Here we go again. The annual associate bonus season is now in full swing, with a growing number of firms committing to match the scale set earlier this week by Cravath, Swaine & Moore.
It has become such a well-trodden path as to practically be tradition: Cravath sets the mark, everyone else follows. But does it really make sense for firms with such disparate strategies, practices, staffing models, remuneration systems and profitability to all adopt the same rates of pay?
Cravath is one of the world’s most profitable law firms, with a profit margin of 48 percent and average equity partner profits of $3.56 million, according to The American Lawyer’s latest Global 100 survey. While extremely profitable by any reasonable measure, A&O and Clifford Chance are simply not in the same league as the Wall Street firm, with profit margins of 40 percent and 36 percent, and PPPs of $1.83 million and $1.88 million, respectively. (And that’s ignoring the fact that both firms, as with the rest of the magic circle, continue to struggle in the United States.)
It seems a particularly risky move for firms to be willfully increasing their costs in a legal market that last year saw growth slow to its lowest level since the recession. Firms are also facing intense pressure from clients on fees, meaning it is now much harder for these costs to be passed on.
There is a strong competitive element at play, of course. Although they don’t enjoy quite the same bargaining power as they did in the pre-crisis boom years, top associates are still prized assets. But would a refusal among firms to match Cravath’s bonuses really lead to a mass exodus of associates? They couldn’t all go to Cravath.
KWM To Be Rescued By…KWM?
Hands up if you saw this one coming. Just days after it was revealed that Dentons was in merger talks with King & Wood Mallesons’ beleaguered European practice, another potential savior has entered the fray…King & Wood Mallesons.
That’s right: KWM’s Chinese partnership has emerged as a potential buyer of the firm’s own European business, which faces an uncertain future after the collapse of its planned $18.4 million recapitalization.
The American Lawyer’s U.K. sister title Legal Week reports that KWM’s Chinese leadership team flew to London earlier this week to discuss a possible acquisition. KWM’s three member firms—China’s King & Wood, Australia’s Mallesons Stephens Jaques and U.K.-based SJ Berwin—combined under a Swiss verein holding structure, meaning they remain legally and financially distinct. (Almost every major cross-border combination of the past five years has utilized the verein, including those that formed Dentons, DLA Piper, Hogan Lovells, Norton Rose Fulbright and Squire Patton Boggs.)
It would be a particularly ironic twist, given that KWM’s European partners recently comprehensively rejected a financial rescue deal from the firm’s Asia arm. (And they did so despite having being told that they may have to repay two years’ worth of profits if the bailout was not approved, although a leading expert in partnership law says it would be practically impossible for the firm to claw back the profits.)
It also appears that DLA Piper and Greenberg Traurig are among the firms interested in picking up partners and teams from KWM Europe, with its London real estate practice one of those targeted.
That would make sense for Greenberg, which has long sought to bolster its U.K. offering in what is a core practice for the firm globally. Greenberg earlier this year held merger talks with London-based Berwin Leighton Paisner, which has one of the U.K.’s leading real estate practices, but called off the talks amid concerns about BLP’s practice mix, culture and management.
KWM said in a statement announcing the failure of its recapitalization that its European management board was now “considering a range of strategic options, including mergers.” The firm recently held recently held unsuccessful talks with Morgan, Lewis & Bockius.
The stakes are high: Sources told Legal Week that a failure to secure a merger may result in KWM going into administration.
U.K. Government Admits Single Market Brexit Deal Under Consideration
The U.K. government has admitted that it may continue making payments to the European Union after the country leaves the political bloc in order to maintain access to the single market.
Brexit secretary David Davis told parliament that achieving tariff-free access to the EU was a “very high priority” and that the government would consider paying in order to “get the best possible access for goods and services to the European market.”
Davis said that the financial arrangement, which is similar to the EU’s deals with Norway and Switzerland, was just one option under consideration.
U.K. prime minister Theresa May previously indicated that the country will withdraw from the European single market as part of a so-called “hard Brexit.” There are fears that this could result in banks and other companies—including global law firms—shifting business away from London to other European cities.
Davis’ comments led to a strong rally in the British pound, which rose to a two-month high against the dollar, at $1.27, and a three-month high against the euro, at 1.19 euros—its strongest single-day performance since the Brexit vote on June 23. The value of U.K. currency has been severely weakened by the Brexit vote, having hit $1.50 immediately before the referendum.