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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.

Q2 2016 and Off to the Races

As we move towards the heart of 2016, the Dewey & LeBoeuf saga has faded quietly into the annals of BigLaw history (having failed to garner convictions but succeeded in propelling the youngest of its defendants to a first-year associate position at Williams & Connelly), and the few early financial reports that have become public paint a rosy picture.

Among the leading thoroughbreds is Paul, Weiss, Rifkind, Wharton & Garrison, which continued its twenty year streak of increasing revenue and profits. exceeding $1.1 billion in revenue last year representing a 7.1 percent increase from 2014 and over $4 million in profits per partner for the first time in its history (see http://www.americanlawyer.com/id=1202748743109/The-Am-Law-100-the-Early-Numbers-Paul-Weiss-Partner-Profits-Top-4-Million#ixzz41VnKioek).  Revenue and profits per partner also rose at Willkie (gross revenue reportedly increasing to $658 million representing a 2.8 percent increase over 2014 with profits per partner rising 1.8 percent to  $2,605,000  (see  http://www.americanlawyer.com/id=1202751808613/The-Am-Law-100-Willkie-Grows-Revenue-Profits#ixzz44o4KpQbs), Fried Frank (revenue reportedly up almost 10 percent to $504.5 million and profits per equity partner up 21.5 percent to $2.2 million – s firm record (see http://www.americanlawyer.com/id=1202751870681/The-Am-Law-100-A-Big-Year-for-Fried-Frank-as-New-Strategy-Pays-Off#ixzz44o3NcSyJ), Milbank (reporting $771 million in gross revenue representing an increase of 1.3 percent with profits per partner up 0.7 percent to $2.765 million (see  http://www.americanlawyer.com/id=1202751817832/The-Am-Law-100-Milbank-Posts-Modest-Financial-Gains#ixzz44o5EV2jZ), Gibson Dunn (posting a 4.7% increase in revenue to $1.54 billion, profits per partner rising 4.6% to $3.19 million (see http://www.legalweek.com/legal-week/news/2449451/am-law-100-gibson-dunn-reports-20th-straight-year-of-revenue-growth), Mayer Brown (gross revenue increasing 2.8 percent to $1.257 billion and profits per equity partner up 7.6 percent, to $1.56 million (see http://www.americanlawyer.com/id=1202751330446/The-Am-Law-100-Revenues-Edge-Up-at-Mayer-Brown#ixzz44o7FK71z), Winston & Strawn (revenue per lawyer at the Chicago-based firm topping $1 million for the first time in 2015 with profits per partner up 7.1 percent over 2014 (see http://www.americanlawyer.com/id=1202752698340/The-Am-Law-100-Winston–Strawn-Grows-Profits-Revenue#ixzz44nvrCJ9W), Seyfarth Shaw (gross revenue rising 6.3 percent to $590 million and profits per equity partner reaching $1.02 million representing an increase of 8.5 percent, with average partner compensation reportedly up 4.8 percent to $660,000 (see http://www.americanlawyer.com/id=1202751889794?rss=rss_tal_amlawdaily). and Schulte, Roth & Zabel (revenue rising to $405.5 million representing an increase of 1.2 percent with profits per partner up less than 1 percent to $2.33 million on net income of $198 million (see http://www.americanlawyer.com/id=1202752080965/The-Am-Law-100-Schulte-Roth-Holds-Steady-in-Revenue-Profits#ixzz44nxwMwdO).

One firm reporting negative revenue and profits was Cahill, but no partners there are heading to poorhouse anytime soon either (gross revenue reportedly down 4.1 percent to $364.5 million, profits per partner down 7.1 percent to $3.36 million  (see http://www.americanlawyer.com/id=1202751922568/The-Am-Law-100-Revenue-Partner-Profits-Dip-at-Cahill-Gordon#ixzz44o2lSOm4),

To be clear, however, not all firms are thriving.  Dickstein & Shapiro is the latest of our major players to see its demise, joining in first quarter 2016 the steady march to the graveyard at the rate of approximately one every one-and-a-half years since 1999 other once-BigLaw players including Brobeck, Heller Ehrman, Howrey, Thelen, Dreier, Thacher Profitt, McKee Nelson, Wolf Block, Dewey & LeBoeuf and Bingham McCutcheon.  Of the 175 or so AmLaw 200 firms that have not yet reported their financials, no doubt most are doing their best just to maintain their respective positions in the BigLaw revenue and profitability race, while some are teeter-tottering as they make every effort to hide their struggles so as to avoid crises of confidence and the inevitable partner and client exoduses that follow.

To those contemplating a lateral move, we as always urge a thorough due diligence of viable market possibilities and firm finances when relevant, and are eager to assist in performing that diligence so as to minimize the risk of jumping onto the next sinking ship.

 

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!

37 Signs That Your Firm May Be Sinking

It does not take a legal market expert to know that the landscape of major law firms is changing like that of the polar ice caps. Since 2000 at least nine firms have collapsed from their perches amidst the Am-Flawed 100 directly into oblivion, namely: Dewey & LeBoeuf, Howrey, Heller Ehrman, Thacher Proffitt, McKee Nelson, Wolf Block, Dreier, Thelen, and Brobeck — or on average one firm every one and a half years.

Happy Holidays from Hanover Legal!

As we fast approach the edge of the fiscal cliff and our first peek into 2013, Hanover Legal urges our clients to proceed cautiously.

Despite the enormous market uncertainty ahead, we are hopeful that our Congress will agree on a budget in the nick of time and our economy will be spared free-fall and the consequent unfathomable market casualties. On the flip side, if the storm is even nearly as dramatic as many fear, our strongest, most agile and best managed firms will enjoy a lateral feeding frenzy the likes of which the legal market has never before witnessed.

No matter how severe or not 2013 turns out to be, we promise to stay by your side offering our assessments and advice as we have done continuously since our founding in 2000 and during each and every market cataclysm we’ve encountered along the way.

May good karma be with us in 2013 and our market gods gentle. With that, please accept our warmest wishes for a happy, healthy and prosperous 2013!