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Watch Out World
By John E. Morris
The American Lawyer
January 6, 2000
If Keith Clark's shoulders are sagging a little more than usual these days, there's a good reason. As chairman of the world's largest law firm, he's carrying a globe on his back.
By the time this magazine arrives in your in-box, New York's Rogers & Wells and Germany's Pünder, Volhard, Weber & Axster will have merged with Clark's firm, Clifford Chance, to create a new 3,000-lawyer global behemoth with estimated revenue of $1.2 billion its first full year. Will the firms' herculean gamble pay off? The American Lawyer recently obtained the confidential 211-page partners' prospectus for the merger. The tome reveals in intimate detail the potential payoffs from the deal (the firms are blending blue-chip clients and slashing their rent bills), as well as many of the remaining hurdles (notably disparate partner profitability) that the firm will have to overcome.
From the beginning, the rationale was that in a globalizing world, the firms could capture more business if they had critical mass in each of the biggest economies. Clifford Chance has struggled to break into the U.S. market. Rogers & Wells and Pünder, meanwhile, had international client bases but weren't large enough to support the international office network needed to play on the global stage ["The New World Order," August 1999].
The internal prospectus sheds new light on how much the firms needed each other. Office-by-office profit breakdowns show that they each had problems in foreign markets.
Rogers & Wells lost $2.2 million operating its small London, Frankfurt, and Hong Kong offices in 1998, while Pünder was losing money in Hong Kong and barely breaking even in New York. For its part, Clifford Chance was eking out an 11 percent profit for its 40-lawyer practice in New York and Washington, D.C. miles behind the 40-plus percent margins it was posting in London and Western Europe and far below even offices such as Moscow (a 28 percent margin) and Hong Kong (22 percent) that have been buffeted by regional economic crises. Merging should help. In four high-cost cities New York, London, Frankfurt, and Hong Kong each firm has an office. Consolidating these and other offices is expected to save an estimated $8.8 million a year.
The real payoff, though, won't be from cost savings but from attracting new business. And there the client lists paint an encouraging picture [see table].
Rogers & Wells and Pünder bring corporate clients to help round out Clifford Chance's base, which is heavily weighted toward financial institutions. Still, all ten of the merged firm's top clients will come from the financial sector. Rogers & Wells's top client, Merrill Lynch & Co., Inc. ($14 million in fees, or 7 percent of revenue in 1998), will be the top client overall. It was already Clifford Chance's fourth-ranked client ($12.6 million in the fiscal year ended last April). The rest of the new firm's top clients are just as enviable, including Citigroup Inc., The Chase Manhattan Corporation, and Morgan Stanley Dean Witter & Co.
"That is a far more impressive client list than most people would have realized, given the reputation of Clifford Chance," says a partner in another American firm who has scrutinized the client lists. "These are blue-chip clients with good continuation of fees." While Rogers & Wells "isn't Simpson Thacher or Davis Polk," he says, "it's got a lot of synergies. . . . [Rogers & Wells's] clients blend nicely with the Clifford Chance model. . . . I think they're going to do very well."
The firm is now actively looking for "star" M&A partners in New York. To land them, recruiters are offering far more than the $1 million or so that partners make at the top of Clifford Chance's lockstep seniority system. As we reported last August, Clifford Chance had already agreed to pay a handful of highly compensated Rogers & Wells partners outside the normal lockstep most notably, antitrust specialists Kevin Arquit and Steven Newborn, and L. Martin Gibbs, who oversees the $10 million MasterCard account.
Firm managers in London and New York declined to comment on clients or financial information or specific hiring plans, though they have stated that lateral hiring in corporate finance and M&A would be a priority. One challenge will be to bring the economics of the German firm's practice closer to those at the English-speaking firms. Pünder's profits per partner and revenue per fee-earner are far lower [see table]
But management sees "significant opportunities" for increased associate leverage. After combining Pünder's Brussels, Moscow, and Warsaw offices with Clifford Chance's and focusing on higher-margin work, "conservative estimates . . . suggest that improvements in PPP of the order of 40 percent could be achieved over a two-to-three-year period," according to the prospectus. Even that would barely narrow the gap with Rogers & Wells, however, where profits are on course to rise by a third this year, to over $1 million.
Management is not predicting huge synergies in the first year. Profits are budgeted to be $923,000 per partner in the joint firm's first full fiscal year, 20002001, or only slightly above the $912,000 that Clifford Chance expects this year.
At press time in mid-December, the firms were still working out some details of their new venture. Partner and associate billing rates vary and still need to be aligned in some of the firm's branch cities. And there are associate compensation issues, too. When Rogers & Wells began issuing the now-standard year-end bonuses to associates in New York, Clifford Chance's New York partners had to scramble to decide if they would match them. (They did.) "There are anomalies that show up in spades," says one partner.
As for billable hours, Clifford Chance equity partners logged 1,275 hours on average in the last fiscal year, compared to figures in the mid-1,700s at both Rogers & Wells and Pünder. Are the Brits overdoing those lunches? No. British solicitors historically charged out fewer hours to clients than American lawyers, but their rates were higher. So far there has been no effort to bring these billing practices into alignment.
For students of law firm structure, the merged firm's legal status is fascinating. Rogers & Wells was already organized as a limited liability partnership, and its partners insisted on keeping that structure to stave off liability claims. English law doesn't yet permit LLPs, though a draft law has been presented in Parliament. So the new firm will be organized as a New York LLP, in which almost all partners worldwide will be members. But, because limited partnerships can be taxed like corporations in many countries, and because of local legal ethics, there will be national partnerships in many countries, from which local partners will draw most of their incomes. It will take a complex set of rules and formulas to ensure that all partners are paid according to the same lockstep system, from one profit pool.
In short, it's a structure only a lawyer could love.
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