Law firms defy downturn to post bumper results
Lawyers stay busy but the year ahead looks tough
As investment banks continue to announce widespread redundancies, the largest global law firms are turning in double-digit revenue increases despite the credit crunch forcing a downturn in deal activity.
Although some mid-tier US law firms, such as Chicago’s Sonnenschein Nath & Rosenthal, have been public about lay-offs – the firm cut 37 lawyers from its 700-strong ranks – the bulk of the profession is barely feeling the pinch.
In the UK, Magic Circle law firm Freshfields Bruckhaus Deringer announced a 20% increase in revenue to £1.18bn (€1.5bn) for the year to April 2008 and a 40% increase in average profit per partner to £1.44m.
London-based international firms Herbert Smith and Norton Rose posted 25% and 28% increases in turnover respectively, with Herbert Smith’s profits per partner increasing to £1.02m. Many firms are yet to announce their audited results, though the annual figures will benefit from the usual time lag in closing deals that were announced when markets were stronger.
James Bateson, member of the management board at Norton Rose, said: “The difference between the law firms and the banks is that there is less money for the banks to lend, but there are more legal problems for us to advise on.”
Travers Smith, a London mid-market law firm known for private equity and corporate finance work, finished its financial year on June 30.
Managing partner Chris Carroll, said: “I am surprised that we look like we will turn over at least the same as we did last year because we are a transactional firm. There are fewer deals, they are smaller in value and they are harder to push over the line because financing remains difficult.”
However, he said large parts of the business were unaffected by this. “The restructuring side of banking is obviously going to be the place to be as the economy goes down,” he said. When Travers Smith computed its earnings based on the typical April 30 year end, it recorded double-digit growth.
Many firms’ annual results also show bumper performances in May and June last year. However, there is evidence the credit crunch may only now be starting to bite.
Steven Davis, chairman of Dewey & LeBoeuf, a New York-based international law firm, said: “Structured finance work is down and some of our capital markets work is down as there have definitely been effects on the volumes of initial public offerings.
“But we feel pretty lucky because we are diversified geographically and also in terms of industry sectors. So, for example, the work we do in the energy sector and in insurance has been strong. Russia and the Middle East have also been active.”
The New York team has witnessed increased activity from foreign investors taking advantage of the weak dollar to make acquisitions, such as buyers from the Middle East and Asia investing in New York real estate.
Recruiters say law firms have been redeploying resources into busier practice areas and are increasingly relocating lawyers to busier offices overseas to avoid layoffs. The legal industry has historically avoided large-scale redundancies, in part because of difficulties in rehiring experienced solicitors when markets pick up.
Bateson said: “History shows that if you get rid of staff in a thin market, it is difficult to replace them when things pick up, so you have to find them things to do rather than get rid of them. It is hard to build the business up again quickly, and these things do tend to turn quite fast.”
Law firms have been able to keep busy with insolvency and restructuring work in the past few months, while regulatory teams have seen a boom in activity thanks to the UK Financial Services Authority issuing rules governing short-selling and asking banks to review their staff incentive structures.
However, Ted Burke, chief executive of Freshfields Bruckhaus Deringer, issued a warning despite last year’s record performance: “We had a terrific year last year and were particularly pleased with the growth in our emerging markets practices.
"But contrary to what some might say, law firms are not immune to problems in the larger economy and we expect this year to be much more challenging.”
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