Editors' Blog

US results 2007: high growth, high anxiety

Posted 1/05/2008 by Alex Novarese

Here’s a telling story regarding the ambiguous mood in the outwardly-robust US legal market.

At the time its well-received union was being finalised during late summer 2007, Dewey Ballantine and LeBoeuf Lamb Greene & MacRae were predicting profit distributions to partners would be around 10% above budget. As any law firm leader will tell you, that’s a handy windfall anytime but that goes double when you’re about to put together one of the largest ever legal mergers. Yet by year-end there was almost no excess to distribute, according at least to one partner within the firm.

The reason, according to Dewey chief Steven Davis, was an unbudgeted $30m (£15.1m) hit the firm took on compensation for its associates that saw the firm boost its year-end bonuses to between $45,000 (£22,700) and $110,000 (£55,500). Cue lots of grumbling among the partners as Dewey & LeBoeuf faces up to the less sunny commercial environment of 2008 with less fat to get it through the cold snap.

End of the road?
Such concerns illustrate the uneasiness that has taken hold of American firms despite the world’s largest legal market in 2007 maintaining robust growth.

Our US sister title The American Lawyer’s eagerly-awaited Top 100 financial rankings show that turnover across the group grew by a healthy 13.6% to hit $64.5bn (£32.4bn) in 2007, driven largely by the first-half boom in M&A and banking work.

It’s the end of an impressive five-year run for America’s top law firms that has seen the group grow considerably ahead of their long-term trend. Over this period the key benchmark of underlying productivity, revenue per lawyer, has grown by $205,000 (£103,000). Profits per partner has accelerated even more dramatically, rising $438,000 (£221,000) to an average of $1.3m (£653,000) across the top 100.

But even if the US economy hadn’t been hit by the sub-prime collapse there would have been cause for concern given some of the underlying trends at play. For a start, it’s become increasingly apparent that US law firms have squeezed their equity every bit as aggressively as their UK counterparts. AmLaw found 37 of the 100 shrunk their equity partnerships over the year while a further four had held flat. Having pushed leverage, many partners are now concerned at the cost implications of last year’s hikes in assistant salaries and bumper bonus pay-outs at a time when transactional work is sharply down.

This fear has been compounded as overall attorney headcount rose substantially across the group last year, up 6.8% annually. Interestingly, while this mood of uncertainly has become more pronounced since the crunch started to take hold, that unease was plainly there as far back as last spring.

The London view
On this side of the Pond the interest will be what the US results mean for American firms on the international stage. On first reading, it appears London firms will further bolster their competitive position, though not to the same extent as last year. This is because it was a generally uneven year for New York-based law firms that didn’t have heavy exposure to private equity. (The exception proving the rule is once again Wachtell, which kicked up its profits no less than 23.6% to take its PEP within a whisker of $5m (£2.51m).)

As such, it looks entirely possible that two or even three London firms will this year earn a place in the world’s top 10 most profitable practices, ending the long domination by Manhattan firms of this select club. Even though UK firms will have longer to feel the crunch-effect thanks to their April year-ends, current indications are that European firms will keep pace with the US, rather than lose ground as they did in the wake of the dot.com crash.

Set against that, it was a generally solid if unspectacular year for internationally-minded firms such as Shearman & Sterling and Weil Gotshal & Manges (Latham being the happy exception), which suggests benchmark firms in London will keep investing in the UK. Elsewhere, the winners and losers were hard to predict, but that’s another blog in itself. Perhaps some of the US firms that have been widely dismissed in the jaded London market – Proskauer Rose, say – will be getting a positive reappraisal.

If you want to see more of the top 100 results, Legal Week will be running in depth coverage later this month. If you can’t wait that long, check out the relaunched and much-improved website of The American Lawyer. The site will be working more closely with legalweek.com from now on, reflecting the increasing links between the two titles.

That means more of our coverage will be reaching the vast US legal audience and our readers will be getting the pick of AmLaw’s highly-rated analysis and commentary.

alex.novarese@legalweek.com