How the Magic Circle Lost the Battle for New York
Despite decades of effort and millions of dollars spent, the U.K.'s Magic Circle firms still haven't made a dent in the New York market.
Manhattan can be an intimidating place for an outsider. The buildings are huge, the people are aggressive, and the cab drivers are just plain crazy. The legal market isn't the most welcoming, either. Just ask the Magic Circle.
Four of the five members of this elite club of U.K. firms—Allen & Overy, Clifford Chance, Freshfields Bruckhaus Deringer, and Linklaters—have each had offices in New York for between 27 and 41 years, but they are still fighting just to make their presence felt. These pioneers came to America with grand intentions: not just to service the U.S. needs of existing clients, but also to compete head-on with the top Wall Street firms for the biggest-ticket transactional work—the sort of complex and cross-border deals for which the Magic Circle is known around the world. (The fifth Magic Circle firm, Slaughter and May, has generally eschewed international expansion in favor of a global alliance network that in the United States includes Cravath, Swaine & Moore and Wachtell, Lipton, Rosen & Katz.)
The foreign quartet has enjoyed some success in the U.S., gaining traction in niche practices such as aviation finance, real estate funds, and international arbitration. But despite significant investment—Allen & Overy's U.S. offices have lost a staggering $250 million over the past 20 years, according to two former partners with knowledge of the situation—they continue to lack the scale, profile, or major client relationships to effectively challenge America's leading firms in the key areas of litigation, mainstream finance, and M&A. The Magic Circle's rigid lockstep compensation systems and lower profitability relative to the leading U.S. firms has also severely hampered their recruitment efforts.
While the Magic Circle has long found life across the Atlantic to be a frustrating and costly slog, marked at times by a surprising lack of strategic clarity, a flood of senior departures in recent months suggests that their problems in the U.S. may have become acute. As of early September, the four U.K. firms have seen seven U.S. practice heads leave in 2013 alone. A&O has lost four, including two in the past two months: U.S. leveraged finance head Mark Wojciechowski, who joined Morrison & Foerster in August, and Americas international arbitration practice head Benno Kimmelman, who moved to Sidley Austin in September. (An A&O spokesman points out that, even after the recent glut of senior-level exits, the firm still has around 10 more partners in the U.S. than it had in 2010.) Also in September, Linklaters U.S. litigation head Joseph Armao left for Reed Smith, alongside fellow disputes partner Paul Alfieri.
Both A&O and Linklaters have recently completed strategic reviews in which they effectively admit defeat in their attempts to crack the New York market. At the beginning of the year, A&O's global managing and senior partners, Wim Dejonghe and David Morley, respectively, traveled to New York to restructure the firm's New York office. In meetings, partners were told that global capital markets head David Krischer was being parachuted in from London to replace Kevin O'Shea as the firm's U.S. managing partner. (O'Shea was subsequently named A&O's first U.S. senior partner—an external, client-facing role with less responsibility for the strategy or administration of the practice.) Several partners and associates were asked to leave the firm following that meeting, according to two individuals who were present at the meeting, while other equity partners were asked to take a pay cut—some of whom then decided to leave anyway. The partners were also hit with a truly shocking revelation: A&O's U.S. offices had lost a quarter of a billion dollars over the past two decades, including $20 million in 2011 alone.
"We were all pretty stunned," says one A&O partner who was in attendance—one of 39 U.S.–based law firm partners, recruiters, and consultants interviewed for this article. "Part of it was down to fluctuations in currency exchange rates, and there was some pretty screwy accounting over things like how global overheads were allocated, but there's no escaping the fact that it was a massive, massive loss."
In an interview, Dejonghe declined to comment on the financial performance of the U.S. offices (the firm has a base in Washington, D.C., as well as in New York) or the pay cuts, saying only that New York, like all of the firm's offices, is subject to "routine equity management." While Dejonghe denies that the U.S. practice was restructured, he admits that the firm has "refocused" its strategy there. It will now be geared toward servicing the U.S. needs of existing firm clients and targeting international work from U.S. clients, rather than trying to compete directly with top American firms for locally sourced domestic work. (The same strategic shift has occurred at Linklaters, which presented the findings of a yearlong U.S. strategy review, led by London-based projects and finance head Jim Rice, at the firm's annual partner conference in April.)
"If you look at our global offering, we can claim to have a leading practice in every jurisdiction in which we operate—apart from the U.S.," Dejonghe says. "We initially had an ambition to become one of the leading [firms in the U.S.], but we've become quite a bit more realistic. It's a tough market—tougher than we first thought. We've learned that the hard way."
Ask a partner at any of the top U.S. firms about the Magic Circle in New York, and the answer tends to be: "We don't see them." Ask one of the Magic Circle firms about their U.K. rivals in New York and they'll say they don't see them either: "We only compete with U.S. firms." To more objectively quantify the relative strength of the Magic Circle's U.S. practices, we analyzed their performance in legal directories Chambers & Partners and The Legal 500, deal data from Mergermarket Ltd, and client-sourced brand strength indexing from global research company Acritas. We found that, far from being nonentities in the U.S., the Magic Circle firms have genuine strength in certain niche areas, such as aviation finance, real estate funds, and international arbitration. But they also have no meaningful presence in the core practices of mainstream banking and finance, commercial litigation, and big-ticket M&A.
In the directories, Clifford Chance comes out on top among the U.K. firms, with the most overall rankings and by far the highest number of leading lawyers. While just six Magic Circle lawyers are named as "leading individuals" by the U.S. Legal 500—itself an indication of the firms' lack of standing in the market—five are at Clifford Chance: U.S. corporate finance chair Jay Bernstein and Americas tax head Richard Catalano, who are both experts in real estate investment trusts (REITs); aviation finance heads John Howitt and Zarrar Sehgal; and tax partner Donald Carden. (The sixth is Nigel Blackaby, head of the U.S. international arbitration team at Freshfields.)