The UK’s Magic Circle – a variable, but severally-numbered group of firms which represent a charmed band favoured by the government, banks and major companies in the UK – will not, I think, survive in the longer term.
The UK’s premier players are in a strategic dead-end, unable to achieve what they need to without sacrificing everything that they are, and facing impossible competition which will ultimately choke the life out of them.
I’d except one firm from this analysis: Slaughter and May. The Lawyer unceremoniously ejected Slaughters from its definition of the Magic Circle for perfectly logical reasons, but instinctively, emotionally, I think the legal market continues to regard this bluest of blue chip firms as part of the charmed five, and I think it’s the one which will endure.
So it is to the other four that this piece is primarily addressed and to their need to attain credibility in New York, the world’s largest, richest and most prestigious legal market.
I’m not going to give you a data-led analysis here. For an eye-popping article looking at the issue from that point of view, check the excellent piece by Bruce MacEwen in 2014, which starkly illustrates some of the trends I’m talking about.
Gaining credibility in New York is a very tricky thing to do. Organic growth via lateral hiring has seen Freshfields recently adding a restructuring team from Kaye Scholer, and Allen & Overy bringing a finance and securities team in from Paul Hastings, for instance.
Clifford Chance is the only firm to try to short-circuit the grind, merging with private equity firm Rogers & Wells in 1999, a merger Legal Business described as “the troubled US acquisition that halted Clifford Chance’s once unstoppable momentum”. CC’s New York office today is less than half the size it was immediately after the R&W takeover.
The perceived failure of that merger stands as a warning to any US firm foolish enough to consider submitting to a takeover by the former Colonial masters, so organic growth is the only viable option for the MC.
However, this strategy is costly, beyond the titanic recruitment fees hanging off each hire. Because indigenous New York firms are significantly more profitable than the Magic Circle, the MC has had to award ‘super-points’ to many New York partners, a policy which has been extended to London in some cases, with inevitable systemic consequences I fear.
While UK firms in New York have to break their own rules in order to hire good people, US firms in London, in contrast, can comfortably cherry-pick from the Magic Circle without breaking stride, financially.
But a deep-dive into the London vs NYC comparison demonstrates how the Magic Circle is, in fact, going backwards in comparison with New York rivals.
To illustrate, in the 2006 UK edition of The Legal 500, there was not a single US firm in the first six tiers of the ‘London: Mergers & Acquisitions’ table, the directory’s Blue Riband benchmark of elite status.
By 2016, however, Skadden Arps had climbed to the first tier of the ‘Upper Mid-Market and Premium Deals (£250m+)’ table, and tier three featured Cleary Gottlieb and Shearman & Sterling, along with the US/UK merged firms Norton Rose Fulbright and Hogan Lovells.
Cross the Atlantic, and in the US directory’s equivalent table, ‘Mergers & Acquisitions $1bn+’, the first UK firms to feature – Allen & Overy and Clifford Chance – are found languishing in the 7th tier.
Corporate isn’t everything, of course. In the US rankings, Clifford Chance manages top tier status in Asset Finance and Leasing, REITs and Tax: Financial Products, but this is classic ‘mid-tier’ performance. Freshfields scores top in International Arbitration, but that’s the only Gold Star it gets.
The combination of being squeezed in your own backyard and slogging expensively to try to gain purchase in New York creates a terrible asymmetry, and forces the Magic Circle into that thing all military strategists warn against: fighting a war on two fronts.
The obvious solution would be merger, and many Magic Circle partners have fantasised over the years about creating a Transatlantic titan – Davis Polk and Freshfields was often touted, for instance.
But there are only two ways to do Transatlantic merger. Either you find a firm of equivalent gravitas – as Hogan Lovells and Norton Rose Fulbright seem to have done, broadly – or you subsume one into the other and let the legacy identity fade into history – Rowe & Maw, Richards Butler, Rogers & Wells and so on.
True merger is impossible for the Magic Circle. All the New York firms of the requisite quality and pedigree have nothing to gain by a ‘merger of equals’, and even if any of the MC firms would agree to be acquired – a scenario which I have difficulty imagining – we’d have Rogers & Wells: 2, in London, as the more powerful partner’s identity took over and key teams headed for the door.
So organic it is. And this is where resources come into play, and where the US firms have an insurmountable advantage over their UK rivals, thanks, in large part to the US preoccupation with litigation, a problem which is magnified thanks, of all things, to the English Bar.
While successive UK governments have kicked the backside out of litigation in the UK, the US tort ‘industry’ continues to grow, pushing in excess of $300bn through the US legal system every single year, much of it going directly into the coffers of US law firms. To put that into context, that is larger than either the US agriculture or mining industries.
So while litigation – not including incredibly-lucrative patent litigation, as well as some other contentious disciplines such as labour law – accounts for roughly 30% of major US firm income, the figure is barely half that for their top UK competitors. As Cicero said – albeit translating terribly into English – “the sinews of war is infinite money”.
Litigation, as the US has rightly recognised, is the gift that just keeps on giving.
And then we have the English Bar. While the rest of the Anglo-Saxon world happily adopted the principles of a ‘fused’ profession, where the same lawyers both prepare the cases and take matters to court, the English (and Welsh) trundle on with an antediluvian system which seems to suit primarily those people who benefit most from it: barristers.
Yes, you can go on as much as you like about how special the English court system is, how respected around the world it is, and so on, but the net effect of taking many of the most talented legal brains out of the intake valves of law firms and sticking them as guns-for-hire in antiquated premises clustered where the centre of the English legal universe used to be has been to deprive the UK’s law firms of the cream of the legal talent pool, not to mention revenue.
The combined effect of being comprehensively and continually out-pointed on money by US firms, and the subtraction of talent and revenue from the UK’s law firms due to the continued existence of the Bar is, I believe, a toxic cocktail for UK law.
Firms like Lovells, Rowe & Maw and Richards Butler saw the writing on the wall, and jumped early. Norton Rose and Eversheds are trying a slightly different tack and trying to retain the cultural whip-hand, a strategy which may or may not be sustainable in the long term.
For the Magic Circle, though, the stakes are much higher and the deck is stacked against them.
To win this one will take something breathtaking, a genuine reinvention of the way these firms operate. At the moment, I see little evidence of such radical vision at work.