As they often say about New York in the US: If you can make it there, you can make it anywhere. And to make it in New York, you need to make it with the investment banks. For UK 'global' firms to convince the world that they truly have an international reach, they need to establish credible and substantial US capabilities sooner rather than later. "If you believe that the future will be a cadre of global firms that dominate cross-border deals, then they have to have full-scale, but not necessarily full-service, US capability with critical mass," says Allen & Overy (A&O) New York partner Andrew Ballheimer. "For that, you are looking at 150-200 US lawyers. That is the goal and we do not have an unlimited amount of time, although fortunately we are on the way to achieving that. "Maybe, but Clifford Chance aside, in the recruitment market, nobody is going to reach that figure in a hurry. The others have made some useful lateral hires, but their US competitors claim they rarely come across the English practices in the market. If this capability is to be realised, the only realistic option is to merge. Linklaters & Alliance and Freshfields Bruckhaus Deringer have already indicated that their aim is for a US merger in the medium term. The exception seems to be Lovells, which has a securities and tax practice established to handle the US end of deals. It is benefiting from an upturn in referral work as its English rivals build their US practices and its merger with Boesebeck Droste attracts German referrals. Otherwise, there appears to have been a considerable amount of 'goodwill' spreading going on by English firms of all persuasions. "We get a lot of UK firms over on goodwill visits," grumbles one US managing partner. "They sit down and the first thing they ask is 'what about merging?'. "The question is who with? Given the time and effort required in putting together a transatlantic merger, the English are only going to get one shot at it. Getting the potential partner right first time is crucial. Among the national and middle-tier firms in the US, there is a growing appreciation of the benefits of international networks, particularly from those that have been slow in building their own. But as Marianne Rosenberg, head of the New York office at Linklaters, puts it: "We are focused on a quality product and service. We would not put that into question."This means Wall Street firms, the top 10 or so that have the best lawyers and client relationships. Of these, Shearman & Sterling already has an extensive international network, as do Skadden Arps Slate Meagher & Flom and Cleary Gottlieb Steen & Hamilton. The only problem is that, currently, they are not interested. If the other English firms thought that the Rogers & Wells and Clifford Chance merger would quickly break open the market for them and force the top firms to reconsider their strategies, they will be disappointed.
It is early days for the first major transatlantic merger and there is little consensus about the potential success of the union, beyond the conclusion that it has yet to make a significant difference to the market. The union has suffered the usual number of departures that any large merger suffers and is having to undergo a recruitment drive.
And Clifford Chance Rogers & Wells is considered to have some way to go before it begins to operate as a properly integrated firm, a point even its managing partner is prepared to concede. "The biggest challenge is getting partners to think of themselves as partners in a new global law firm, "says Clifford Chance's managing partner in New York, Larry Cranch. "A partner in New York now has the ability to sell services in Hong Kong, but getting people to think globally takes time."Nevertheless, Cranch says, in addition to new business introduced from Clifford Chance's network, the merger has brought in deals that the pre-merged Rogers & Wells would not have been considered for. As an example, he points to the recent billion-dollar internet banking venture between Merrill Lynch and HSBC, which was handled in both the London and New York offices. "We had good relations with Merrill Lynch, but we would not have had a chance if we were still just Rogers & Wells," he says. "Clifford Chance had the new economy expertise and the global network, but did not have the relationship with Merrills. What we can do now in New York is to take these relationships and add them to a global capacity."What the Clifford Chance merger does seem to demonstrate is that as the investment banks grow and expand the range of their services and the number of cross-border deals increases, there are significant opportunities for global firms. But, as the profits of top New York firms indicate, they are not substantially winning this work at the expense of Wall Street practices.
And it does not appear to have made the top firms change their minds. Although the profitability gap between top English firms and the New York market has narrowed recently, the top Wall Street firms are still significantly ahead. For example, Wachtell Lipton Rosen & Katz makes more than $3m (£2.1m) per partner; Cravath Swaine & Moore more than $2m (£1.4m) A further five make in excess of $1.5m (£1.1m) per partner.
They are also reluctant to give up their cultural independence, particularly given the relative sizes of the Wall Street firms and their global English counterparts. Freshfields, Linklaters, A&O and Clifford Chance all have well over 1,000 lawyers. Cravaths and Simpson Thacher & Bartlett, for instance, have 350 and 550 respectively.
With the exceptions of Cravaths, Cleary Gottlieb and Debevoise & Plimpton, US firms have merit-based remuneration systems. The view in New York is that going back to a lockstep system is practically impossible. Any merger would require an English firm to abandon lockstep.
Fundamentally, it seems, they just do not want to merge. But will they be forced to? This comes down to three scenarios. Firstly, clients would have to desert independent Wall Street firms for their global rivals. International firms claim 'one-stop shopping' is catching on in the US and, as investment banks are slowly consolidating, there is evidence they are looking to reduce the number of firms they instruct.
But this is unlikely to impact seriously on the often decades-old relationships between the banks and their traditional providers of legal advice. As the size and activities of the banks grow, these relationships are no longer as exclusive, but at the high end, elite Wall Street firms still appear to be the advisers of choice, and that includes international work. "One-stop shopping is overstated; sophisticated users of legal services will use the best lawyers whether they be in the US, UK, Italy or Germany," says Sullivan & Cromwell partner Ricardo Mestres. "Maybe there is a demand for one-stop shopping at the commodity end of the market, but big firms do not emphasise that end of the market." Typically, general counsel will instruct a single firm for litigation and another for tax work (which incidentally are the areas where Clifford Chance claims most success in lateral hiring). Although they may have an approved list of firms, for transactional work the instructions still come from individual investment bankers rather than in-house lawyers. Even where these lists do exist, frequently they are not enforced. Departments within investment banks often operate independently of each other, making the imposition of a panel across a bank even less likely. Underpinning this is the traditionally close relationship between lawyer and client in the US. "Lawyers here are much more involved in the business process and they will be involved very early," says Duane Wall, managing partner of White & Case. "Therefore relationships are very difficult to break." The second scenario is that as the best firms in Europe and beyond join the networks of global firms, this will severely deplete the referral network of independent firms. But the international firms have not so completely sewn up the market for this to cause acute problems for Wall Street firms, and many are building small local law practices in key jurisdictions in any case. Further, given the importance elite firms attach to preserving their cultures and the confidence they have in their own abilities, it would seem unlikely that they would sacrifice their independence rather than bite the bullet and instruct a foreign firm that was allied to or part of an international competitor.
This confidence is rooted in the fact that top New York firms have traditionally cornered the best talent, enabling them to offer the cutting- edge expertise that helps keep their profit levels high. The final scenario that one day could force the elite firms to think about merging would be if the global English (and US) firms began to seriously erode their traditional virtual monopoly position in the recruitment market. At partner level, while English firms have achieved some significant lateral hires, it is unlikely that there will be an exodus from elite firms while the gulf in profitability remains. But beyond that, the international firms believe they are in an increasingly strong position. Rosenberg joined Linklaters from White & Case in 1998 and has found that the combination of an international network and the lockstep remuneration system has proved to be an effective platform for her practice. "There is a collegiality that is absent – or not even looked for – at many US firms," she says. "Some believe that competition between partners is a good thing. Here, I have the support I need and the global brand of Linklaters is one that a lot of US practices do not have. It is much easier to develop your practice here. At associate level, they have matched the recent salary hikes (see page 27) and as quality of life becomes a burning issue among associates, they believe that the perceived cultural differences will become increasingly attractive.
Earlier this year, A&O was voted the best law firm for the treatment of its trainees and atmosphere in a poll conducted among those on summer associate programmes by American Lawyer magazine. The top City firms also claim the international opportunities they offer are also proving an effective hook. They are keen, however, to emphasise that working for an international English firm is not necessarily an easy option.
"We deliver the same salary, better benefits and are selling this on the team environment that we offer," says Stephen Revell, US managing partner at Freshfields. "Will associates work as hard here? Yes. Are they happier? Yes." But the associate market is tight: the real, longer-term battle is for the hearts and minds of those at law school, particularly those at the top of their class who are asked to contribute to the prestigious Law Review. All the English firms are targeting law schools and Cranch says his firm has seen a dramatic rise in the number of top-quality students applying since the merger. "They are attracted to a global law firm, and we offer something that no other US firm can," he says. "There are very rich cultural differences that are attractive to them." Lynn Mestel, of recruitment consultancy Mestel & Company, generally backs up his claims. Individually, she says, neither Clifford Chance nor Rogers & Wells could compete with the New York elite, but "Rogers & Wells is now part of one of the top five or six worldwide firms." She also says that since the other English firms have invested in their New York offices, they also are being considered seriously by potential recruits. They previously struggled in the market because they could not offer a significant base for US lawyers to return home to. "Now, for an internationally-minded US lawyer, joining Linklaters, A&O or Freshfields is possible," Mestel says. But it is likely to be some time before this makes a serious impact on the recruitment that top firms enjoy. "They are not seriously impacting on them. Davis Polk [& Wardwell] is recruiting 150 a year and most of the English firms are only recruiting 10," Mestel says. So it does not appear that any of the above scenarios is likely to happen soon. Which means that if Linklaters, A&O and Freshfields want to merge in the near future, they will have to trade down a little. In the longer term, any union between the globalising firms and New York's finest is down to the on-going argument over whether the global firms really will dominate the international legal market. On this point, attitudes are poles apart. A recession, and there are a few in New York who expect some sort of slowdown soon, could provoke a rethink, but whose strategy will ultimately prevail is, as they also say in the US, "too close to call".