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Brexit and Q4 2016 BigLaw Stability

According to a report published on law.com on October 6, 2016, “global and European M&A deal volumes fell to their lowest levels for three years during the third quarter of 2016, following Britain’s vote to leave the European Union this June. Mergermarket data shows that 3,595 global deals were announced during Q3, the lowest quarterly figure since the second quarter of 2013 (3,546), and the worst Q3 since since 2012, when 3,296 deals were announced. Global deal volume fell by more than 20 percent on Q3 last year, when 4,501 transactions were announced. Meanwhile, the European market saw 1,323 deals during Q3 – the lowest figure since Q3 2012 (1,271).  Total deal values were also affected, with $8.13 trillion worth of global deals announced – 15 percent down on the same period last year, when total deal values stood at $9.58 trillion.”  This report has naturally sent chills down the spines of some of our attorneys.  So, how worried should we be?  Is the sky now really falling?

The answer in our view is yes and no depending on the strength of your firm’s platform, which is essentially a function of its current financial and cultural health, its ability to withstand short-term turbulence, and the extent to which it is balanced and diversified in terms of practice areas and geographic scope.  To put Brexit in perspective, BigLaw has recovered from other significant turbulence over the last few years, including, since 1999, the bursting of the dot.com bubble, September 11, Enron, WorldCom, the Iraq Wars, and the CMBS frauds leading to our most recent financial crisis.  With respect to Brexit, White & Case M&A global co-head John Reiss and Freshfields corporate head Simon Marchant offer the following calming observations:   “After Brexit,” says Reiss, “commentators struck the death knell for M&A.  It has had some impact, particularly on certain industries in the U.K., but its impact is, and will be, limited.”  Marchant similarly posits:  “What we saw during the aftermath of the financial crisis was that the market and clients can absorb quite a lot of uncertainty and nevertheless get on with their business…”  Id.  See also an article published shortly after the Brexit vote in the Financial Review entitled:  London Law Firms Shake Off Brexit as Revenue Rises:  “The elite group of “magic circle” law firms with headquarters in London increased their revenues last year and signaled that the global nature of their work would help them weather any UK downturn resulting from its decision to leave the EU…  Andrew Ballheimer, A&O’s global managing partner, called Brexit “the largest demerger in history”, adding that it would be “unbelievably complex”. He stressed that A&O’s business was “well hedged”, with just 35 per cent of revenues coming from Britain.  Matthew Layton, managing partner at Clifford Chance, said his firm too was “well hedged” to withstand any future UK slowdown.”

This is not to say, however, that the decreased global deal flow attributed to Brexit will not effect any of our BigLaw players.  To the contrary, our weaker and less balanced and hedged firms may indeed not survive the related turbulence.   We remind our clients that since 1999, BigLaw has suffered fatalities at the rate of about one AmLaw 100 firm every one-and-a-half years, including the following once venerable players:  Brobeck, Thelen, Heller Ehrman, Dreier, Thacher Proffitt, McKee Nelson, Howrey, Wolf Block, Dewey & LeBoeuf and most recently Bingham & McCutcheon.   Whether in each of these cases the ultimately fatal turbulence was more dot.com-related (Brobeck, Thelen, Heller), financial crisis-related (Thacher Proffitt, McKee Nelson), cultural toxicity-related (Dreier) or more a combination of market and cultural factors (Howrey, Dewey & Bingham), the bottom line remains that the landscape of BigLaw is changing before our eyes and the demise of the next BigLaw firm is not a matter of if, but when.

As we noted in a prior post, there are numerous signs which may point to BigLaw firm instability. See 37 Signs That You Law Firm May Be Sinking.  In short, we always advise our attorneys to be wary of potential red flags with respect to the stability of your firm’s platform, to stay current as to the relative financial and cultural health of competing firms, and to be in as good a position as possible to jump to a more stable ship if the need arises.

Fourth Quarter 2015 Prognosis

With Labor Day firmly behind us and the summer of 2015 wistfully fading into our memories, now is an opportune time for Hanover Legal to offer a look back into some key BigLaw events over the last few months and a glimpse forward into the trajectory of our collective ice-breaker as we head into fiscal year 2016.

We commence here with a sobering reminder that the waters in which we sail remain perilous as we recall the late 2014 demise of our once venerable Bingham McCutcheon, following into the murky graveyard beneath the waters which we continue to navigate deceased stalwarts such as Dewey & LeBoeuf, Wolf Block, Howrey, Thacher Proffitt, Heller Ehrman, McKee Nelson, Thelen and Dreier — continuing, since the demise of Brobeck in 1999, the rate of one major firm fatality every year-and-a-half.  If this pattern continues, which all observations and logic would dictate, another major firm will collapse within the next twelve months or so, one major firm New York managing partner recently sharing with us his own perception of many of the now highest ranking firms on the infamous Am-Flawed ranking charts as merely “houses of cards.”  While many leading media outlets attempt to predict the identity of our next casualty by pursuing superficial criteria such as mere numbers of lateral departures and take every opportunity to add fuel to the fire of anxiety by correlating such numbers to levels of financial distress, the sad general perception is that most of our remaining major firms continue to hold their cards tightly to their chests, inflating revenue and profitability numbers in order to enhance the impression of health and stability wherever possible, only increasing the need for careful due diligence of a firm’s financial health when any player may be seeking a merger partner or contemplating a lateral move.  To be sure, the ongoing saga of the collapse of Dewey & Leboeuf and criminal trial of its former Chairman and top financial officers for inflating financial figures and misrepresenting the firm’s financial state with the goal of retaining and attracting top rainmakers and securing loans is only our most egregious public example of this disturbing phenomenon.

Nonetheless, the quest for global omnipresence remains ever-alluring.  The firm that has most closely approached Dewey & Leboeuf in terms of media attention thus far in 2015 is Dentons, whose attorney head-count on its “vereins” platform which loosely congregates under one corporate umbrella disparate offices while allowing individual offices to largely operate autonomously, has swelled to over 6000 worldwide spread out over 125 some-odd offices, primarily as a result of mergers this year with China behemoth DeCheng and Australia’s McKenna Long.  In doing so, Dentons has now easily eclipsed the previous BigLaw leader in those categories, namely DLA.  Tellingly, DLA’s recently departed managing partner Tony Angel remarked just before parting ways with DLA on April 30, 2015, only four years after having been brought aboard from Linklaters in one of the most high profile hirings this decade, as follows:  “This is an extraordinary time. In five years, firms like ours will have had to become much more optimized because our other global advantages will have been watered down. You need to add another string to your bow. That might be having a Peerpoint-style operation or a Belfast, for example.”  (See http://www.thelawyer.com/analysis/dla-pipers-wingman/3033806.article?cmpid=dnews_1043004.)   We at Hanover Legal similarly consistently encourage all major players to shed fat wherever possible so as to maximize the chances of competing effectively no matter what the overall revenue rankings will yield, and caution observers not to confuse careful and deliberate trimming sometimes in the form of necessary layoffs and lateral departures as a symptom of illness, but rather consider the equally plausible possibility that such trimming may be the best evidence of a conscious and healthy effort on the part of management to trim-down and shape-up.

More generally, the financial performance of our major firms so far this year appears mixed, Citi’s Private Bank’s Law Firm Group offering the following summary of the performance of our major firms during the first half of this fiscal year in its August 2015 report:  “The optimist and pessimist will each find support in the first half 2015 results: Momentum clearly improved, but overall results fell short of the first half of 2014. The legal industry picked up steam in the second quarter after the slow start to 2015… Revenue growth accelerated due to improved demand, and expense growth slowed, relieving the pressure on margins.”  (See http://www.americanlawyer.com/id=1202734681984?rss=rss_tal_amlawdaily&slreturn=20150820111400.)

That said, our increasingly few financially robust and healthy firms continue to recruit lateral talent aggressively and pay handsomely for superstar talent with portable books of business or business generating potential particularly in regulatory-oriented fields like white collar defense and even more explosively cutting-edge areas like cyber-security, especially given the lightning speed at which the technology driven environment in which we all toil is evolving and with which our firm leaders recognize a client-driven imperative to stay one step ahead of the curve.

In sum, we predict a robust fourth quarter 2015 in terms of lateral activity as firms gear up for fiscal year 2016, which promises to be the most competitive and challenging year for our major firms in decades, and assure all our law firm and attorney clients that we remain on board with you as you seek to better understand the market of BigLaw and optimize your ability to successfully navigate these tumultuous waters during the months ahead.

The Current BigLaw Bubble

As favorable 2014 revenue, profitablity and compensation reports from our strongest large firms roll in and bonuses creep up towards levels not seen since shortly before the 2008 financial crisis, there is a sense of augmenting confidence that all is well in the world of BigLaw and will stay so for the indefinite future.  While the mighty get mightier, however, our weaker firms are steadily losing ground in the constantly contracting and consolidating BigLaw market, biting, kicking and scratching as they attempt to fend off relentless predators of their most productive lawyers in the fierce competition for superstar talent and proven rainmakers.

For lateral candidates, a key question must be which of our major firms are most likely to sink while the current bubble continues to inflate and even more likely to fall when it inevitably pops.  We continuously remind our candidates that the recent Bingham and Dewey dissolutions continue a now 15 year pattern of one AmFlawed 100 firm collapsing at the rate of one every one-and-a-half years, following the steady stream to the graveyard of other former BigLaw stalwarts including, since 1999, Brobeck, Heller Ehrman, Thelen, Thacher Profitt, Howrey, McKee Nelson, and Wolf Block – not to mention the disgraceful case of Dreier LLP.

As such, when seriously contemplating a lateral move, a candidate must undertake a thorough due-diligence of a prospective new firm’s financial and cultural health highlighted by an analysis of less readily apparent indicators of financial and cultural dysfunction through a probing of the contemplated firm’s leadership as well as its rank and file, ideally via prepared and pointed questions posed during carefully orchestrated face-to-face meetings.

We at Hanover Legal remain by your side in these unpredictable waters to assist in any way should the need arise.

Happy New Year and Full Steam Ahead

As we head into 2015, our major law firms are by and large optimistic with respect to their revenue and profitability, and eager to take opportunistic gambles on lateral talent as well as ventures into new markets.   This optimism is tempered however with the still-fresh memories of the brutal financial crisis of 2008 and the unprecedented law firm layoffs that followed, coupled with heightened sensitivity to the reality of the ongoing avalanche of major law firm collapses at a rate of one every year-and-a-half since the year 2000.

As such, while law firm managers are eager to grow strategically, they do so  with heightened due diligence and caution;  no firm wants to be the next Bingham McCutcheon, Dewey & LeBouef, Howrey, Heller Ehrman, Wolf Block, McKee Nelson, Thacher Profit, Thelen, Dreier or Brobeck.  Similarly, no attorney wants to be on board the next Titanic as it starts to sink.

As we enter our fifteenth year in business, Hanover Legal remains constantly vigilant of the health of our major law firms both financially and culturally and prepared to assist our finest attorneys in their efforts to secure spots at those most likely to provide enhanced stability as well as financial and cultural well-being to them going forward, and reciprocally to our finest firms in the increasingly fierce competition for top talent on the lateral attorney market.

We wish all our firm and attorney clients a healthy, happy and prosperous 2015!

One-Stop Shopping and the BigLaw Balloon

We are quickly approaching the end of Q2 2014 and heading into summer, but the open sky in which BigLaw flies is not likely to provide much rest and relaxation during the warmer months ahead. Relentless market winds offer constant opportunity to our stronger firms to increasingly distance themselves from their less healthy competitors, in particular those simply getting bigger.

A cursory comparison of the AmFlawed 100 ranking chart of America’s top-grossing law firms for the years 2009 and 2013 shows that while only two firms in 2009 exceeded gross revenue of $2 billion (Baker & McKenzie at $2,112,000,000 followed closely by Skadden at $2,100,000,000), five firms surpassed the $2 billion gross revenue mark in 2013: DLA at $2,481,000,000, followed by Baker & McKenzie at $2,419,000,000, Latham at $2,285,000,000, Skadden at $2,235,000,000 and Kirkland & Ellis at $2,016,000,000 — DLA’s jump to the lead of the pack in 2013 representing a more than doubling of their 2009 13th place finish of $1,014,500,000. Moreover, while in 2009 a total of 13 firms enjoyed gross revenue in excess of $1 billion, by 2013 almost double that number or 23 firms had surpassed the $1 billion barrier.

These gross revenue figures indicate an unabated urge to grow bigger presumably based on the premise that one-stop global shopping is an attractive marketing tool in the increasingly interconnected global business environment. While that may be true, big of course is not necessarily strong or healthy; the five most productive firms based on purported revenue-per-lawyer figures ranking only between 13th and 54th on the gross revenue chart, namely: 1) Wachtell, first in RPL at $2,310,000 but only 54th in gross revenue at $601,000,000; 2) Sullivan & Cromwell, second in RPL at $1,590,000 but 13th in gross revenue at $1,278,000,000; 3) Quinn Emanuel, third in RPL at $1,445,000 but 26th in gross revenue at $972,5000,000; 4) Cravath, fourth in RPL at $1,430,000 but only 52nd in gross revenue at $614,000,000; and 5) Simpson Thacher, fifth in RPL at $1,350,000 but 20th in gross revenue at $1,128,500,000.   While the saga of Dewey & LeBoeuf – which ranked towards the top of the AmFlawed chart in all categories across the board the very year they collapsed – dictates that the chart need be taken with salt, it also evidences the fact that big sometimes means dangerously obese but never in and of itself healthy.

That said, we at Hanover Legal always caution our candidates considering a new firm to focus on its health – not its rankings on the AmFlawed 100 chart.