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March 8, 2011 8:04 AM

Paul Hastings Adjusts Its Asia Strategy

Posted by Anthony Lin

From The Asian Lawyer

Paul, Hastings, Janofksy & Walker had a head start in Asia. While other large U.S. firms were still dithering over their strategy for the region, the Los Angeles-founded firm forged ahead, establishing and expanding large offices in the critical markets of Hong Kong, mainland China, and Japan.

But lately things have been going in reverse, at least as measured by head count in the region. A Tokyo office that reported 38 lawyers three years ago is down to around 20, according to the NLJ 250--with top Japanese partners Jun Usami and Yoshihiro Takatori departing within the last month for White & Case and Orrick, Herrington & Sutcliffe, respectively. The firm has seen similar drops in its Shanghai, Hong Kong, and Beijing head counts. Last month Shanghai head Mitchell Dudek and partner Alex Wang headed for the new Hong Kong office of SNR Denton.

Managing partner Greg Nitzkowski says Paul Hastings is now in the process of “refocusing” Asia, moving away from inbound, foreign-investment-oriented practices that demanded large local staffs and concentrating more on higher-end cross-border work that will require fewer, more international-oriented lawyers.

"We were more focused before on work that dictated that we have a lot of lawyers," says Nitzkowski, adding: "It's a much more complicated market than it was only a few years ago. We’d be foolish not to adjust."

Paul Hastings was one of the first international firms to enter the Japan market when it opened in Tokyo in 1988. By the end of the next decade, it was the top real estate capital markets firm in Japan, at a time when foreign banks and investment funds had a seeming insatiable appetite for securities backed by nonperforming Japanese real estate loans.

"For a number of years, they had something that was the best thing going in Japan in terms of real estate,” recalls ex-partner Alexander Jampel, a member of that practice that left to join Baker & McKenzie’s Tokyo office in 2009.

But it was a practice that needed Japanese lawyers, or bengoshi, to handle much of the work, and the office rapidly swelled with local hires. Integration of the new lawyers proved difficult: Many of the new recruits were new to international practice and many spoke little English. "It was essentially a two-language office," says one former partner. "You either spoke English or you spoke Japanese."

Though Nitzkowski agrees the office had integration issues, he says the biggest problem was the shift in the market: Global banks started pulling out of the Japanese real estate market around the time the subprime crisis began in the United States in 2007 and the local banks started handling most Japan securitization work, pitching them mainly to domestic, rather than international, investors. Paul Hastings simply could not compete for such work against big local firms like Nishimura & Asahi and Nagashima Ohno & Tsunematsu, whose billing rates are typically a third less.

Part of the reduction in head count in Tokyo was achieved through layoffs--the firm announced global cuts in March 2009, and Asia was not spared. An ex-partner estimates that around one-third of lawyers who left the office were let go. (At press time the firm had not confirmed this number.)

In China, the firm has also seen a dramatic market shift. The firm entered Beijing and Hong Kong in 2002 through a merger with Hong Kong firm Koo & Partners, opening in Shanghai the following year. At that time, says Nitzkowski, the firm made the decision to pursue a practice catering to multinationals entering the China market. Since foreign investment is governed by Chinese law, Chinese lawyers were needed.

Under former office head Dudek, who did not respond to a call seeking comment, the Shanghai office built a large group of Chinese “legal advisers"--Chinese lawyers who had joined the firm and, as required under local bar rules, surrendered their law licenses. At the practice's peak, just before the financial crisis hit in 2008, the firm says that it had around 50 of these legal advisers in Shanghai. Additionally, according to the NLJ 250, it had 110 lawyers in mainland China and Hong Kong.

As in Tokyo, a combination of layoffs and attrition has left the firm with less than ten Chinese legal advisers today. It has a total of 77 lawyers in mainland China and Hong Kong, not including those legal advisers, according to the most recent NLJ 250 data. What's happened to that practice is familiar to anyone who has worked at an international firm in China in the last five years.

"The Chinese firms have gotten so much better," says Nitzkowski of local firms like King & Wood and Zhong Lun Law Office that have begun to dominate inbound work for large multinationals. "It's really remarkable. We don't want to compete with that, and we won't."

So where does Paul Hastings want to compete now? Nitzkowski says the firm is looking to rebuild its Tokyo practice, where almost all of the bengoshi partners have left. (Current office head Toshi Arai is a bengoshi but has mainly practiced non-Japanese law in the U.S. and China over the last two decades.) Now the firm aims to focus more on the rarer but more lucrative cross-border capital market deals, the sort of work that now tends to be handled by New York firms like Skadden, Arps, Slate, Meagher & Flom or Simpson Thacher & Bartlett.

He says the firm will likely soon announce senior bengoshi hires with more international experience than many of the firm's previous Japanese lawyers. Neither Usami nor Takatori responded to requests for comment.

In China, Nitzkowski says that the goal is to tie the practice more tightly to a thriving, capital markets-driven Hong Kong office, which had 47 lawyers according to the most recent NLJ 250 data. The firm proved ahead of the curve in incorporating a Hong Kong law practice back in 2002, a move other U.S. firms have only made more recently, though mostly on a smaller scale, in response to the boom in Hong Kong listings work. The firm estimates that it worked on 14 percent of equity offerings in Hong Kong by value last year.

Hong Kong is one reason that, despite setback in Tokyo and mainland China, Paul Hastings still regards Asia as an overall success. According to Nitzkowski, Asia accounted for less than 4 percent of firm revenue in 2004; now the Asia revenue is 12 percent.

In that time, though, many more firms have entered the market, producing what Nitzkowski calls "absolutely intense, formidable" competition. In such circumstances, he says, it's entirely possible the firm will shift Asia strategies again in a few years' time.

"The only mistake is not adjusting," says Nitzkowski.

 

 

Contact Anthony Lin at alin@alm.com.

This report is part of The American Lawyer's expanded coverage of the Asian legal market--which also includes a new weekly e-newsletter, The Asian Lawyer. Click here for more from The Asian Lawyer and to sign up for a free subscription.

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