As Freshfields Bruckhaus Deringer faced up to the news that it had been frozen out to the fringes of Citibank's European legal panel earlier this month, lawyers at two leading US firms in London were in a slightly more celebratory mood.
Skadden Arps Slate Meagher & Flom and Weil Gotshal & Manges were toasting their appointment to the panel for UK work – a move that could prove as symbolic as it is lucrative.
With Citigroup's global legal budget estimated to be worth more than £150m a year, the work will certainly prove juicy to the firms in question. But it was also evidence of something far more significant. "These firms have excellent practices in New York," one Citibank insider says, "and that is why we are using them in London."
His sentiments confirm what many UK lawyers have been thinking for some time – that US firms are translating their superior client connections in New York to London. And the City's legal elite are getting worried.
US law firms with strong investment banking, private equity and corporate practices have grown most rapidly in London over the last five years. Buoyed by their heavyweight connections across the Atlantic, firms such as Weil Gotshal and Shearman & Sterling have started to create a serious presence by offering their expanding clients their New York service in London.
This may not be headline news, given that most US banks and financiers had made bold forays into the European market a decade before and were intent on staying. Nonetheless, it was not until the US banks started sending over their big guns in the mid-1990s that New York law firms began to up the stakes.
The relationship between investment bankers and lawyers in New York is unique. Lawyers are treated as friends, confidantes and fellow dealmakers by their banking contacts and will often be brought in at a much earlier stage of the deal than their UK counterparts. Consequently, US lawyers are able to charge their clients significantly more in fees. The relationships they enjoy with their investment bankers is the main reason that elite US lawyers are so feared in London.
For it is these relationships that the magic circle firms, for all their muscle, can do nothing about. "My clients in New York were like best friends, whereas over here it is much more of an arm's length relationship," says one leading US M&A partner, recently relocated to London. "General counsel here are more subtle and you have to be able to read the signs or risk jeopardising future work. It is a different situation."
How have the US firms translated these strong relationships on Wall Street into lucrative work in London? According to Andrew Wilkinson, London managing partner of Cadwalader Wickersham & Taft, the key is to create a synergy between the firm's practice in London and New York. "No-one gets hired in London purely on the basis of their connections on Wall Street, although it is useful to have them," he says. "You need lawyers of the highest calibre who can build upon these relationships and grow a practice in London that is stronger than your competitors, because it mirrors what you are doing in New York.
"We are winning new clients over here because we have a synergy between our practice in London and New York, which the investment banks like. We are building on relationships on Wall Street, yet our New York office picks up referrals based on what we are doing here."
It has not always been thus at Cadwaladers' London outpost. Last year, the office lost five key partners. Ex-Freshfields partner James Starkey; James Roome, formerly of Simmons & Simmons; ex-Wilde Sapte partners Russell Jacobs and John Walker; and Paul Griffin, the partner in charge of the London office all resigned in quick succession.
On reflection, Wilkinson feels that despite the bad press at the time, the departures helped galvanise the practice into what it is today.
While Cadwaladers was going through the motions last summer, its US competitor, Weil Gotshal, was having an even more torrid time. The firm's finance team practically fell apart
in the aftermath of rainmaking partner Maurice Allen's departure to White & Case. A host of
top partners followed him during the year, including the firm's respected capital markets team, which joined Ashurst Morris Crisp in March.
The unlikely upshot is that the firm looks to be in better shape than it has ever been. "We all wondered what the hell Weil Gotshal was doing when it started hiring all those finance partners," said one managing partner of a US firm in London. "It did not complement what the firm was doing in New York and prevented it from using its connections there to kickstart the London office."
While tales of Allen being regularly hauled before the firm's partners in New York to explain his business plans are legendary, his departure has allowed London managing partner Mike Francies to transform the firm's London office into the profitable corporate practice his bosses across the Atlantic demanded. The office is 126-lawyers strong – making it the biggest US firm in London – and turned over £135m last year.
Like Cadwaladers, Weil Gotshal is sending a substantial amount of profit back to the US and has been doing so for the last three years.
Other profitable London outposts can be found at Shearman & Sterling, largely because of its superior acquisition finance practice; Latham & Watkins, which is making a killing from bond issuance work; and corporate powerhouse Skaddens. But who is not doing so well?
While the closure of Sonneschein Nath & Rosenthal's London office two years ago was heralded by some as the beginning of a mass US withdrawal, things have been quiet since. Some firms have reduced their head count in London, while others, such as White & Case, have expanded rapidly. Nonetheless, the City is awash with speculation that a number of US firms are looking for dignified exits.
While this might be overstepping the mark, some firms appear to be suffering a crisis of confidence in London. Take Dewey Ballantine. The departure of capital markets guru Drew Salvest to Andersen Legal last month meant the firm has lost all but one of the lateral partner hires it made when it first started offering UK legal advice four years ago. The firm is also believed to be affected by internal management disputes, centring on partner dissatisfaction with the direction that the firm is taking.
"We are frustrated that we haven't grown more quickly," admits London managing partner Fred Gander. "But there is currently a lack of potential lateral hires that fit our business plan. Due to the turbulence that several US firms have suffered, people are more cautious about joining them.
"There are some US firms that have over-extended themselves in London and may be considering closing their offices," he added. "But that is not the case here."
The issue of costs is a pertinent one. The US predilection for skyscrapers has led most firms to locate to either Tower 42 or City Point – offices with some of the most expensive rents in the City of London.
With many partners demanding three-year guaranteed profit agreements to soften the blow of a move to London and US associate salaries spiralling out of control, questions are being asked about how firms can make London pay.
"It is tough," Cadwaladers' Wilkinson concedes, "but we are all here to do high-margin work and that is the only way to make money in London."
Despite charge out rates being slightly higher than those used at UK firms, US counterparts need a remarkably tight business plan to reap any reward from their UK endeavour. Those that do not are likely to fall by the wayside.
So what lies in store for US firms in London? The pressure to globalise is being felt more keenly than ever and it seems certain that even against the backdrop of a slow economy, most firms are here to stay.
London offers access to lucrative financial markets, and is also the perfect springboard into Germany – a key battleground this year, in the light of tax reform and the potential reform of its takeover code. As in all competitive markets a shake-up is inevitable.
"A handful of firms will become clear leaders, particularly on the M&A side, while a lot will simply fall out of the equation," one US managing partner in London says. "The winners will target areas where they can beat the magic circle at their own game and that means working those New York contacts hard in London."
As dark clouds continue gathering over the US economy, the London offices of New York firms are having to justify their existence like never before. Those firms that can replicate their Wall Street client relationships in the City are likely to lay the solid foundations needed to weather the storm.
For the rest, London is proving an expensive flag to fly.