As attention turns to emerging economies, London's top firms continue to press on in the US. Georgina Stanley asks whether a breakthrough is finally in sight

Seven years ago, Linklaters took a group of journalists, including representatives from Legal Week and The Times, on a trip to New York which included a lavish client event at the Museum of Modern Art.

The message conveyed to the reporters was clear. The firm may have largely abandoned its earlier hopes of securing a major tie-up on Wall Street, but its US ambitions were undimmed. Instead, with a clutch of high-profile hires from New York firms recently under its belt, it would build its practice organically.

The very public fallout from the 1999 merger between Clifford Chance (CC) and New York's Rogers & Wells meant Linklaters was not charting such a course alone. Both Allen & Overy (A&O) and Freshfields Bruckhaus Deringer, concluding there was little prospect for a market-shifting merger state-side, were positioning themselves for a similar long-term push into the US.

But while all of the firms have since remained outwardly insistent that building a globally credible US presence is near the top of their strategic priorities, progress since then has been slow and sporadic.

During the credit boom there had seemed a good prospect that the ascendant magic circle could carve out a strong position in the world's largest legal market.

But the prevailing economic conditions have been much less favourable to the City's top firms since the banking crisis of 2008 – in particular the sharp fall in sterling's value against the dollar, but also the prolonged slump that has affected the magic circle's European heartlands.

Indeed, attempts to build up in the US appear to have taken a back seat in recent years, leaving Asia and other key emerging economies to become the battleground for US and UK firms.

As the European head of one Wall Street firm comments: "I get the impression [the magic circle firms] are all thinking about Asia now. If you look at the list of priorities, why would the US be near the top when it's so hard and so big? Add to this that if you're looking to get big names your salaries have to be huge, and it looks impossible."

Yet for all the focus on emerging economies, the US remains a strategic quandary that London's top firms cannot afford to ignore – probably the strategic quandary. While City firms generally struggle to make progress, US firms as a whole have clearly made greater inroads into Europe. There are no easy solutions in sight – only the prospect of a continued hard march for years to come.

Linklaters' former US head John Tucker comments: "We have a very large number of US clients and a strong US service demand to fill for our other clients. The importance of the US remains, so while it's important to strike a balance, it would be foolish to allow attention on Asia or other markets to ignore or displace New York."

If you can make it there…

For all the daunting challenges, the rationale for cracking the US remains obvious. With a value generally estimated at around $250bn (£158bn) it is by far the largest legal market in the world – even the smallest firm in The American Lawyer's top 100 US law firms by revenue made more in 2010 than the UK's 20th largest law firm, Addleshaw Goddard.

To put it further into perspective, only 15 UK law firms made it into the 100 largest global firm rankings carried out by The American Lawyer and Legal Week, with the vast majority of the spots going to US firms. And despite being a highly fragmented market in comparison to the UK – less than 10% of the US' one million-plus lawyers work for top 100 law firms, compared to around 40% in England and Wales – it has maintained an array of large law firms with proud histories.

As Julian Pritchard, Freshfields' US head, says: "The US is very important to us as a firm. It's the largest economy in the world with a huge pool of actual and potential clients so, if you want the best global mandates, the US is always going to be a fundamental part of your strategy."

Obviously, much of what makes the US such an attractive market for UK firms also conspires to make it extremely difficult to crack, including the large domestic market and the sprawling land mass. Indeed, only a handful of the UK's largest law firms have attempted to build teams in the US – with London's big four the most dominant players in a group that also includes Ashurst, Clyde & Co and legacy Lovells, with Herbert Smith expecting to open this summer.

London's largest law firms have been sidling towards the US for decades, with all of the big four firms making their first moves across the pond as far back as the 1970s and 1980s, beginning to build up targeted US law teams in New York and London in the 1990s. However, it was only in the aggressive period of cross-border expansion in the late 1990s that the newly emboldened magic circle began turning its sights on securing mergers with major Wall Street firms.

With hindsight it would be fair to characterise the initial attempts to secure Manhattan deals as fumbling and naive – though no less ham-fisted than the initial attempts of many US counterparts to break into the City. The best that could be achieved was a problematic union between CC at the height of its global ambition and clout and mid-tier New York practice Rogers & Wells (see box, above).

But whatever damage CC's initial struggles inflicted on the ambitions of London's big four – and they were considerable – they have never had much option but to push on with investment through lateral hires. This was often unpopular in the early 2000s, as the magic circle struggled to integrate hastily built European networks and regain their profitability. There was also no shortage of mis-firing lateral recruits during this period.

Now, those that have made the effort face competing for talent not only with New York rivals but also with a growing band of ambitious national practices ready to offer big money for rainmakers.

One highly published case last year saw DLA Piper offer a $5m (£3.2m) annual package to lure Paul Hastings litigator Jamie Wareham, underlining the willingness of non-New York firms to invest in star names.

As A&O US head Kevin O'Shea comments: "The US is the toughest and most competitive legal market in the world. The competition is fierce, both for clients and lawyers."

What is less often talked about – at least in explicit terms – are the formidable cultural barriers that face any foreign law firm in the US. For one, American business is often primarily focused on its huge domestic market in contrast to the global focus at many European bluechips. Law is hardly unusual in resisting foreign entrants – many successful foreign companies have struggled to make headway in the US.

And as many UK managing partners that have tried to negotiate deals with US firms can attest, US firms struggle to conceive of themselves as anything but top dog in a merger.

One head of a major London firm argues that Manhattan bears more than a passing resemblance to the caste-based culture of some emerging economies. He goes as far as to argue that foreign law firms have no choice but to hire what he dubs the Wall Street equivalent of Brahmins – the highest social caste in India – the established partners who are members of the club and can open the right kind of doors.

However, the weakness of sterling compared with the dollar – the pound has fallen more than 20% since its boom-time peak – has by wide consensus made such recruitment harder for UK firms.

In addition, while London's big four continue to edge towards more actively managed locksteps, their relatively flat nature of partnership remuneration makes recruiting and then managing US partners a huge continued struggle. (A&O has on occasion hired off lockstep, but has not made such a move for years. CC introduced a super plateau above its core equity ladder but has shown little willingness to use it.)

Indeed, the evolution of the US legal market in recent years, which has seen packages on offer for a select band of rainmakers rocket into the $5m-$10m (£3.2m-£6.3m) region, has put further pressure on the pay model of UK firms.

As a UK partner at one US firm comments: "The magic circle has made no inroads whatsoever into the New York market. In order to become credible players they would have to hire a rainmaker and with their lockstep models this is simply not possible. In order to really break into the US, they would have to overhaul their entire structure and culture."

Linklaters' senior partner Robert Elliott concedes: "It's harder for a lockstep-based firm to hire in the New York lateral market, particularly for magic circle firms over the last three years, when sterling has been weaker. Given it's one of the most competitive legal markets in the world, I think the progress we've made in New York over the last five years is good."

Hard ground won

Despite the huge challenges they face, away from the spotlight UK firms have made some advances. Even after suffering numerous departures in the wake of its merger with Rogers & Wells, CC remains the largest magic circle law firm in the US, with some 272 lawyers bringing in revenues of $216m (£136m) last year.

Its lawyer count is around 100 more than its nearest magic circle rivals, A&O and Linklaters, which each have more than 170 lawyers, although the gap in revenues between the trio is much smaller, with CC's US income significantly lower than five years ago.

With the firm making around 22 internal partner promotions in the US over the last five years and a similar number of lateral partner hires, many of which have joined CC's litigation practice, the firm looks to have stabilised following a swathe of partner exits during 2008 and 2009.

Rated by Chambers USA across 13 practice areas including equipment finance and leasing, CC's mandates over the last six months have included advising Empire State Realty Trust, the owner of the Empire State Building, on its plans to raise $1bn (£631m) and become a publicly traded company on the New York Stock Exchange (NYSE), acting for CVC Capital Partners and Resource America on a combination with Apidos Capital Management, as well as several major energy and infrastructure financing deals.

In contrast to CC's falling revenues, Linklaters has grown turnover by around 85% over the last four years, with US fee income standing at £89m during the last financial year. While some of the increase for all of the UK firms will come from the strength of the dollar, Linklaters has also made efforts to grow in the US, particularly in 2007-08, both through lateral hires and the past relocations of high-profile partners such as corporate partner Nick Rees and finance partner John Tucker to the office.

Linklaters' US lawyers have won roles on deals including the blocked Deutsche Boerse/NYSE Euronext merger bid last year as well as US aspects of the Lehman Brothers restructuring, though there is no doubt a firm of Linklaters' calibre will want to do better on M&A and securities mandates. (Chambers is relatively downbeat on Linklaters, giving the firm no practice rankings above the third tier in the US.)

The firm's recruitment efforts in recent years have been subdued, with its most notable lateral hire seeing the firm bring in the director of the Federal Trade Commission's (FTC's) competition bureau in New York, Jeffrey Schmidt, as a partner in New York in 2008. Some partners have argued the firm's recruitment efforts should focus more on securing a steady stream of up-and-coming partners rather than big names that they struggle to afford. The firm remains the only member of the big four without a Washington DC arm.

Commenting on the firm's strategy, one Linklaters partner told Legal Week: "It's fair to say we're not as strong as we could be out there – though that is true of the other magic circle firms. The tendency is for management to want laterals who are already leaders, but you don't beat Man Utd by buying Man Utd. What we should be doing is hiring people who've been successful on a smaller platform."

Any current efforts to expand in the US are realistically also likely to be hampered by the firm's latest restructuring of its partnership – its third in a decade – with more than 35 partners expected to leave the firm and more to be de-equitised. Rivals suggest that some partners in the US will be affected by the process, but even if the US practice remains untouched, American partners instinctively recoil from the kind of robust central management for which Linklaters is well known.

If CC and Linklaters are generally regarded as being yet to fulfil their potential in the US, the consensus view of the progress of Freshfields and A&O is more upbeat.

Freshfields, while generally the most conservative of the magic circle internationally other than Slaughter and May, has strengthened its US offering significantly in recent years, making eight partner hires since 2009, all of whom have joined its litigation and arbitration practice, where the firm has made a particular name for investigations work. In addition to the partner hires, which include a number of senior names such as the former deputy general counsel and director of litigation at Bank of America and two partners from Covington & Burling, the firm has been bulking up its junior ranks.

Buoyed by its contentious practice, where average hours for its 52 associates were 2,000 in January, Freshfields' US revenues now account for approaching 10% of its global fee income according to one partner, giving the firm's 31-partner US practice revenues of more than £100m.

Pritchard (pictured) tells Legal Week: "I'm very excited about what we've done here. The measures we look at are growth with the right people at both the senior and junior end, the mandates we're advising on and what clients are saying about us and we think that we're scoring highly on all these measures.

"You wouldn't come to the US if you didn't think you had advantages, in particular a combination of offerings that differentiate you. We have built in areas which are strategically aligned so that we can offer global, multidisciplinary advice on issues that are important to clients. Our global investigations practice is an example of that."

Certainly the firm's mandates back up its claims of substantive progress, with Freshfields' US practice advising Continental Airlines on antitrust matters connected to its $3.2bn (£2bn) merger with United Airlines in 2010 and advising HP in connection with its $10bn (£6.3bn) acquisition of Autonomy.

Meanwhile, in addition to building a strong project finance practice, its litigation and arbitration teams have worked on matters including advising Anglo Irish Bank in a suit by note-holders, representing ConocoPhillips and some Dutch subsidiaries in an arbitration against Venezuela as well as advising the Government of Turkey on three arbitrations worth $17bn (£11bn).

The firm is also the most successful of the magic circle for M&A, according to data from Mergermarket, which shows it advised on the highest value and volume of US outbound M&A activity of all of the magic circle firms between the start of 2007 and the close of 2011, as well as the largest value of inbound M&A work (see graphs, page 13).

To date it has yet to secure a marquee corporate hire, but Pritchard is undaunted and insists it will happen in time.

A&O's O'Shea is equally emphatic about the firm's ambitions stateside, where A&O has made 12 partner promotions and 18 lateral partner hires over the last five years, including five partners hired for the Washington office it launched last summer to focus on financial regulation, intellectual property (IP) litigation and antitrust.

"Since I joined 10 years ago, the evolution of our practice here has been dramatic both in terms of quality of clients and profile of matters," argues O'Shea. "We're really only 12 years old when you consider that 2000 was when we started building a full service US capability. Ultimately, we feel the scale needs to be around 400-500 lawyers in the next five to 10 years and, barring a full-scale merger, which we believe would be difficult to achieve, we're expecting to get there through strategic group hires."

With 13 of its practice groups rated by Chambers in the US last year, with litigation, derivatives and corporate scoring higher, A&O has already made significant investment in the US in a short period of time and is set to continue heavy investment. Top of the firm's priorities include bulking up its antitrust, regulatory, IP and investment funds regulatory practices across Washington, as well as growing funds, M&A, capital markets, projects, banking and Latin American expertise in New York. And in keeping with A&O's ambitious international expansion outside the US, O'Shea believes A&O could ultimately have a presence in Houston and on the US' West Coast.

Tough miles ahead

Somewhat unconvincingly, the magic circle firms all insist they are pitting themselves again Wall Street leaders such as Davis Polk & Wardwell and Skadden Arps Slate Meagher & Flom rather than each other in the US. However, it is clear that they face a new set of challenges beyond the traditional competitiveness of the US, as American rivals start to threaten their international model.

There is no doubt that a broad emerging band of US law firms, typified by globally ambitious names like Kirkland & Ellis and Latham & Watkins, have begun making serious inroads in the City and Europe over the last five years – more ground than the London firms have managed in the US. At the same time, more conservative elite firms such as Simpson Thacher & Bartlett, Sullivan & Cromwell and Davis Polk continue to edge into key finance centres in Europe and Asia.

And for all the dismissals aimed at firms like Hogan Lovells, DLA Piper, Norton Rose and Ashurst that have utilised Swiss verein structures to secure major global mergers, it remains possible that more flexible tools being used by such firms to tackle the US could allow them to gain ground as the magic circle is constrained by its business model and lockstep-based partnerships.

Despite all the bold words from City firms, there is also a consensus view that a quality merger – no matter how hard to secure – remains the best option to make real ground in the US. That leaves London's big four to trudge on, continuing to build up a presence in New York in the hope that the dynamics of the global legal market start to once again favour UK law firms.

As such, it has become increasingly clear that much of the expansion into key emerging economies by UK firms has in part been about securing a commanding global footprint by which to ultimately come back and secure a breakthrough in the US (Ashurst's union with Australian leader Blake Dawson, Norton Rose Group's global expansion and, arguably, even Herbert Smith's bid to merge with Freehills all have an eye on the US.)

But while consolidation may be at play in some key global markets, there appears to be little chance of such unions in the US at present.

Elliott (pictured) concludes: "Our ultimate goal is to be the leading global law firm and that requires a strong New York practice. We plan to grow and we are patient and determined. The driver for us is can we cover our clients effectively? If the right merger opportunity arose, obviously we would look at it, but in the meantime we'll focus on organic growth."

Chambers USA editor Laura Mills sounds a note of encouragement for the road ahead: "What the magic circle has done, generally speaking, is impressive. A decade ago people wouldn't even think of these firms and now they're heavy hitters in litigation and some transactional areas. The ultimate question is whether they can really crack the huge corporate relationships and investment bank mandates. Building a tier one finance or M&A practice will be difficult, but it isn't impossible. US clients could wake up to the magic circle."

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CC in the US – Putting history behind it

By Sofia Lind

Clifford Chance (CC) managing partner David Childs (pictured) is understandably not eager to focus on the Rogers & Wells merger that brought the magic circle firm into New York in 1999, arguing the deal is "not very interesting in relation to our current practice".

CC maintains that its US practice has put a turbulent history behind it to finally turn a corner in 2009 with a re-angling of its strategy to focus largely on cross-border work rather than domestic US deals. Still, there is no doubt that CC's experience in the US has shaped its modern development. Childs recalls: "We already had an office in New York, but we needed to speed up the process. The basic reasons for doing the merger were right. We had to be able to practise US law and have a US law talent pool to draw from for our international offices."

In 1999, all but 10 CC partners voted in favour of the merger with the 89-partner US firm, but even before the vote was concluded partners began to leave overseas, including Rogers & Wells corporate partner John Keitt and M&A and securities partner Joseph Adams. This was a first sign of things to come, with the 21-lawyer Rogers & Wells Paris office also opting out of the combination.

Commenting on the merger a month after it went through, in August 1999, senior partner-to-be and then finance head Stuart Popham told Legal Week: "The merger is not the end, it is very much the beginning of what we are going to try to put together."

The firm went on to launch on the West Coast of the US with a dramatic 17-partner raid on Brobeck Phleger & Harrison in 2002 but closed the three offices in June 2004, after the failed venture also saw CC fighting a liability claim for Brobeck's collapse six months after the partner raid.

In New York, the issues with bedding down the US deal came largely from disagreements over partner remuneration and strategy, with CC's lockstep in stark contrast to the US firm's aggressive eat-what-you-kill model. The US partners were aligned with the firmwide pay model in 2001 but the departures did not abate.

In the years directly after the merger, CC saw a decline in its relative size in the New York legal market, soon falling from a post-merger level of more than 400 lawyers in the US. In 2005, managing partner Peter Cornell moved to New York in a high-profile relocation after 25% of lawyer count – over 100 people – left in a year.

However, departures hit the firm again in 2008 and 2009 and the shrinking of the practice culminated with another round of exits to a range of US firms, including at least 15 litigation partners including high-profile former global litigation chief Mark Kirsch, who left for Gibson Dunn & Crutcher in New York. In January 2012, CC lawyer headcount stood at 272 for the Americas practice as a whole while Americas revenues had declined by almost a fifth (19%) since 2005-06, from $266m (£168m) to $216m (£136m).

On the lessons learned, Childs says: "If you want to merge two partnerships with different compensation systems, you have a big task on your hands. What is also important is what you do in the first year to integrate the practices. With hindsight, both points were underestimated by the management at the time."

CC argues that its current model has evolved to focus on two primary elements: to be the best international law firm in the US and Americas region and to continue building on areas where it holds significant firmwide strength.

The exceptions include domestic real estate investment funds, where the firm is top-rated, asset finance and leasing and some of the capital markets practice, while most other practices have seen the firm refocus to be an integral part of CC's global offering. As such, the firm highlights its energy, aviation and capital markets groups as important cross-border practices.

Today, around half of the firm's 70-strong US partnership stems from legacy Rogers & Wells, while the other 50% is either homegrown or lateral hires. The firm says the practice is on an upward trajectory, with solid revenues and lateral and organic growth. It has moved to rebuild in corporate and litigation, two of the practices that suffered the most amid the 2009 exodus, and has added five partners in the areas in the last three months.

In litigation, Nixon Peabody government investigations and white-collar defence practice head Ed O'Callaghan joined in November 2011 along with two other partners he had formerly worked with – David Raskin, a federal prosecutor, and Chris Morvillo, who worked for his own firm.

Meanwhile, in corporate CC added Dewey & LeBoeuf M&A partners Ivan Presant and Joseph Cosentino. CC is now looking at growth in the US. While it has no current plans to launch further US offices, it has not ruled out taking on large teams in its existing offices, or even merging with a corporate boutique, as it especially wants to grow its US M&A practice.

Childs says: "We are very pleased with our US practice at the moment. We are very ambitious with regards to the growth of our Americas practice and we would not rule out any means of expansion, including team hires or mergers."

For more analysis, see:

• All about America – Manhattan still looms over London's finest
• Different routes – the non-magic circle way to fly American