Ian Fraser reflects upon year of intense activity at Scots law firms
A flurry of deals towards the end of 2006 capped a particularly busy year for the corporate finance teams at Scotland’s leading corporate and commercial law firms. The mergers and acquisitions upon which they advise increasingly have an international dimension, a consequence of globalisation.
Most firms seem confident that the current spate of M&A will continue well into 2007. The only significant clouds on the horizon for the larger corporate firms are the relative saturation of the Scottish legal services market; the continuing struggle to secure the best talent; and uncertainty surrounding the implementation of the so-called Clementi reforms for the liberalisation of their profession in England and Wales.
Magnus Swanson, chief executive of Maclay Murray & Spens, said: “We see no evience of any slowdown in the M&A market at the moment – in fact there’s a real head of steam.”
Philip Rodney, chairman of Burness, agreed: “There’s been a marked upturn in mainstream M&A activity during 2006 and this is expected to continue through 2007.”
Patrick Andrews, chief executive of Shepherd & Wedderburn, commented: “Levels of activity across all four of our offices are very strong, particularly in corporate finance and property.”
Shepherd is working on the $6bn IPO of Cairn Energy’s Indian operations and last year advised on the £2.5bn merger of the two Alliance Trusts.
Andrews added: “I’m optimistic about levels of corporate finance activity in 2007. There are some very interesting propositions that are due to float on the Alternative Investment Market during 2007. Also, the arrival of real estate investment trusts in the early part of the year can be expected to provide a market fillip.”
Shepherd & Wedderburn increased its revenues by 13 per cent to £34.6m last year, ranking it just behind the three biggest corporate law firms in Scotland. In the year to May 2006, Maclay Murray & Spens’ turnover rose by 13 per cent to £48.5m, with profits increasing by 21 per cent to £16m. The standout deal for Maclays was advising Aberdeen Asset Management on its £265m takeover of Deutsche Asset Management.
Swanson was reluctant to make predictions for the current year but stressed that the firm is “well ahead at the half year”. He also pointed out that Maclays had achieved 13 per cent growth last time without any significant transactions, lateral hires, or mergers.
Scotland’s largest law firm, Dundas & Wilson, saw its annual revenues climb by 20 per cent to £53m last year, partly as a result of its involvement in the demutualisation of insurer Standard Life.
Dundas’s managing partner, Alan Campbell, said: “For the first time, profits per partner topped £300,000, which is a nice milestone.”
Other highlights for Dundas & Wilson included being appointed to advise Donald Trump’s organisation buying land for a golf course near Aberdeen and advising South Lanarkshire Council on its £320m schools PPP, the largest such project of its kind in the UK to date.
Campbell added: “Our key markets are showing no signs of softening.”
In turnover terms, McGrigors was only marginally behind Dundas & Wilson. The firm’s income climbed 14.7 per cent to £52.1m in the year to September 30, fuelled in part by taking on a 45-strong team from Aberdeen-based oil and gas specialist firm Ledingham Chalmers.
McGrigors’ senior partner, Kirk Murdoch, said major deals included advising Cairn Energy on a $1bn fundraising, the £130m Highland Schools project, and acting for management in the $280m management buy-out of part of oil services firm Kellogg Brown & Root.
Murdoch said McGrigors is budgeting for a “reasonable” amount of growth this year, boosted by M&A activity and a full-year contribution from the former Ledingham team.
Burness’s Rodney said his firm has not contemplated opening up in London, since this might lead to less work north of the border as referrals from the big London law firms dry up. “It’s better to be really strong in one market than an also-ran in several.”
Murdoch, however, disputes the notion that having a sizeable London presence is barring McGrigors from securing work in Scotland.
He says: “We’ve had a London office since 1987 and still get referrals from the likes of Clifford Chance, Allen & Overy, and Freshfields. My model — which is different from Philip’s — is to say once you’ve got the client relationship, what’s wrong with trying to follow the client?”
Most Scottish lawyers are relaxed about the prospect of the unlevel playing field that is likely to emerge in the UK market for legal services as a result of the Clementi reforms, which are set to take effect in England and Wales but not Scotland from November.
Unlike some other Scots law firms, notably Golds and Dundas, McGrigors has not threatened to shift its principal business base to London in order to benefit from the asymmetric liberalisation that Clementi will bring about.
“We don’t feel threatened or vulnerable as a result of the proposed reforms at all. Indeed we think that will bring opportunities and we are fully supportive of the thrust of it.”
Nor does Murdoch believe the partners of large Scottish law firms such as McGrigors will be tempted to realise the value they have created by selling out. “The partners at any one time are to some extent the trustees of the business which they have a duty to drive and grow the firm for the sake of the next generation of partners.”
Swanson warns that Clementi will, at the very least, accelerate the pace of consolidation in the law.
He said: “We’re likely to see the arrival of external players, along the lines of the RAC and others, with deep pockets.” He believes such firms will initially target commoditised retail services such as will-writing and conveyancing rather than the high-end commercial work in which corporate firms specialise. He added: “We remain watchful. We are not at all complacent about Clementi.”
The Maclay Murray & Spens chief executive’s biggest concern is over law firms’ ability to share out their own equity for the benefit of staff. “If it turns out law firms are able to do that in England but not in Scotland, we would definitely hope the Law Society of Scotland would react positively.”
Murdoch believes middle-sized commercial law firms could struggle in coming years. “Aggregation will be one of the continuing themes in the legal sector. You’re seeing many takeovers and mergers in the corporate world. Lawyers are going to have to gear up, in terms of numbers, to serve bigger client entities. That means the middle ground will become an increasingly difficult place to be.”
Swanson said: “There is a growing distance between big four firms in Scotland and some of the others. The problem they face is being able to attract the specialist skills that clients increasingly demand.”
Rodney agreed that the profession is polarising. He said: “How will the smaller firms attract talent? How will the bigger firms service smaller clients? In theory there should be a solution to allow both to prosper. At present, I think that many firms have not identified their specific markets and aligned their practices accordingly.”
One of Murdoch’s priorities for 2007 is to boost McGrigors’ sectoral expertise further. “We believe clients will continue to demand more and deeper specialism from us.” Key sectors in which McGrigors is aiming to strengthen include oil and gas, financial services and infrastructure, including property and PFI/PPP.
All firms say “the war for talent” remains intense. “One of the problems is that graduates from the Scottish universities are very well-regarded and attractive to the big English firms as well as us. There is fierce competition for the best candidates which continues through the generations,” said Swanson.
There is also the looming issue of the growing “feminisation” of the law, which is expected to accelerate given that around 70 per cent of law graduates, and hence trainees, are now female. Some firms privately admit they are struggling to appoint any male trainees at all.
Swanson pointed to “a real gender shift” in the profession, suggesting this will inevitably mean law firms will have to rethink their approach to issues such as work-life balance.
One lawyer suggested that firms such as Freshfields Bruckhaus Deringer and even Dickson Minto (which has a reputation for offering trainees the carrot of high pay in exchange for maximum chargeable hours) will need to rethink their strategies as so-called “feminisation” gains momentum.
Rodney believes that one reason the Scottish legal services market may appear saturated is that few law firms are properly geared up to handle public sector work. He believes this is a clear weakness, since an estimated 50 per cent of Scottish GDP comes from the public sector. “Practices will have to recognise that and focus on servicing the public sector and private/public alliances.”
However, working for public sector clients will be no sinecure in the coming months. Dundas & Wilson’s Campbell predicts a downturn because of the Holyrood elections in May and local authority polls. He said: “It will be interesting to see how those elections affect public sector assignments; I’d anticipate a short moratorium in the middle of the year and possibly even into 2008.”
This review of Scottish law firms’ performance in 2006 was published in The Herald on 8 January 2007