On April 23 Shearman & Sterling announced that it would shutter two offices in Germany and consolidate its 66 German lawyers into a single Frankfurt office. It appeared to be an about-face for the 842-lawyer global firm. Shearman has been a major presence in Germany over the last 22 years. Its reputation in the country was cemented in 1998, when Daimler AG tapped Shearman, rather than the firm’s much larger German rivals, to lead it into a megamerger with Chrysler Corporation. In 2002 Shearman’s German offices peaked at 130 lawyers. Even as recently as 2009, Shearman was named “M&A law firm of the year” by the German legal publication JUVE, a testament to its stature in both cross-border deals and domestic ones.

However, rather than mourning the consolidation, Shearman veterans welcomed it. After four years in which German domestic deal work lagged, competition from U.S. and U.K. rivals increased, and margins slipped, firm leaders are restructuring the practice to focus on cross-border work. “We were enormously successful for many years,” says Creighton Condon, Shearman’s senior partner. “But that market has just fundamentally altered. We either needed to be very much larger in that market—or focus just on the top end, but [be] smaller.”

The fix is the latest move by Shearman’s new management team to address some of the 140-year-old firm’s structural problems. Condon, 57, was elected last May and is the firm’s new public face. (His predecessor, Rohan Weerasinghe, was appointed general counsel of client Citigroup Inc. in June 2012.) David Beveridge, 52, a capital markets veteran, has taken the resurrected post of global managing partner. The two are laser-focused on business development, and current partners say they have brought a renewed optimism to the firm.

There is some ground to make up. Shearman has slipped behind its former peer group on the Am Law 100 rankings in gross revenue, head count, and profitability. The slippage dates back 11 years, when the firm was fifth in the 2001 Am Law 100 revenue rankings, just behind Skadden, Arps, Slate, Meagher & Flom; Baker & McKenzie; Jones Day; and Latham & Watkins. Since then, Shearman has steadily lost position, ranking 35th on our 2013 chart. Head count declined 19 percent between fiscal 2001 and fiscal 2012, from 1,039 to 842 lawyers. Cleary, the most similar in strategy and profitability a dozen years ago, is now 50 percent larger than Shearman and boasted profits per partner of $2.7 million last year, $1.2 million higher than Shearman.

Shearman vs. Cleary Gross revenue and Profits per Partner

While Shearman’s profits per partner have risen since 2002—by 20 percent—they have not risen as fast as those of peer firms; the top 20 most profitable firms in 2002 increased their PPP by an average of 73 percent during the same 10-year time period.

In interviews for this story, 10 former and 15 current partners pointed to several factors behind Shearman’s slippage in our various rankings. Bad luck played a factor; so did the departures—unique among top U.S. firms—of three consecutive Shearman senior partner–rainmakers for highly paid executive positions at clients. Most of the partners interviewed for this story also cited the firm’s repeated difficulties in building countercyclical practices, such as litigation, which made Shearman more vulnerable to business downturns than its rivals. “In the past the firm was not as focused on profitability, but on quality,” says M&A global head George Casey. “From a client’s perspective, that’s good. But from a market perspective, it’s important for us to address it.”

Condon and Beveridge are tackling many of those issues. They are trying to grow litigation into a far more significant revenue generator, and to increase the firm’s private equity work. The two have also begun a new client initiative, assigning teams of lawyers across practices and offices to court 25 major clients.

The firm’s leaders say that the new focus on servicing core clients better is beginning to pay off. Meanwhile, years of investment in promoting and supporting younger lawyers is also beginning to bear fruit, they say. And Shearman, unlike some Am Law 200 firms, is in a position of strength in core financial areas: Shearman has no long-term debt and a fully funded pension.

Since last fall, the firm has been on a roll. Shearman ranked first in announced cross-border deals during the first quarter of 2013, according to Bloomberg. Among the headline-grabbing deals: A new client, Liberty Global Inc., tapped Casey to advise it on its $23.3 billion acquisition of U.K. cable provider Virgin Media Inc.; at press time it was the third-largest deal announced this year. And in May, partner Peter Lyons was tapped to represent Sprint-Nextel Corporation’s special board committee in connection with an unsolicited bid by DISH Network. Condon, meanwhile, was advising Dell Inc.’s largest shareholder on a going-private deal.

Litigation is also on a tear. Among the big wins: helping Daimler definitively beat back a $4.7 billion fraudulent conveyance lawsuit filed by Chrysler bankruptcy creditors in 
January; and winning an acquittal for the chief executive of AU Optronics Corp. in a criminal trial last year where the company was found guilty of conspiring to fix prices. And in arbitration, Shearman helped The Dow Chemical Company win the largest International Court of Arbitration award ever, a $2.48 billion judgment last October against a Kuwaiti state-owned company arising out of a failed petrochemical joint venture; the award was confirmed in May.

Shearman, says Beveridge, is at a pivot point. “We’ve had our time of floating down, and now we’re moving up,” says Beveridge. “I wouldn’t bet against us.”

The declines in Shearman’s relative profitability coincided with the departure of a charismatic M&A lawyer, Stephen Volk. As senior partner between 1991 and 2001, Volk led the firm to M&A preeminence until his departure for Credit Suisse First Boston. When he started in 1960, Shearman was a Wall Street firm to its core; until about 1980, as much as half of the firm’s revenue was attributable to one bank, Citicorp (now Citigroup), Volk estimates. With a steady pipeline of bank advisory work, Shearman lawyers’ modus operandi was waiting for the phone to ring. “The firm produced some very good lawyers, but it did not produce lawyers with marketing skills,” says Volk, now a Citi managing director. “The goal was not going out and getting clients.”

Volk successfully pushed for a stronger M&A practice. He also modeled a more entrepreneurial culture, tapping the lateral market more aggressively than U.S. rivals to do so, say several lawyers at Shearman at the time. By 1996, Shearman had a hand in 60 deals, ranking second for investment adviser representations and eighth for acquirors, according to Corporate Control Alert, an American Lawyer affiliate. A year later, opposite Cravath, Swaine & Moore, Volk led Morgan Stanley into a landmark marriage with Dean Witter, Discover & Company, prompting BusinessWeek to anoint him “master of the M&A universe.” Over the next four years, the firm handled several transformative megadeals, including Viacom Inc. in its $35 billion merger with CBS Corporation in 1999 and SmithKline Beecham in its $75.7 billion merger with Glaxo Wellcome in 2000.

Shearman also became a renowned global brand. The firm had previously set up representative offices abroad, opening in Paris and London in 1963, Abu Dhabi in 1975, and Hong Kong in 1978. But in the 1990s, the firm began developing robust local law capabilities in the United Kingdom, France, Germany, and Hong Kong. Shearman recruited from top European and Magic Circle firms to do so. The strategy, Volk told The American Lawyer in 1999, was to build “critical mass” in the firm’s premier practice niches—which included arbitration; M&A; capital markets; and project finance—in the world’s most important commercial centers. The growth paid off: As European governments privatized state industries, Shearman won significant government advisory work—and then clinched many now-private companies as clients. “Shearman had one of the most exciting European corporate client bases” in the 1990s, says a former partner. “All the good work was coming from those companies that had gone private.”

In Düsseldorf—now slated for closure—Volk recruited Georg Thoma in 1991. Thoma leveraged his relationship with Germany’s privatization commission into relationships with German companies, racking up the kind of high-end German M&A that Volk and his team were doing in the United States. So important was he to the firm—until recent years, roughly 5 percent of firm revenue was attributable to his clients, several former partners say—that in 2007 the firm changed its retirement policy to allow him to continue as partner. (He is 68.)

In Paris and London, firm leaders also nurtured capable builders. In Paris, Emmanuel Gaillard, an international arbitration law professor who joined the firm in 1987, grew the arbitration practice to its current position, among the most exalted in the world. And in London in 1996, Volk recruited two top project finance partners, Kenneth MacRitchie and Nicholas Buckworth, from Milbank, Tweed, Hadley & McCloy to jump-start the firm’s English law practice. The two lured star laterals who in turn built top domestic M&A and capital markets practices. By 2001, international matters were generating about half the firm’s revenue.

Volk’s anointed successor, David Heleniak, shared his international vision and elite M&A rainmaker status. But after Volk left, say several partners, the firm effectively stood still. In addition to the loss of its number one dealmaker, the transactional business was pummeled, first by the dot-com bubble collapse, then by the 9/11 terrorist attacks, and, in late 2002, by the global SARS outbreak.

In 2001 Shearman handled a fraction of the M&A transactions it had done six years earlier, falling to 18th by deal value as counsel to principals, according to Corporate Control Alert. Profits per equity partner, which had reached $1.28 million in 2002, dipped to $1.15 million in 2004. Moreover, the litigation practice remained a service arm of the corporate side. While Shearman recruited several litigation partners, “we didn’t pivot fast enough into litigation,” Volk says.

Beginning in 2004, Heleniak tried to change that, recruiting several top litigators, among them Herbert Washer from the New York office of Clifford Chance; Patrick Robbins from the San Francisco U.S. attorney’s office; and Steven Molo, a well-known Chicago trial lawyer from Winston & Strawn and former protégé of national trial lawyer Dan Webb. Molo earned the firm new recognition for trial work; in his first full year, he handled four jury trials. (In 2009, citing the conflicts that are common in a large firm, Molo left to start a litigation boutique, MoloLamken.)

Shearman has fallen to the 35th spot in the Am Law 100.


There were other challenges. In the early 2000s, Shearman was beginning to face new competition abroad from Magic Circle firms like the newly merged Freshfields Bruckhaus Deringer, as well as from more U.S. firms.

Heleniak’s tenure, however, was cut short. In May 2005 he left to become vice-chairman of client Morgan Stanley, accepting a compensation deal worth at least $20 million, according to financial filings. Partners selected Rohan Weerasinghe, the firm’s capital markets head, who handled the Citigroup relationship, to take his place.

Weerasinghe was widely respected as a bottom-line-driven manager, cast more in the model of a CEO than his predecessor. In contrast to Heleniak, whom many called a consensus-builder, Weerasinghe, a formal and somewhat aloof presence, looked to a small circle of colleagues and outside consultants, say several former and current partners. (He was not available to comment for this story.) But Weerasinghe was effective: During the next seven years, he eliminated the firm’s long-term debt, Condon says. For three years running, PPP increased by double digits, reaching $1.84 million in 2007.

Litigation remained underdeveloped, however. That proved the firm’s Achilles’ heel once again, when the recession hit in 2008 and profits per partner slid 9.5 percent, to $1.67 million. Other top American firms had either nurtured or built up litigation to a third or even half of revenues; Shearman’s litigation practice generated 20 percent of its revenue at that time. The firm’s arbitration practice, while hugely profitable, didn’t make up for the gap; arbitrations “do not require nearly the leverage, nor do they bring in nearly the revenues, that a U.S. securities class action practice does,” notes a former partner.

Weerasinghe, like Heleniak, turned to building litigation. In 2010 litigation partner Washer told The Lawyer that the firm’s five-year goal was to grow the practice to at least a third of total revenue. It would do that gradually, not by buying books of business, he said. (Two years later, Washer left for Cahill Gordon & Reindel. He declined to comment on his departure.)

But over time, the firm failed to move the dial significantly. Shearman was now competing in the lateral marketplace, where big-name litigators and lawyers in other countercyclical practices like restructuring were now commanding big compensation packages. And there Shearman was at a disadvantage: Its compensation spread remained quite narrow—between $600,000 to $2.5 million in recent years, the firm confirms.

In 2011, with profits per partner flat at around $1.6 million, Weerasinghe announced changes to Shearman’s compen­sation system. The firm had historically withheld 15 percent of budgeted compensation until April, then returned almost all of it, minus a small percent allocated to boost junior partners’ compensation. Weerasinghe told partners at their May retreat that the 15 percent “float” would be kept back as an expanded bonus pool and would be doled out on the basis of performance. His rationale was that the top 20 percent of the partnership was driving the business, so it was important to compensate them well. He also wanted to bring in high-profile laterals.

By 2012, Shearman’s compensation spread had widened to 5:1 or greater. Mid-tier partners saw their compensation drop by hundreds of thousands of dollars, while star business generators collected bonuses as high as $800,000, lifting the top end to around $3 million. (Shearman, as in the past, continues to top up compensation to its junior-tier nonequity partners.) Among those getting the highest bonuses were star litigation and disputes partners.

The larger bonus pool “is being used a little more liberally to reward outstanding performance,” confirms Linda Rappaport, the longest-serving current member of the firm’s nine-partner policy committee.

Whatever the reasons, in 2011 and 2012 more partners exited the firm, according to American Lawyer research. Some were star performers able to command higher salaries elsewhere; others were middling performers unhappy with the compensation changes, according to several former partners. Sixteen partners left for other firms in 2011, up from four the previous year, and 15 left in 2012. Most were replaced via promotions and lateral hires. In the first five months of 2013, 12 partners left for other firms, while five joined laterally. At press time Shearman’s website listed 187 partners, down from the 201 full-time equivalent number reported to The American Lawyer for 2012.

On a cloudy day in May, Shearman’s leadership team met with The American Lawyer to discuss their new strategy. Condon, after shaking a reporter’s hand, sat across the table, smiling broadly. Beveridge sat farther off and to the right, occasionally jumping in to underline a point. That’s in keeping with their reputations. Condon, the public face of the firm, is the more approachable; he is known to stroll the offices in his shirtsleeves, popping by partners’ offices for a chat. Beveridge, brusquer, spends 90 percent of his time on management matters and is described as highly efficient. “If I tell [Beveridge] I’m going to do something,” says Matthew Bersani, the firm’s Asia managing partner, “two weeks later, I’ll get a call from him, and he’ll say, ‘Well, did you do it yet?’ ” Like their predecessors, both have been major rainmakers in their respective practice areas (though Beveridge has had to put aside most client matters in his current role).

Outside the window of the Shearman conference room looms the gunmetal gray Citigroup Center, named for its onetime anchor tenant, a constant reminder of the firm’s ties to the bank. These days, Citi occupies only three of the tower’s 59 stories; and Shearman, likewise, has been steadily diversifying away from bank underwriting work. Financial institution clients “have been hit hard,” Condon says. “And a lot of what came out of the crisis was litigation work. And we weren’t well positioned to get enough of that.”

Last year, the two say, revenue from the firm’s global disputes practice, which includes both arbitration and litigation, jumped from 20 percent to 24 percent; U.S. litigation revenue surged by nearly 20 percent, according to litigation head Adam Hakki. But with only 17 percent of its partners in the area, Shearman will need to significantly up its partner head count. For instance, to bump up to Cleary’s level—where 29 percent of firm partners are litigators—Shearman would have to add roughly 22 disputes partners to its current 32. To do that, the firm may go after larger lateral groups than it has in the past, but “we don’t break the bank to get in laterals,” says Condon. “If someone wants a Dewey model, that’s not what we’ve done.”

To build the practice, the firm is relying on Hakki, 41. He says that Shearman remains a desirable destination for litigators. “We’ve been able to hire leading people out of the government who see this as a real opportunity,” Hakki says. “When they hear the cases we’re in, and the fact that we’re not that big, and that we’re young, they want to come here.”

In March, Shearman hired Christopher Lavigne from the U.S. attorney’s office in New York. Lavigne was lead trial counsel in the insider trading trial and conviction of the founder of the Whitman Capital LLC hedge fund. And last September, Mark Lanpher rejoined the firm from the Securities and Exchange Commission’s enforcement division, where he was assistant chief litigation counsel.

This time, the firm may enjoy some tailwinds. The United States is in the midst of a sustained wave of credit crisis–spawned litigation and investigations, much of it involving Shearman’s bank clients. Hakki and others have helped the firm win some choice assignments, such as representing Countrywide Financial Corp. as lead trial counsel in a number of MBS lawsuits. Shearman’s litigators have also been tapped by several financial institutions in connection with the global LIBOR probes, and by JPMorgan Chase & Co.’s board in connection with investigations into the “London Whale” imbroglio. The firm also recently handled two insider trading matters, including representing Galleon Management L.P., since the arrest and trial of its founder, Raj Rajaratnam. And it has represented 33 Chinese companies facing securities cases. “We’re not trying to be the best at everything,” says Hakki. “We’re focused on what is hot today—securities litigation, white-collar, IP, and antitrust in certain jurisdictions.”

Shearman has also shown that it can build successful practices from scratch. In 2011 Brussels had a single antitrust partner. That year the firm brought in a five-partner group from Howrey. The group has since racked up an impressive client list, including Samsung Electronics Co. Ltd., Qualcomm Incorporated, and Hilton Worldwide Inc., and ranks among Brussels’s elite antitrust practices.

The Brussels team has also expanded relationships with Shearman clients, including Nokia Oyj in its ongoing defense against a Google Inc. complaint before the European Commission, and Société Générale S.A. on E.C. antitrust aspects of its sale of a Greek subsidiary last year. The firm’s Asia platform, the Brussels lawyers say, has been particularly helpful. In their first visit to Japan for Shearman, two of the Howrey hires, Stephen Mav­roghenis and Trevor Soames, landed a new client undergoing a cartel investigation. “At Howrey we were not very visible” in Asia, says Mavroghenis. “At Shearman, we are.”

The firm has also made some splashy hires in private equity, another area that current management wants to grow. On May 15 Shearman announced the arrival of three private equity partners in London from Weil, including Mark Soundy, a buyout veteran who last year advised on Silver Lake Capital Partners Inc.’s $1.3 billion acquisition of tax-free shopping business Global Blue. And in April, Shearman hired Jeremy Dickens for its private equity group.

But litigation, like private equity work, is crowded with better-known brands. Will the practice be able to woo clients away from those firms? Shearman “is a highly valued brand,” says Charles Kalil, general counsel of The Dow Chemical Company, a major firm client for arbitration and corporate work that has historically looked to Kirkland & Ellis for litigation. “But there are some great litigation firms out there that have a longer history.”

Still, Shearman’s vastly expanded relationship with Dow in recent years is a model for the relationships the leadership hopes to build via its new “core client” initiative (which it says has already resulted in a 25 percent surge in revenue from that client group). In 2007 Shearman was tapped by Dow for advice on a $17.4 billion joint venture with Kuwait’s Petrochemical Industries Company, known as K-Dow Petrochemicals; the venture was on a much larger scale than the firm’s previous corporate work for Dow, involving roughly 30 jurisdictions and, Kalil estimates, about 2,000 separate agreements, which filled an auditorium-sized conference room at Shearman. But in December 2008, the deal collapsed; Dow sued for breach of contract, claiming $2.16 billion in damages—once again tapping Shearman for the arbitration (which it won last year).

Concurrently, Dow looked to a different M&A team at Shearman to advise it on its $15.3 billion merger with Rohm and Haas Company. (Dow delayed the close, prompting Rohm and Haas to sue; Dow tapped Kirkland & Ellis for that litigation, which was ultimately resolved when Dow agreed to go through with the deal.) Kalil says Shearman’s relatively small size has never been a problem; in fact, “they’re one of a handful of firms where we’ve never had a talent or a quality issue.” Condon and Beveridge are increasingly relying on younger partners to grow the business. In part this strategy stems from Shearman’s youthful demographic: Since 2006, the firm has elevated an average of nine associates to the partnership each year; 63 have been promoted during that time, or roughly a third of the current partnership. The decision to keep promoting associates through the recession “was a philosophical decision with financial consequences” to profitability, Condon says. “But as that group matures—and they’re really getting to the next stage now—you really start to see the upside” in revenue growth.

Michael Benjamin, a 40-year-old onetime Mallesons associate promoted to the Shearman partnership in 2007, is someone who has seen his client responsibilities grow. “If there’s one thing that keeps me engaged here,” says Benjamin, a high-yield finance specialist, “it’s that it was always made clear to me that the room to grow would be made for me. I really do feel very supported here, and that’s huge.” Benjamin is now the co–relationship partner for Morgan Stanley. The move follows years of grooming. As a fifth-year finance associate, partners recognized that Benjamin got along particularly well with Morgan Stanley executives. “They sat me down and said, ‘We want you to focus on this practice and this client, and see how it grows,’ ” Benjamin says.

Likewise, Apostolos Gkoutzinis, a 37-year-old London capital markets partner, has been asked to help manage the European relationship with Citigroup and other investment banks. Gkoutzinis is also overseeing teams of associates who have been given a budget to develop relationships with junior executives at “core” client banks. “We have to ensure that clients stick with the firm,” Gkoutzinis says.

In the global competition for talent, Shearman has assets that can’t be measured purely by PPP. Its small size and youthful demographic mean that it is still a place where a young transactional lawyer can expect to have a hand in the most difficult cross-border deals, and where a junior disputes lawyer can expect to be involved in cutting-edge arbitrations. This is reflected in our A-List rankings [see the chart]: Shearman’s surge on the A-List—from 18th last year to 10th (tied with Morrison & Foerster) in 2013—was boosted by a very high score for associate satisfaction. And the emphasis on promoting younger partners isn’t just talk, former partners confirmed. “The system allows them to move up rapidly,” says one. “It’s an ecosystem. You really do have an incredible amount of support. It’s nice.”

Also, Shearman lawyers genuinely seem to like working there. It is by most accounts a collegial place; its lawyers are exceptionally cosmopolitan, and the caliber of the work is high. Even departed partners miss it. “It was more fun at Shearman,” a European partner now at a Wall Street firm notes. “They were more relaxed in their approach. Technically they were as good as any lawyers anywhere else. But they were more individualistic. The place had more personality [than some competitors did].”

Last year, however, partners at Cleary, the firm that most partners identify as a top rival, earned on average $1.2 million more than their peers at Shearman. Unlike Shearman, Cleary has benefited during the recession from a large and successful restructuring and litigation practice, advising on some mega-bankruptcies as counsel to more than 50 financial institutions in lawsuits arising from the collapse of Lehman Brothers Holdings Inc.; it also excels in other recession-era niches, including European bank rescues and advising on sovereign debt matters.

Condon asserts that with changes to the business mix, “it will be demonstrably achievable in time to substantially narrow that gap” with Cleary. But just how high do profits need to go to remain competitive? Legal consultants say that while making up all the ground lost to rivals like Cleary may not be necessary or achievable, “you have to be within spitting distance of $2 million [profits per partner] for the [top-tier lateral] market to perceive you as a going brand. There’s a tournament going on, and success is measured by money,” says law firm consultant, Peter Zeughauser, founder of the Zeughauser Group. “It just is.”

In the short term, a couple of years of strong growth and the careful execution of the new leadership’s strategic plan may give the firm the wiggle room it needs to begin to build again. And that, says Condon, is exactly what is happening; as of the first five months of 2013, billings were up 9 percent. The challenges facing Shearman “are purely dollars and cents,” says Condon. “But we’re on a trajectory to make that less of a factor.”