Editors' Blog

Global 100: Cloning the big four

Posted 4/07/2008 by Alex Novarese

“We did better in the first half… strong growth in emerging markets… challenging times… we’re not profiteering, honest” – OK, the last bit is subtext and not the official line, but there’s something eerily familiar about the message coming out from London’s big four as Allen & Overy (A&O) and Linklaters finally got around to disclosing their results.

This, of course, echoes the message that emerged sheepishly last month from Freshfields Bruckhaus Deringer, though the awkward timing of the Spitfire Pilot’s restructuring-induced profit surge made that understandable.

And Linklaters chose the day after A&O’s results announcement to get its numbers out there. Perhaps that’s because the growth rates were spookily similar, with both firms growing the top line by 15%, while average partner profit growth at Linklaters of 11% was just a touch above A&O’s 9%. Growth in revenue was similar to CC’s 13%, though Freshfields’ 19.5% looks impressive for a business coming out from a major shake-up.

Now all the big four have turnover in excess of £1bn, with A&O and Freshfields crossing the line this year. Relative headline profitability is a little more spread with profits per equity partner (PEP) at A&O and CC in the £1.1m range, while the unambiguously bottom line-focused Freshfields and Linklaters now hover in the rarefied region of £1.4m.

But what strikes is how similar as businesses the big four have become, both in practice breakdown, geography and underlying growth trends – it’s like Harvard Business School got hold of a copy of Vision For The Future back in ‘97 and started cloning these beasts. So A&O, buoyed by a renewed international push in the last two years, for the first time joined its peer group in generating more of its fee income from outside the UK.

The group’s revenues are also beginning to converge, though Linklaters has possibly missed its window to overtake CC. With the firm to split from a four-office network in Central & Eastern Europe and falling foul of JPMorgan, achieving flat turnover in 2008-09 would look to be a decent result. Judging the group, Freshfields and A&O currently look to have that little bit more wind in the sails, but there’s very little in it.

There’s also little evidence that prolonged credit turmoil and a global slowdown is yet to seriously damage this group. Turnover across the big four averaged 15% in 2007-08, against 24% in the boom period of 2006-07. Likewise, PEP growth has fallen from 24% to 18% (though a back-of-the envelope calculation stripping out the one-off impact of Freshfields’ restructuring would knock that down to a figure closer to 12%).

The magic circle clearly won’t be the top-performing band among the UK top 50 this year (that honour will go to the chasing pack firms) but it is far from being the worst.

Put in the context of the upcoming Global 100 from Legal Week and The American Lawyer, three magic circle firms will this year make the top 10 on the basis of profitability including Slaughter and May. Indeed, reading the runes, the latter firm should now be in the Wachtell/Cravath ballpark.

Of course, the big four are not out of the woods yet. Continental Europe and the wider Asian market, two regions that have protected this group, are now likely to slow considerably (though Russia and the Middle East will likely not). We’re also still a good way off the institutional finance markets unblocking.

But as H1 M&A research from Mergermarket showed, underlying deal activity has not been hit as hard as some of headlines would suggest, and larger firms are proving adept at soaking up market share from smaller rivals. Those expecting that the crunch would reverse the big four’s global ascent had better be patient.

alex.novarese@legalweek.com