Many of the top-tier New York firms are slowly shifting their strategy in favour of international expansion. But not all of them are convinced, writes Helen Mooney
“When the firm decided to bring on board
local law capability in France it was definitely a wrenching change,” admits Rodgin Cohen, managing partner of New York white shoe firm Sullivan & Cromwell.
Cohen is referring to the hiring of Gerard Mazet and Jean-Pierre Le Gall last December from the leading French practice of Jeantet & Associes. It was the first time in its history that Sullivan & Cromwell had hired a partner laterally, the first time that the firm had taken on local law capability and the first time that non-Americans had been admitted to the firm’s partnership.
At the same time Sullivans made Jamie Logie a partner in London after hiring him as ‘of counsel’ in May 1999. Logie is the firm’s only UK-qualified partner. The reason, Cohen concedes, is that the firm “would have been at a serious disadvantage had it not secured local law capability in those jurisdictions”.
Sullivans’ new found international strategy is indicative of a shift in strategy that has been adopted by many of the top tier New York firms.
For the first time, many of New York’s elite have begun to concede that the world of business needs global capability outside of Manhattan, and that to become a global firm the focus needs to turn to Europe.
Having sat in splendid isolation until recently, Sullivans has indicated that it is reconsidering its international strategy; it has established a London office with 60 lawyers, has focused attention on Paris with 17 lawyers, and now has its sights set on Germany.
And it is not alone. Shearman & Sterling’s European network may have its roots in the 1920s, but recent years has seen it grow dramatically. The firm has established and expanded practices in Paris, London and Germany, with more growth promised.
However, not all the white shoe firms are in agreement. In fact when it comes to assessing the global strategy of New York’s elite most local lawyers agree that the indigenous Big Apple firms generally fall into three categories.
The first are those such as Shearmans, which have decided on a clear strategy of international growth for the long term. Shearmans’ aim is to become truly international in order to rival the best the UK can offer without internationalising at the same pace or by the same means.
Second, there are those that appear to see nothing worse than having to consider any form of international expansion, especially when it comes to local law. These firms are the richest in the world, with profits per partner for 1999-2000 well above the $2m (£1.4m) mark. Firms falling into this category believe that, as long as their formula provides them with the highest end of the capital markets, M&A and banking work, there is no need to jeopardise their already massive incomes.
Finally the last category of firms are, as one partner terms them, the “in-betweeners”; the firms that have as yet not formed a clear international strategy but have indicated they recognise the need to do so.
Firms in the first strand include Shearman & Sterling, Cleary Gottlieb Steen & Hamilton and Skadden Arps Slate Meagher & Flom.
In this group Clearys has offices in London, Paris, Brussels, Frankfurt and Rome and local capability in all.
The respect it has achieved from its peers lies in the firm’s achievement of providing a core mix of capital markets, M&A and banking work in all the key jurisdictions. The Paris office is reputedly the strongest US firm in the region with 14 partners and strengths in banking,
corporate and M&A, and corporate finance. Frankfurt and London are following rapidly with 40 lawyers in each jurisdiction and similar practice areas.
Clearys’ clients in both the US and Europe include top investment banks Goldman Sachs and Morgan Stanley as well as many corporate clients in the European market.
Most recently the firm has advised German client Deutsche Telecom on its acquisition of US mobile telephone company VoiceStream, and this year its turnover reached $460m (£328m).
Clearys’ managing partner, Peter Karasz, believes that the firm’s international formula has been successful.
“As we have grown stronger in Europe we have been able to capture a slice of the domestic markets in each of the jurisdictions in which we have a presence,” he says. “European clients want lawyers who can represent them
on a multi-jurisdictional basis and that
also means having top-quality advice in the US,” he adds.
The Clearys strategy, being replicated by some of its elite New York rivals, is also starting to prove a threat to the UK magic circle on their own territory. European clients are increasingly attracted to a firm that can provide the service it needs across the continent as well as full-service in the US, something that, for most work, the magic circle cannot do on their own.
Both Clearys and Shearmans are holding their own in Europe and increasingly building strong practices. Following them is Skadden Arps, whose turnover figures last year far exceeded all of its New York-based rivals at a phenomenal $1.154bn (£823m).
Yet even Skadden Arps has long identified the need to expand from its home on the corner of New York’s Times Square. The firm has European offices in London, Brussels, Frankfurt and Paris, and last month it managed to secure a long-awaited exclusive alliance with top Italian firm Chiomenti.
Be this as it may, partners at Cravath Swaine & Moore fail to see the need to replicate any of these approaches.
Why jeopardise a profit-per-partner average of $2.2m (£1.57m) compared with Clearys’ $1.2m (£855,000) or Shearmans $1.1m (£784,000)?
According to one New York rival Cravaths’ success is down to its pull in the recruitment market. “Cravaths is like Tiffanys – as long as it can keep getting hold of the highest quality diamonds, then it will continue to be unbelievably profitable. However, if the best type of diamond can no longer be found, profits will be threatened.”
Cravaths has a series of ‘best friend’ relationships with some of the top firms across Europe including Slaughter and May, Herbert Smith and German firm Gleiss Lutz Hootz Hirsch.
The firm is happy to refer work when necessary while keeping a tight rein on its independence at all times. And for the time being Cravaths sees no need to worry: profits-per-partner continued to grow last year.
The same is true at Simpson Thacher & Bartlett, another member of the New York elite in favour of maintaining its localised stature.
Both firms are small in partner numbers -Cravaths has 83 partners, Simpson Thacher has 127 and neither firm hires laterally – and the consensus among New York partners is that the likes of Cravaths will continue without a hiccup for years to come.
A change would only be triggered by a dip in profits caused by clients taking their work to an international firm, or if firms such as Cravaths and Simpson Thacher were no longer able to recruit the top associates from the Ivy League colleges. And, says Mel Immurgut, managing partner of Milbank Tweed Hadley & McCloy, these strategies would even survive the first transatlantic mega-merger.
“Would we see a difference in strategies if Davis Polk & Wardwell were to merge with Freshfields [Bruckhaus Deringer]?” he asks. “Maybe, but even then it would not be earth shattering and it is not going to happen.
“If the UK firms are going to compete fully they will have to go the Clifford Chance Rogers & Wells route, which is a problem since there are few, if any, top New York firms interested in a step like that.”
As Cravaths’ brochure states: “Rapid growth would improve our market share but would undermine our ability to serve our clients at the level they expect. While Cravaths strives to be the best law firm in America, we will never be the biggest.” To this end these firms see no reason to stray from the model they have been following, in Cravaths’ case, for more than 150 years.
Which brings us to the ‘in-betweeners’.
At the top of this list is Davis Polk & Wardwell. Historically, Davis Polk has maintained a similar position to Cravaths. The firm is highly profitable – with an average $1.7m (£1.2m) profits per partner – and focuses on high-end capital markets work, which in large part is supplied by investment bank JP Morgan, one of the firm’s biggest and oldest clients.
Davis Polk has never had an expansionist international strategy choosing, like Cravaths, to maintain a series of best friend relationships with top-tier European lawyers.
However, the firm is waking up to the realisation that clients want global coverage. And there are definite signs that a more formal presence in Europe is being considered.
Davis Polk and its German best friend, Hengeler Mueller, have recently formalised their relationship to an almost exclusive extent. Hengeler Mueller’s website states that the firm refers work to Davis Polk wherever possible.
Arthur Golden, head of competition at Davis Polk and a member of the firm’s management committee, confirms that the firms have cemented their relationship. They now have the same computer systems and have put in place a secondment programme for associates.
The firm also maintains best friends relationships with top independent firms in Europe including Slaughter and May, Uria & Menendez in Spain, Paris boutique Bredin Prat and Italian firm Bonelli Erede Pappalardo. Golden adds that the firm is in the process of strengthening its relationship with Uria & Menendez along similar lines as Hengeler Mueller .
But for all the increased international pressure, one thing is certain: Davis Polk will not be merging tomorrow. And George Bush is more likely to become a Democrat than Cravaths or Simpson Thacher are to consider any form of serious international expansion that would threaten their sky-high profits.
As an English partner told Legal Week’s Diary a few weeks ago: “There is only room for one Slaughter and May in London – and it’s them.” There may be space for three in New York – and it’s Cravath, Davis Polk and Simpson Thacher. Diamonds, as they say, are forever.
