January 7, 2009 4:11 PM
The New Ice Age
Posted by Emily Barker
From the Winter 2009 issue of Focus Europe
Early last autumn, for a very short while, the credit mess looked as though it was just an American problem. Europe sat back and prepared to enjoy a little Schadenfreude. But banking failures quickly spread across the Atlantic, and it became painfully clear that Europe was not immune to the impact of the crisis that began in the United States.
Nor were the European offices of American law firms. At many firms, practice areas like private equity and real estate were already sluggish. They came to a dead halt after the credit markets seized up. Also hit were structured finance, capital markets, and mergers and acquisitions.
When partners from almost a dozen U.S. firms with offices in Europe were interviewed this past fall about the current state of the legal market, no one expressed panic or even admitted to being anxious. They did, however, admit to an unusual degree of uncertainty--and respect for the economic storm still gathering strength.
"Everything has pretty much frozen up," Steven Davis, the chairman of Dewey & LeBoeuf, said in late October, speaking of capital markets work in particular. "Will the work come back? Absolutely, but when will it come back--that's the hard part to know." Orrick, Herrington & Sutcliffe European managing partner Stuart McAlpine is similarly cautious. "You can't take anything for granted now," he says. "It's a completely new world we're living in."
Although the downturn has spread across Europe, not all markets have been hit equally hard. While the French, Italian, and German legal markets have been shaken, the United Kingdom has felt the most pain, several lawyers say. "London is the real issue, I think, for most firms," says Wesley Johnson, Jr., partner in charge in Jones Day's Paris office. Firms there are being buffeted by both the upheaval in the financial markets and the rapid worsening of the U.K. economy.
Despite Russia's travails--cash-short oligarchs and a stock market that has shut down numerous times since September--most firms with Moscow offices said their Russian practices were still fairly busy. "At the end of the day I remain relatively optimistic about Russia," says Dewey & LeBoeuf's Davis, "because of the tremendous capital that's been accumulated [there]."
But the only lawyers to sound truly chipper were partners at the small handful of New York-based firms that are hip-deep in work from multibillion-euro bank bailouts and mergers. "Clearly there's a flight to quality, and it's nice to see we're very much a central part of that quality," says Barney Reynolds of Shearman & Sterling, which is representing Merrill Lynch & Co., Inc., in its sale to Bank of America Corporation and Germany's Hypo Real Estate Holding AG in its 50 billion-euro bailout by the German government. "On our side, there is a lot of activity that is being generated by the crisis," agrees Pierre-Yves Chabert, a partner in the Paris office of Cleary Gottlieb Steen & Hamilton. In Europe, Cleary represents BNP Paribas, which is acquiring part of Belgian bank Fortis SA/NV for 14.5 billion euros; Dexia NV/SA, which is being bailed out by a consortium of funds and the French, Belgian, and Dutch governments; and UniCredit S.p.A., which is receiving a 6.6 billion-euro infusion from the Italian government.
Almost every partner interviewed pointed hopefully to a significant uptick in litigation and a likely increase in insolvency work. In Europe, as in the U.S., these countercyclical practice areas are providing some hedge against recession for American firms. "We're seeing some restructuring, particularly with private equity portfolio companies [that] are busting their covenants," says Jones Day's Johnson. "We have a huge litigation department [that] is just going flat out." At DLA Piper, lawyers are being redeployed from capital markets, finance, and real estate into restructuring, says Andrew Darwin, the firm's managing director for Europe. "We expect 2009 to be a major upswing in restructuring work," he says.
In general, though, American firms in Europe are still heavily dependent on the transactional and financial side of the practice--the areas that brought most of them to Europe in the first place. Bruce Buck, partner in charge of Skadden, Arps, Slate, Meagher & Flom's European offices, says that Skadden is better positioned to weather a downturn in Europe now than it was in the recession of the early 1990s, having added arbitration, bankruptcy, and litigation capabilities and developed a banking practice that can do restructuring. Still, he says, "we'd prefer more M&A, because [historically] that's the engine that drives us."
Restarting the deal engine, though, will take cash and/or credit, and plenty of lawyers are trying to figure out where that liquidity might come from. Some lawyers are betting that sovereign wealth funds will get back into the game. Others are looking for private equity to return from the dead. A lot of cash is building up in private equity funds, points out Philip Feder in the London office of Paul, Hastings, Janofsky & Walker.
"There are some very smart private equity people who are going to step into the breach," Feder says. "The question is, when's that going to happen?"
While waiting for a new source of deals to materialize, firms still must survive the current downturn. Although lawyers acknowledge that their firms are looking closely at costs and reassigning attorneys, they are reluctant to say that their firms plan to cut jobs in Europe--at least at the moment. Many predicted significant cutbacks and consolidations among the other U.S. firms in Europe. (At press time Orrick, White & Case, and Cadwalader, Wickersham & Taft were among the firms that had announced layoffs in their European offices in 2008.)
Meanwhile firms are on the lookout for whatever strategic advantages they can seize in an unsettled market. Some see a chance to raise their profile through lateral hiring. The downturn, says Baker & McKenzie's Eric Lasry, is an "opportunity for us where we will be able to attract more talented people." Clients will be more demanding, several lawyers say. Orrick's McAlpine sees an end to the automatic yearly fee increases that law firms have gotten used to--replaced, increasingly, by alternative fee arrangements, among other changes. His firm is ready to adapt, he says. Baker's Lasry and McDermott Will & Emery's Doron Ezickson think more clients will embrace the convergence trend, slashing their roster of outside firms in favor of a "one-stop shop for all needs worldwide," in Lasry's words. Not surprisingly, both believe their firms are well placed to take advantage of this shift. "I'm not sure we're going to return to the growth levels we've seen in the past," says Ezickson, "but I am confident in our own ability to navigate through the storm."Make a comment