UK State Of Law

The following is an excerpt from the Vault Guide to the Top

UK Law Firms, 2009 edition.

www.vault.co.uk

When life gives you subprime lending, make lemonade

It wasn't so long ago that mergers and acquisitions were the

axes around which London's legal universe evolved. Indeed,

elite UK law firms spent 2006 and the first half of 2007 basking in

the radiance of record-breaking M&A activity. According to

Thomson Financial, deals in 2007 tallied $4.5 trillion, up 24 per

cent from 2006, itself a record year.

By midsummer 2007, however, the picture had changed

dramatically. As the US credit crunch sent predictable

reverberations throughout the international legal market, big

corporate tie-ups became scarcer, and deal volume dropped. By

January 2008, it was clear that markets were battling rough

weather. Transactional activity fell, and deal value for worldwide

acquisitions value plunged 24 per cent in the first quarter of

2008, compared to its standing a year earlier. Deal volume plunged

as well, with M&A stalwarts like Clifford Chance even reporting

a drop (from 98 transactions in the first quarter of 2007 to just

60 a year later). Naturally, certain firms felt the pain more than

others, and those leveraged in structured finance were particularly

hard hit. But even as the credit crunch took its toll on banks, the

legal industry still managed to achieve growth and Magic Circle

firms garnered the double-digit revenue growth seen before the

crisis hit.

Nevertheless, many firms took the lesson, changing direction and

strategy. As big-ticket deals, leveraged buyouts and private equity

mandates withered in the wake of the subprime crisis, law's

bigger players forayed into the still active middle-market. Other

outfits found work rescuing suffering investment banks, as

sovereign wealth funds came galloping to their rescue, couriering

emergency cash. London litigation giant Herbert Smith, SJ Berwin

and US-based Bingham McCutchen even geared up for bank-on-bank

court fights. The Bear Stearns buyout, government orchestrated to

prevent the investment bank's total collapse, also generated

work for a number of US-based law firms. Many firms turned their

profit aspirations to emerging markets, in the hopes that growth in

these regions would mitigate slack business on the home front.

Credit-crunching the numbers

In the face of upheaval, UK firms managed to keep their

trajectory, with the top firms scoring double-digit growth in both

turnover and profits per equity partner. Despite its exposure to a

floundering structured finance market, Clifford Chance posted 11

per cent growth in turnover and saw PEP increase by 13 per cent for

the year 2007-2008. Other Magic Circle firms fared even better.

Freshfields Bruckhaus Deringer's PEP surged by 39 per cent,

crossing well over the £1 million threshold?and

that wasn't just the result of tighter equity rolls, slashed in

a 2006 restructuring. After all, the firm's turnover also

jumped 19.5 per cent, shattering the £1 billion benchmark.

Hovering just outside the Magic Circle, Herbert Smith recorded a

PEP rise of 25 per cent, which catapulted the firm into a clique of

seven UK firms that have surpassed the £1million PEP

milestone (among them, Ashurst, Linklaters, Freshfields, Clifford

Chance, Allen & Overy and Macfarlanes). Other firms posting

significant revenue growth for 2007-2008 include Bird & Bird,

CMS Cameron McKenna, Dundas & Wilson, Field Fisher Waterhouse,

HBJ Gateley Wareing, Norton Rose, Stephenson Harwood and Veale

Wasbrough. Meanwhile, as US firms published their 2007 results, it

was clear the M&A boom had elevated the legal market there to

new heights. Among top US firms with sizeable London contingents,

Sullivan & Cromwell tallied an enviable $3.1 million in partner

profits, with Simpson Thatcher & Bartlett coming in at $2.9

million. In terms of revenue, Skadden, Arps, Slate, Meagher &

Flom led the field with $2.2 billion, while Latham & Watkins

followed closely behind with a revenue figure of $2.01 billion.

Profitability aside, it is, of course, uncertain just how much

the legal industry has cause to worry. US firms are more vulnerable

to a potential economic downturn and, as UK firms continue to

thrive post-crunch, industry observers suggest that City firms'

broader exposure to emerging markets provides some protection, come

balance sheet time. That said, US based firms have traditionally

performed better through slumps, because of their wider spectrum of

practice areas and access to the huge American market, a money pot

that can more than make up for these firms' rather myopic

geographical reach. In the end, law firms' revenue figures are

not prompt reflections of current economic conditions, and it is

simply too soon to gauge what effect roiling markets will have on

the legal world.

Penny-pinching

The ships may be weathering the storm, but what about the crew?

Challenging times have seen law firms cull their ranks, especially

in the areas of real estate finance and structured finance. US

firms wielded the biggest axes. The first high profile cuts

occurred at New York's Cadwalader, Wickersham & Taft, which

laid off 35...