The Score

March 9, 2012 3:24 PM

The Am Law 100, the Early Numbers: Modest Growth for Top New York Firms

Posted by Julie Triedman

For the firms near the top of the New York legal market, 2011 was a Jekyll-and-Hyde year.

In the first half, dealmaking and capital markets work boomed to levels not seen in several years. The second half told a different story, with a chill on deals and capital markets as the European credit crisis spooked investors.

"It was a year of two distinct halves," says one partner in management at a Wall Street firm. "Every firm with a substantial M&A and capital markets practice saw a much better first half."

The year's split personality showed up on many firm balance sheets as a pretty good year, however—perhaps due to the fact that collections lag billed work by several months. But the increases didn't come close to matching the resurgence several of these firms enjoyed in 2010, as The Am Law Daily reported last March.

We analyzed financial results at six of the most profitable New York–based firms: Skadden, Arps, Slate, Meagher & Flom; Davis Polk & Wardwell; Simpson Thacher & Bartlett; Cleary Gottlieb Steen & Hamilton; Weil, Gotshal & Manges; and Paul, Weiss, Rifkind, Wharton & Garrison. All six experienced single-digit revenue growth last year, with revenues rising an average of 4.5 percent. Growth rates fell within a pretty narrow band, ranging from a low of 3.1 percent (Skadden) to 7.1 percent (Cleary), according to The American Lawyer's reporting.

The same firms also all saw single-digit upticks in profitability, though overall gains were slightly lower than revenue growth, up an average of 3.8 percent. Profits per partner increases ranged from less than 1 percent (Simpson Thacher) to 8 percent (Weil).

Expenses increased slightly, which dragged on profitability. Several of the six firms opened new offices and were more active in the lateral market than in previous years. The Hong Kong IPO listings market, booming until last summer, cooled dramatically in the second half, a bit of bad timing for the several firms (Davis Polk, Simpson Thacher, and Sullivan & Cromwell) that recently made large investments in their Hong Kong practices in order to handle the work (see articles here, here, and here).

Associate pay, another expense, also increased, with all six awarding extra bonuses last spring. Pricing pressures also affected profits: several senior corporate partners or firm managers noted increased competition for underwriting work, resulting in lower fees last year; and push back on rates continued to be a concern in many practice areas, especially litigation. 

In three cases, profitability rose in part because partner head count declined. Skadden, Davis Polk, and Weil all had fewer partners splitting firm earnings. Skadden's equity partnership tier declined 3.7 percent, while its profits per partner rose by 6.9 percent, according to our reporting. Weil's equity partner head count declined by 4.1 percent, which contributed to a profits per partner surge of 8 percent last year, our reporting showed. Meanwhile, Davis Polk slipped by 1.2 percent in partner head count and rose by 2.3 percent in profits per partner, according to our reporting. Leverage—the ratio of all lawyers (minus equity partners) to equity partners—likewise increased at all the firms where partner head count fell.

Of the six, only two—Paul, Weiss and Simpson Thacher—lifted both profitability and equity partner head count. Partners at Paul, Weiss, as we previously reported, took home 1.5 percent more, even though there were 4.1 percent more of them. Simpson Thacher's partners, meanwhile, drew 0.8 percent more on average, while the number of partners grew by 2.8 percent. Leverage dipped slightly at both firms.

Below are the core 2011 financial metrics for the six firms we analyzed:

Cleary: According to reporting by The American Lawyer, the firm's gross revenue surged to $1.125 billion from $1.05 billion, while profits per equity partner rose to $2.7 million from $2.6 million last year. The firm was involved in some of 2011's biggest deals, including Bank of America's sales of billions of dollars of shares in the China Construction Bank; Google's proposed $12.5 billion acquisition of Motorola Mobility in August; and Nortel Networks's sale of its patent portfolio in June. The firm has also had a squadron of lawyers working on behalf of Greece in connection with the country's debt crisis since August.

Davis Polk: According to reporting by The American Lawyer, the firm took in $910 million, up from $870 million, and its profits per partner rose to $2.3 million from $2.2 million. Davis Polk continued to expand internationally, opening a São Paulo office in August and adding four lateral partners globally. The firm's capital markets practice was ranked first in 22 U.S. and global equity and debt categories on Thomson Reuters's year-end legal advisory tables, though the capital markets were quiet in the second half. Its bank-centered restructuring practice remained busy all year, advising, for example, Citigroup in connection with its $950 million debtor-in-possession financing for Eastman Kodak Company, and JPMorgan Chase as agent in restructuring the Tribune Company's $8.5 billion pre-filing bank debt, as well as major roles in Lehman and other bankruptcies.

Paul, Weiss: As previously reported by The Am Law Daily, the firm collected $780 million in gross revenue in 2011, up from $751 million in 2010. Its profits per equity partner rose to $3.1 million from $3.05, largely on the backs of financial services industry litigation and more than a dozen multibillion-dollar M&A transactions.

Simpson Thacher: According to our reporting, the firm had gross revenue of $963 million last year, up from $923.5 million in 2010. Its profits per equity partner, meanwhile, edged up to $2.66 million from $2.64 million. The firm took on laterals in Houston, Hong Kong, London, and Washington, D.C.; opened an office in Houston; and expanded its office in Hong Kong, where it began offering a Hong Kong law practice. The firm handled KKR's $7.2 billion acquisition of Samson Investment Company—one of the biggest leverage buyouts of the year. It also advised Petrohawk Energy on its $12.1 billion acquisition by BHP Billiton in July. The real estate group was busy assisting The Blackstone Group in acquiring $9.4 billion in Australian shopping centers from Centro Properties Group, announced February 2011. On the litigation front, the firm helped longtime client Travelers win a case at the U.S. Supreme Court.

Skadden: According to our reporting, the firm took in $2.17 billion in gross revenue last year, up from $2.1 billion the year before. Average profits per partner soared to $2.48 million from $2.32 million. Skadden had a hand in many of 2011’s major deals, including representing Cephalon, Inc., in its defense against a bid by Valeant Pharmaceuticals and its eventual acquisition by Teva for $6.8 billion; Express Scripts in its $29.1 billion acquisition of Medco Health Solutions in July; and Gilead Sciences in its $11 billion proposed acquisition by Pharmasset, Inc., in November. Skadden's restructuring team was tapped as debtor's counsel in the MF Global Chapter 11 filing in October, and by Travelport in a $3.8 billion cross-border restructuring announced in September.

Weil: As The Am Law Daily previously reported, the firm saw its gross revenue increase to $1.23 billion from $1.19 billion. Its profits per equity partner surged to $2.44 million from $2.26 million. Among the matters keeping the firm busy last year: litigation stemming from the financial crisis and the $65 billion Chapter 11 plan for Lehman Brothers, which Weil lawyers steered to a close in December.

The American Lawyer's reporting is not yet complete on 2011 financial results for three firms that have been among the most profitable: Cravath, Swaine & Moore; Sullivan & Cromwell; and Wachtell, Lipton, Rosen & Katz. In 2010, Cravath and Sullivan broke the $3 million profits per partner mark, according to our reporting, with Wachtell partners clearing an average of $4.3 million, according to the final results of that year's survey.

Looking ahead, several senior corporate partners at major New York firms say they are concerned about the lack of deals and financings coming into the first quarter of 2012. The market "still seems fragile," says one senior partner who asked that neither he nor his firm be named. "Private equity firms, which tend to have a big role in the M&A market, are still holding back."

"A lot of firms depleted their inventory and are entering 2012 with little inventory," says a partner in management at a different firm. "There are only a handful of deals out there."

Not all the law firm leaders expressed pessimism, however. "The picture we’re getting is pleasing stability in our peer group, even though the overall market is down," says one top firm manager, who asked not to be identified.

This report is part of The Am Law Daily's early coverage of 2011 financial results of The Am Law 100/200. Final rankings and full results for The Am Law 100 will be published in The American Lawyer's May 2012 issue and on The Am Law Second Hundred will be published in the June issue. An interactive chart of the financial results reported so far is available here. The chart will be updated as additional data is reported.

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