UK 200 - SAMPLE
Sample of The Lawyer's UK 200: Top 100 report
Financial overview SAMPLE
UK 200: Top 100
Financial overview – introduction
Forget the money. The most telling data point in this year’s UK 200: The Top 100 report comes courtesy of the firms that answered our annual attitudinal benchmarking question about whether they believe trading conditions this year will be tougher than in the last. A record 96 per cent of firms said they thought they would.
This speaks volumes about the mood in the UK legal market. That sound you could hear a few months ago? Budgets being ripped up.
“Like a lot of firms, we’re expecting to be 15 per cent down for the year,” one UK managing partner told The Lawyer over the summer.
Another put a more optimistic gloss on the turmoil: “When we do emerge from the current situation, I’m anticipating private equity to be extremely busy, because finance is available, they’re sitting on a lot of dry powder and deals will need to be done. I’d expect in Q4 that we’ll start to see an uptick.”
The debate will go on, and its accuracy at an individual firm level will depend largely on the practices, sectors and clients in which a firm specialises. It will also depend on variables never before discussed in these pages, such as the length of time it takes for a vaccine to be discovered, or the extent to which government policy regarding the handling of the pandemic continues to oscillate.
UK Top 100 SAMPLE
Pandemic casts long shadow
While this year’s UK 200: The Top 100 is not solely about the pandemic, it inevitably features as a theme running through the entire report. Indeed, the report is chock full of detail both on the measures firms have taken to combat the impact of the pandemic, and also of the effect it has had on their financial and operational health.
In at least one case, the shock of the pandemic has already proved too much to bear. After entering administration in the spring, this year’s UK 200 represents the fourth and final inclusion of McMillan Williams Solicitors, or MW Solicitors.
It was sold to Taylor Rose TTKW as part of a pre-pack deal in May 2020, with the entirety of its workforce being transferred to the new firm. At the time of MW’s administration, its headcount exceeded 400.
A recent report conducted by MW’s administrators noted that a steep decline in the firm’s residential conveyancing revenue was at the heart of its problems. In 2018/19, this group contributed to 54 per cent of total revenue.
UK Top 100 SAMPLE
Mapping the future
In this year’s UK 200: The Top 100 report, you will find a raft of new data and other indicators as to the financial health of the market. You may also find the style somewhat different.
In January this year, The Lawyer launched a daily, data-led analysis covering all aspects of the market, called Horizon. In this year’s report, we have imported that approach, allowing us to cover – and comment upon – a wider range of topics than in previous editions of the UK 200.
We also examine in some detail what the future of the legal market might look like, once the worst of the pandemic subsides.
“The profession will never slot back into pre-Covid mode,” insists Herbert Smith Freehills CEO Justin D’Agostino.
This year’s features range from a raft of economic modelling projections and predictions to an analysis of the variety of Covid-19-related measures taken by firms, such as use of the government’s furlough scheme, salary cuts and partner profit deferments.
However, the performance of the UK’s four magic circle firms – Allen & Overy (A&O), Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters – is, as always, closely watched for clues as to how the elite end of the market is performing, not least in these straitened times (see Magic Circle in a Decade of Decline boxout).
Transactions were put on hold, road traffic accidents ceased overnight
and the courts closed
Global growth index SAMPLE
UK 200: Top 100
Global Growth Index
International markets critical to Top 20 UK firms’ future growth
The financial results of the four UK magic circle firms make it clear that international growth is vital, as the majority of this group’s revenue is now being generated abroad. The firms’ combined overseas revenue last year was almost twice the size of their UK total. Of the four, Clifford Chance and Allen & Overy (A&O), the two most internationally diverse firms, have performed most strongly in the past four years.
International offices have proven to be beneficial to these UK firms’ top-line growth, and overseas revenues grew at a faster rate compared with their home market. Clifford Chance recorded a 35.6 per cent jump in overseas revenue compared with 2015/16. In comparison, its UK revenue grew by 20 per cent during the same period. Last year, its international offices turned over £1.22bn, the highest amount in its peer group. A&O followed with £1.06bn, a rise of 37 per cent from £773m in 2015/16. Its UK revenue growth during the four-year period was 17.9 per cent.
Linklaters, which has the smallest global presence among the magic circle, shows a 27.7 per cent growth in UK revenue, up from £706.1m in 2016 to £737.9m in 2020.
Among the four magic circle firms, Freshfields has the highest international revenue percentage. Germany is by far its largest fee-earning jurisdiction internationally, where around 100 of the firm’s 383 partners are based. Together they contributed roughly a quarter of its total firm-wide revenue.
But its overseas revenue growth rate has been the slowest during the past four years. In 2019/20, around 68 per cent of the firm’s global revenue was generated by its offices outside of the UK, beating Clifford Chance narrowly by 0.8 per cent. In 2015/16, Freshfields’ overseas revenue was £829m. The total increased by 25 per cent to £1.04bn in 2019/20.
Despite the slow rate of growth, Freshfields’ international expansion has proven to be critical, as its domestic revenue has decreased slightly during the same period, down 2.9 per cent from £498m to £483.8m.
To some extent, the strong international revenue growth was inflated by the decreasing value of pound after the 2016 Brexit referendum. By 2019, the currency lost almost 17 per cent of its value against the US dollar compared with the average exchange rate in 2015. This means that even if a firm’s overseas revenue remained the same in USD as four years ago, when it was translated into pounds, the sum would represent a 20 per cent increase.
Similar to the magic circle, most of the top 20 UK firms now generate more than half of their total revenue from outside of the UK. Slaughter and May, Pinsent Masons and Simmons & Simmons are the only exceptions, as the majority of their fees are still generated in the UK.
Outside of the magic circle, DLA Piper has the highest turnover outside of the UK, which was £1.75bn in 2019/2020 and accounted for 83.1 per cent of its global total. Hogan Lovells and Norton Rose Fulbright (NRF) came second and third, with £1.42bn and £1.25bn, respectively.
By percentage of total revenue, NRF is top, as overseas revenue made up 84 per cent of its global results. DLA Piper and Hogan Lovells, which, like NRF, have also transformed themselves into global giants with cross-border mergers, were the other two firms that see over 80 per cent of their global revenue generated outside of the UK.
Not all transatlantic mergers deliver the same result
Among the top 20 firms, Eversheds Sutherland, BCLP and Womble Bond Dickinson are the three firms that have significantly boosted their overseas revenue through a transatlantic merger in recent years. But not all mergers have helped to boost business in the home market.
Eversheds has fared the best in this regard. In 2016, legacy Eversheds posted £66.1m of overseas revenue, just 16.3 per cent of its global total. In 2019/20, following its 2017 merger with US firm Sutherland Asbill & Brennan, the firm’s overseas revenue has multiplied to £508.3m.
Although most of the additional overseas revenue was generated in the US, where the firm now has eight offices, the merger has boosted its growth in the UK too. In the past financial year, Eversheds turned over £446.4m in the UK, representing a 31.5 per cent jump from the £339.5m in 2015/16. It is a testimony to the fact that a bigger global presence, particularly in the US, can contribute to domestic growth. Globally, its total revenue has seen a 59 per cent, merger-fuelled surge, from £600m at the time of the deal to £954.7m.
While the firm has a sizeable presence in Europe and US, it hasn’t significantly expanded its footprint in Asia. Through the merger with local firm Harry Elias in 2017, Eversheds gained a presence in the Southeast Asia city state. However, the tie-up ended in June 2020 and both firms parted ways. In August 2020, instead of setting up its own office, Eversheds added Singaporean law GT law to its Eversheds Sutherland Asia Pacific Alliance (ESAPA) to service its clients in Singapore.
The firm’s physical presence in Asia is limited to the Greater China region but it services clients in other parts of the Asia Pacific region through the ESAPA network.
According to Eversheds Sutherland Asia managing partner Stephen Kitts, the alliance has more than 35 member firms, covering 40 jurisdictions, and provides a gateway for clients seeking advice in a range of jurisdictions across the entire Asia Pacific region.
For BCLP, which was created following the merger between Berwin Leighton Paisner and US firm Bryan Cave in April 2018, the positive merger effects on financial performance are yet to show through in the UK.
Its overseas revenue was boosted from £46m in 2015/16 to £496.6m last year, with the lion’s share a result of legacy Bryan Cave’s US business. But its domestic UK revenue dropped by 9 per cent during the four-year period, down from £208m to £189.3m.
The firm’s recent international growth has a focus on Continental Europe. In January 2020, it doubled its Paris headcount with a 21-lawyer team including seven partners joining from French firm Franklin. A few months later, BCLP hired another team from Franklin, in Paris. In July, it closed its one-partner Beijing office, which was opened in 2013. The China closure leaves the firm with only two offices in Asia – Hong Kong and Singapore.
Womble Bond Dickinson has also transformed itself from a domestic firm to a transatlantic business with a US merger in 2017. Legacy Bond Dickinson had no overseas presence in 2016, but last year it reported £164.1m of revenue generated abroad, roughly 60.8 per cent of its global turnover.
However, its domestic growth was largely flat following the merger, as revenue only inched up by 1.8 per cent from £104m in 2015/16 to £105.9m last year. Most of the firm’s new expansion following the merger took place inside the US and the UK. In May 2019, its Houston office was opened, and in July the same year it strengthened its Leeds office through the acquisition of local IP boutique James Love Legal.
Listed firms SAMPLE
UK 200: Top 100
Storm clouds gather over 'listed circle'
The UK’s band of listed law firms are grappling with their first financial storm and after years of high-profile preamble followed by external investment and ambitious acquisitions, the notion of the legal market rising as a favourable asset class has now fallen flat.
So far in 2020, the average share price for the UK’s six listed law firms – DWF, Gateley, Ince, Keystone, Knights and Rosenblatt (asset management consultancy MJ Hudson, which includes legal services, floated on the Aim in 2019 but is not included) – as a group has fallen by nearly 30 per cent. This is a significant drop-off compared to the Aim market’s average, which remains level.
There is no doubt that the once-shining skies of the London Stock Exchange have grown increasingly bleak and grey for listed firms over the past six months, with an appetite for any future IPOs diminished.
A key reason is that the market recently watched as the ‘listed circle’, like the rest of the market, battled with the impact of Covid-19, scrapping dividends and cutting costs right in the public eye. DWF and Ince Group made some of the most stringent cuts in the form of redundancies.
By calculating market capitalisation for the six combined firms since the beginning of March, the value lost reaches nearly £400m. DWF accounts for more than a third of lost value at £272m followed by Gateley (£53m) and Keystone Law (£32m). Percentage-wise, Ince Group’s share price was rocked by a 39 per cent drop, now leaving it undervalued at just £10m. To put that into context, its most recent revenue figures were just shy of the £100m mark.
The one shining light is Knights, which has seen its share price skyrocket by 42 per cent in 2020
The one shining light among the six is regional powerhouse Knights, which has seen its share price skyrocket by 42 per cent in 2020. An achievement that helped CEO David Beech beat the likes of Kirkland & Ellis’s superstars to a spot in this year’s Sunday Times Rich List, amassing an estimated worth of £130m. This stems from his 40 per cent stake in Knights.
However, Knights’ success has not been shared elsewhere. Gateley’s share price has flopped by 35 per cent, while Keystone’s and Rosenblatt’s have tumbled by 17 and 21 per cent respectively.
These struggles follow a year when the listed firms outperformed the market significantly, rising by 25 per cent against the Aim in 2019. This goes to show how quickly the clouds can gather for such an untested asset class.
When the chips are down and the economic outlook grows gloomy, investors seek out what they know and trust, and the listed market is just not quite there.
Knights is the exception to the rule, not only through building its share price value but also by maintaining its story of regional growth; one that has held up nicely when compared to its peers.
It is hard to argue that the firm has not been good to its promise of trying to make itself the number one law firm outside of London. In 2020, it has acquired ASB Law in Crawley, Crofton Solicitors in Manchester, ERT in Birmingham, Fraser Brown in Nottingham and Shulmans in Leeds. This leaves it with an office in every major regional city, besides Newcastle and Liverpool.
The £20m purchase of Shulmans in April stands out as it was fully funded by a share placement. If Knights can maintain its buoyant value then it puts it in a good position to snap up more regional firms next year, off the back of further placements. With its revenue rising from £52.7m to £74.3m last year, it will hope this will be the case.
However, even Knights has not emerged from Covid-19 unscathed, as it unleashed a series of cost-saving measures back in the spring. That included a reduction in board members’ salaries by 30 per cent, as well as a 10 per cent pay cut for all staff who earned more than £30,000.
The question for Knights now is how to retain investors’ interest over the next 12 to 18 months, given its extremely high valuation.
When its current market cap is divided by its profit, it gives a price-to-earnings (PE) ratio of 35.8. This is much higher than Gateley’s 18.6, DWF’s 16.1, Rosenblatt’s 10.1 and Ince Group’s 2.6. This high PE ratio means that investors value Knights for what it is going to be in the future, rather than its current level of profitability.
To maintain its exceptional valuation, Knights has to keep backing up its growth story with action. An easy win is to look for a purchase option in Newcastle or Liverpool but once it has a foothold in all the UK’s major regions, it has to show the ability to grow organically. Given the current economic state of the country, it appears that the tricky part of its journey is only just beginning.
Knights currently lacks an office in Newcastle, above, and Liverpool
At the other end of the spectrum is DWF. The fact that it ousted CEO Andrew Leaitherland back in May and replaced him with former DLA Piper chief Nigel Knowles tells you that it has not been a hugely successful year.
Overall, the firm has underperformed since listing in 2019, when it promised the market that it would use the access to public capital to invest in the expansion of its low-cost legal services businesses.
However, there is little evidence there is much internal support for this growth strategy. The operations discontinued by DWF over the past 12 months have generated a loss of £4.5m, which included the downsizing of its New Law arm and the closure of several international outposts.
Unlike Knights’ simpler commitment to regional growth, the DWF story has not proved a hit with investors, as illustrated by its share price falling more than 60 per cent since March.
In theory, focusing on a technology-led alternative legal services business makes sense due to its scalability. Once the initial investment has been made in the tech needed to provide low-cost legal services, such as document processing, it should be easier to grow without a significant increase in costs.
The problem is that listed entities positioning themselves as 'tech' stocks is an old story. Companies across every industry focus on the tech aspect of their business in the hope of wooing investors. Yet, very few deliver, and stock pickers are wise to the trick.
In DWF’s defence, it did purchase MindCrest, a technology-driven legal services provider, for £14.2m in January this year. That deal, which reflected a commitment to its strategy, resulted in an 11 per cent jump in market value overnight.
However, it has been downhill from there. Its value had fallen off a cliff from £1.27 per share to around 57p at the time of writing, while the change in leadership highlighted internal conflicts at the top. It could well be that the struggles in selling the firm's strategy are not merely an external problem but also an issue within it.
Crucially, the business is held back by a pile of net debt reaching £55.7m, which has fallen by almost £10m since April due to Knowles’ cost-cutting drive. This is significant because hefty interest payments can drag on a business.
Once this debt pile has been reduced, Knowles then needs to find the cash and internal support to keep investing in legal services. The share price jump following MindCrest shows that it is a strategy that appeals to the wider market and for good reason.
For traditional firms, the servicing of new clients requires recruitment, which as a model boasts few economies of scale. Therefore, if DWF can truly ramp up its technology trend, the firm’s undervalued shares might look like a steal in comparison to Knights.
City 50 - Real Estate SAMPLE
UK 200: Top 100
Crisis delivers real estate revelation
Among the many questions raised by the pandemic is what will happen to firms’ offices? Occupancy rates started tumbling again in October as the government began tightening rules, and all the signs were that businesses would not be getting back to anything even remotely like normality until next Easter at the earliest.
Even then, the betting is that many firms will, in future, look to use the space they have very differently from before the crisis. In practice, that will mean probably less space overall and in some cases, no space at all.
Already, two big firms – BLM and Dentons – have closed offices and transformed them into 100 per cent virtual offerings. With the cost savings to be achieved by slashing a property portfolio and truly embracing agile working, these are certain not to be the last moves of this type.
Uniquely in the legal market media context, The Lawyer has been tracking firms’ spending on their property portfolios for several years. The insights this data provides are likely to prove invaluable as firms begin to overhaul their property portfolios and make changes, when lease events allow. And rest assured, that is precisely what every firm in the market will do. The sheer cost of real estate – coupled with the pandemic providing the realisation that people can work effectively from home, at least a significant part of the time – makes this a given.
This year’s data for the UK 200 includes 15 firms that are currently spending more than £5m on their property portfolios. Two – Clyde & Co and Pinsent Masons – spent £23m. And since not every firm submits real estate data to The Lawyer – including those in the top 10 ranked by revenue – the true number shelling out double-digit millions on their offices is significantly higher. Any opportunity to reduce that bill is likely to be grabbed with both hands.
Mills & Reeve managing partner Claire Clarke highlights the new office in Manchester the firm has, with the deal all agreed pre-lockdown.
“We’re not quite sure how we’re going to use that space yet,” she admits. “Does having everyone on Zoom mean we need more quiet space? I suspect over time we’ll all need less space. And we’ll all use it differently.”
“We’ve been looking at our property portfolio for years, trying to make it more efficient and streamlined, keep our lease terms flexible and ensure that our space is working for us,” confirms Womble Bond Dickinson co-chair Jonathan Blair.
“Now all of that has been put into sharp focus. The pandemic has provided a platform for a discussion about the future of law, which we’ve been having for five years but against the backdrop of a benign economy, when you can always do something tomorrow. Now the dynamic has changed. There is a real imperative to have a different conversation.”
Law firms have got very used to real estate expenses being their second-highest overhead. That is going to change, insists Blair.
“Years ago, people would talk about IT as a cost line,” adds Blair. “Now, they’re talking about IT as an investment. How long before IT is our second-highest overhead?”
I suspect over time we will all
need less space. And we’ll all
use it differently
Claire Clarke, Mills & Reeve
Firm profiles SAMPLE
UK 200: Top 100
1. DLA Piper
UK 200: Top 100
DLA Piper’s revenue for its international LLP, which covers all offices outside of the Americas, grew 10 per cent from £974m to nearly £1.1bn over 2019/20. Global revenue crept above £2.1bn, up 8.5 per cent from £1.9bn over the last financial year.
The UK contributed around £357m of that total, up 2 per cent from £350m in 2018/19. DLA’s London office, which has a partner headcount of 117, accounted for 47 per cent of the UK total (£170m); an increase of 4 per cent from last year’s £162.4m. Though DLA did not provide a figure for the UK, across its international LLP, average profit per equity partner rose 4 per cent from £814,398 to £848,301.
Global net profit increased 7.3 per cent to £555m, with a 9 per cent uplift for the firm’s international LLP net profit from £203m to £222m.
Business mix: The largest contributors to DLA’s revenue were corporate (27 per cent of global revenue at £570m) and litigation (36 per cent of revenue at £760m). The firm has a global total of 468 litigation partners, of which 224 sit in the UK (38 in London). In August, DLA entered the UK disputes funding market by introducing its own client pot worth £150m, financed in part by a new platform, Aldersgate Funding, led by the firm’s former corporate partner Jim Holding and former global co-chair of litigation and regulatory Stephen Sly.
The firm has sought to rebuild its restructuring practice after exits over the past year; Leeds-based corporate restructuring partner Richard Obank and insolvency partner Colin Ashford left for Brown Rudnick, just a few months after the exit of head of UK restructuring Amy Jacks and global restructuring co-chair Michael Fiddy, to Mayer Brown. In April, DLA recruited restructuring partner David Manson from Paul Hastings, followed by James Davison from Addleshaw Goddard in May.
The firm made four real estate partner hires over 2019 and early 2020, including Joanne Owen, who returned to DLA after three years at US firm Proskauer Rose.
DLA’s client roster includes Abraaj, DekaBank Deutsche Girozentrale, Etihad Airways, Gazprom and Hitachi.
Operational: In 2018, DLA relocated in London to a semi open-plan office at 160 Aldersgate St, covering 266,000 ft and housing 389 lawyers. Global co-CEO Simon Levine says that with people working from home, he does not intend to downsize in London but does expect that the configuration and use of offices will be different from before.
In September, DLA expanded its roster of legal services and consulting products under its fledgling brand, Law&, with the aim of turning the firm into an all-in-one client service provider.
The firm did not provide any information on average work-in-progress and debtor days, or cash at bank and total borrowings.