” Partner hires are a trickier issue altogether in the United States’ eat-what-you-kill market. Forbes-Cockell insists that many U.S. partners are attracted by Linklaters’ lockstep system of pay. “They have seen the time and effort that goes into the compensation process [at U.S. firms], which we spend no time on at all, and it creates a more collegial atmosphere.” But Stephen Revell, head of Freshfields’s New York office, grumbles, “I get literally hundreds of partner resumes, and a lot of them you can write off quickly as people who hawk a book of business around to get the highest price for a couple of years and then move on.” Stephen Hood, who was managing partner of Clifford Chance’s New York office from 1992 to 1998, says that by 1996 he believed he was “on a hiding to nothing” (a Britishism for “going nowhere fast”) in trying to build the office through hiring. He interviewed about 100 potential partners while in New York, but nearly all were “very middling people in good firms.” The trick, he says, is to get good partners from middling firms, but they are hard to find. And — with the U.S. market booming — even these people are unlikely to leave their merit-based firms for lockstep at the moment. The U.K. firms’ first foray into U.S. law came when the Securities and Exchange Commission introduced rule 144A in 1990. This meant that European securities could be sold in the world’s biggest capital market — the United States. To safeguard this important business, the U.K. firms had to be able to offer 144A advice. First Clifford Chance, then Linklaters, Allen & Overy, and finally Freshfields began building U.S. law capability. There was no grand strategy to start out with, and the development has been largely reactive since. Capital markets is a volatile business. “You can be frantically busy, and then you have a Russian crisis, or even a Timbuktu crisis can put the international capital markets on hold for six months, and you have to keep everybody busy,” says Clifford Chance’s Hood. The firms have supplemented their securities teams with U.S. lawyers offering international finance products. This is because the Brits can use their networks to compete for deals, and the work brings in steady income that helps insulate them from the vagaries of the international capital markets. Freshfields’ recent deals include representing Merrill Lynch & Co. Inc. and Chase Securities, Inc., on setting up a $1.9 billion fund and advising the Chase Project Finance Fund on the financing of a power plant in Pennsylvania. Linklaters claims progress on gaining SEC-registered securities offerings, including advising Merrill Lynch and AIB Capital Markets on the $4.2 billion privatization of Telecom Eireann, and its asset finance team has worked on innovative deals including French rail company SNCF’s U.S. service contract, the first to be placed into the U.S. But this means the two firms — corporate powerhouses in Europe — largely restrict themselves to financial products in the United States. Forbes-Cockell says, “How do we tackle doing the U.S. piece of large-scale M&A transactions? How do we establish the size we need to do that? The answer is that’s not going to be the focus of our growth.” Allen & Overy’s Sheldon says his office’s strength is cross-border finance work with a U.S. element, like the financing of Unilever PLC’s $20.3 billion takeover of the United States’ Bestfoods and Vodafone plc’s $14 billion purchase of AirTouch Communications Inc. But the high-margin domestic market remains impervious. “There are great practices here with a fantastic franchise, and that makes them very powerful competitors,” he says, “and it makes it very hard for us to break into big-ticket M&A, litigation, and U.S. securities work… . And those three areas happen to be the most lucrative areas in the world, so if you can get those it would be a huge advantage.” But Shearman & Sterling and Cleary, Gottlieb, Steen & Hamilton are competing for capital markets and M&A deals in Germany, the most important market in the Brits’ European backyard, and on cross-border deals they can combine their German practices with powerful U.S. capability. To protect their territory and achieve their goal of offering one-stop services throughout their networks, the Magic Circle firms need to do mergers. To bring on board top-level M&A and securities players would blow the Brits’ lockstep system to pieces, and the costs wouldn’t stop there. Next, you would need U.S. tax, employment, and all the other “esoterica” (as one U.K. partner puts it) to service the big deals. And this would cost a fortune that even the traditionally longsighted Brit partners would balk at. Even the growth so far in the United States has been an expensive business, says a former Linklaters partner. The U.S. securities lawyers had their own ambitions to do general U.S. securities work, so the firm started adding tax and other support practices needed to do this work. “You keep investing more and more, but you are creating a third-tier practice. You’re competing against Simpson Thacher & Bartlett and Sullivan & Cromwell, but also against second- and third-tier firms with established relationships in the market. It becomes a constant drain because you are not able to get the quality of work that gives you the margins, or the quantity to cover costs.” Ah, yes, the bottom line. So, by pure financial measurements, are the Brits making it in New York? Clifford Chance wasn’t before its merger, and the former Linklaters partner says the same of the firm’s New York office. “It’s one of those big outstanding issues — how do you keep building in America when it’s diluting profitability?” There is no shame in this, of course. Most U.S. firms’ London offices are dilutive of profits if you just look at billable hours minus costs. And lawyers from the U.K. firms point out that in a lockstep global firm an office’s worth is hard to quantify because it may bring in deals through the United States for other parts of the network or help the firm win a deal based outside the U.S. Forbes-Cockell admits that until two years ago there were doubts within Linklaters about the wisdom of the firm’s decision to hire U.S. lawyers, but he says hiring U.S. lawyers only dilutes profits in the very short term: “When we did the analysis, these guys were involved in very profitable deals, so it is working.” But not quickly enough. “We have a U.S. law capability, but we recognize that if you are going to be a leading, top-quality global law firm you are going to need a first-class U.S. law capability,” says Linklaters managing partner Tony Angel. Allen & Overy’s Sheldon says, “We would do a merger if the right partner was available, but unfortunately none is.” The firm wants the kind of combination that would be “untrumpable,” he says. Like other lawyers at the top U.K. firms, Linklaters’ Angel believes the firm will eventually get the merger it wants, because the top New York firms will have to respond to their clients’ need for multicountry service in the burgeoning European market. “They can follow their clients and get big ticket work at the moment, but can they do that indefinitely as the investment banks develop closer relationships with European firms? … The sort of changes that are occurring in the market will, over time, influence their thinking.” A partner at one of the elite New York firms says the Brits never sit down and say, “Boy, do we want to merge with you,” but he adds, “Do they indicate that they would have a serious interest, but by implication? Absolutely.” He rejects Angel’s argument that the rise of the European market will force his firm into bed with an international U.K. firm. Yes, he says, Europe’s important, but for high-value work, Goldman, Sachs & Co. and Morgan Stanley Dean Witter & Co. will still want the best quality U.S. advice, and this is concentrated in a handful of New York firms. There is a quandary for the Brits. While they continue to angle for the best New York merger they can get, they are limited in building their own offices. The issue is “a minefield,” says a lawyer at one of the firms. You don’t want to hire large numbers of lawyers that wouldn’t make the grade with your favored merger partners, nor can you risk enraging those firms by competing head-to-head on U.S. domestic work. “I wouldn’t want to preclude a merger by anything we do in terms of organic growth or small add-ons,” says Freshfields’s Peck. “The biggest single problem in making a merger in the U.S. would be our U.S. lawyers,” says a senior partner at another firm. And while there is still hope of landing Davis Polk & Wardwell or Sullivan & Cromwell, any other merger is out of the question. “This is a one-shot game,” says a partner at one of the U.K. firms. The U.K. firms are caught in a Catch-22. The only thing that would make the top New York firms merge with a U.K. firm would be … if one of the top New York firms merged with a U.K. firm. But why would any of them do so when they are already doing the highest quality, most profitable work? Ultimately, says the New York partner, it is the U.K. firms that will have to adjust their thinking and follow Clifford Chance’s strategy. Otherwise they could be in for a long wait.

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