Editors' Blog

Deal Week’s Manhattan transfer finds New Yorkers less than bullish

Posted 15/03/2007 by Deal Comment

Breakfast with Cravath, coffee with Sullivan, now on to Wachtell – it has been a busy week on Legal Week’s ongoing tour of Manhattan.

The purpose of all the glad-handing (aside from providing material for the Deal Comment blog) is preparation for Legal Week’s US Top 50 results and upcoming US focus, which will analyse the key issues affecting the world’s largest legal market.

The figures tell a mixed story. Following a (sort of) record year in US M&A, it is not surprising some firms have seen substantial rises in both revenue and profits, meaning double-digit growth from some of Wall Street’s finest in the top and bottom lines. But there are also many – mainly Manhattan-centric – firms that have only managed average profit rises of around 5%.

Talk to US lawyers and it soon becomes clear that the current state of the US legal market is far more uncertain than some of the headline figures would suggest.

There are a number of obvious causes for the current mood of caution on Wall Street. Yes, the US has enjoyed some of its biggest-ever deals in 2006, but the total volume of deals did not rise dramatically. A handful of big-ticket private equity bids - such as the record $45bn (£23bn) leveraged buy-out of utilities giant TXU and the buy-outs of Equity Office Properties and hospital chain HCA - have bumped up average deal size. But the number of deals has remained largely static against what was a robust M&A environment in 2005.

US profits have also been hit by cost rises, largely through hikes in associate salaries and bonuses, which both went up significantly in 2006 (and have gone up again this year). As one head of a top-tier New York firm says: “The associates deserved more pay, but it hit our bottom line.”

More striking than the uneven spread of corporate work is the increasing focus among lawyers on when the US economic downturn is going to come.

The hire this week by Cadwalader Wickersham & Taft of a respected four-partner restructuring team from Weil Gotshal & Manges is currently dominating conversation in New York, crystallising the anxious repositioning among US firms to seriously beef up their bankruptcy teams in preparation for an economic downturn.

Almost as symbolically, Weil Gotshal has just welcomed back its celebrated former head of restructuring, Harvey Miller, after a four-year stint at Greenhill & Co. Other members of the Manhattan legal elite are similarly plotting the expansion of their restructuring groups.

“Our bankruptcy group is poised,” says one New York office head. Another sums up the consensus: “Every managing partner is talking about acquiring bankruptcy lawyers.”

Other topics high on the agenda include the drift of securities work away from New York, not to mention wider concerns regarding the city’s very future as the world’s financial capital. The US Chamber of Commerce’s announcement on Monday (12 March) that it would be suggesting listed companies could forego the need to provide quarterly estimates reflects how lively the debate has become.

“Long-term, the markets will correct themselves,” is the view of one managing partner – a position echoed by some, who believe (or perhaps hope) Manhattan will regain its dominance over time. Others are more downbeat, however, citing various underlying trends.

The head of one of the largest US firms questions whether New York can ever regain its previously unchallenged dominance, commenting: “Sarbanes-Oxley hastened what would have happened anyway.”

Despite such gloom-laden predictions, more firms than ever are trying to break into the Manhattan market. ‘Out-of-towners’ such as Latham & Watkins and Kirkland & Ellis continue to invest with success – indeed, Latham’s progress is universally recognised among established New York outfits.

Even the much-derided Londoners are no longer attracting quite the scorn of several years back. Clifford Chance is now widely (and grudgingly) acknowledged to have “turned the corner” after a strong year, though Linklaters, Allen & Overy and Freshfields Bruckhaus Deringer still have work to do.

“I know Freshfields very well," says the chief of one Wall Street practice. "Konstantin Mettenheimer, Ted Burke and the other guy… Greg Morton.”

The profile-raising might just take a bit more time yet.

paul.hodkinson@legalweek.com