_LB224 Herbert Smith

November 2010 Legal Business 3

HERBERT SMITHLegal BusinessMay 2012

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HERBERT SMITH

22 Legal Business May 2012

W hat a difference a decade makes. In the April 2002 edition of LB, we sparked widespread debate when we placed Herbert Smith

into the Magic Circle (see ‘Fellowship of the Circle’, LB123, page 42). We called it the ‘biggest change at the very top of the legal market since the merger of Clifford Turner and Coward Chance’ and praised the UK fi rm for its leading European corporate practice, its stellar fi nancial performance and its successful challenge to the perception that it was a litigation-only fi rm.

A turbulent ten years have passed since then, with the UK legal market shifting dramatically. Stagnant fi nancial markets and struggling economies mean that none of the Magic Circle, and by extension our Global Elite fi rms, look the same as they did at the turn of the millennium.

So how does Herbert Smith, a fi rm that has suffered a debilitating ride of diminished corporate mandates, global partner exits, a failed European merger attempt and, most notably, poor fi nancial performance compared to its rivals, justify its continued position

In 2002 LB made the bold

move of placing Herbert

Smith into the Magic Circle.

But ten years on, has the

fi rm kept up the pace?

EMMA SADOWSKI

AND DAVID STEVENSON

BREAKING

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among the leading UK fi rms that form the Magic Circle?

Herbert Smith’s existence in the exclusive group has been hotly debated over the last ten years, among not only partners and management at rival fi rms but also consultants, recruiters and those involved in the legal sector.

‘It wants to be a Magic Circle fi rm and it has some claim to that, based on the fees it brings in and revenue, although it’s not quite there,’ says a partner at a City fi rm.

However, another says: ‘ Herbert Smith gets big deals. It’s a very impressive place.’

Impressive? Undoubtedly. But a decade after earning its stripes, the fi rm’s business and its position in the market need reassessing. Here we review LB ’s 2002 decision to include Herbert Smith in the Magic Circle and ask whether the reasoning still holds water.

INTERNATIONAL INCIDENTSTen years ago, the fi rm’s lofty international ambitions looked like they were coming to the fore. It had just signed a three-way alliance with Germany’s Gleiss Lutz and Benelux fi rm Stibbe. The trio of fi rms was also courting Spain’s Cuatrecasas, Gonçalves Pereira and Italy’s Pavia e Ansaldo.

Late last year, Herbert Smith launched a review of the fi rm’s international platform led by CIS managing partner Allen Hanen, dubbing it ‘Project Blue Sky’. The goal of the strategic review was to focus on expanding in a number of key jurisdictions, including Europe, Australia, New York and Asia. Part of the review involved approaching its European alliance partners Gleiss Lutz and Stibbe to formally merge. But the request was rejected and Project Blue Sky fell at the fi rst hurdle.

Many explanations have emerged over the collapse of the alliance. Some Herbert Smith partners say that the relationship with Gleiss and Stibbe is still alive, while others

point to the fact that something needed to happen between the three fi rms because the relationship wasn’t going anywhere. However, the simple reason why the alliance fell apart was because the two European fi rms did not want to merge with Herbert Smith.

‘To become part of a global fi rm would have meant signifi cant changes to our partnership,’ explained Gleiss managing partner Rainer Loges to LB in February (see LB221, page 16).

Stibbe’s former Brussels managing partner Olivier Clevenbergh told LB at that time: ‘There are two options – to be a global fi rm or one of the top three fi rms in your market. I think that Herbert Smith’s strategy is to be a global brand. They recognised that it was not always easy to sell the alliance to its global clientele.’

Former partners have been particularly scathing about the affair. ‘The European alliance was a dog’s dinner. Management wanted a deal but Gleiss and Stibbe didn’t. They played a canny game,’ explains a former Herbert Smith partner.

Another says: ‘It [the alliance] was a product of the early 2000s and the risk was that the relationships weren’t moving on.’

Before Herbert Smith can begin again in Europe on its own, it has to see out a one-year non-compete clause contained in the Alliance Tripartite Agreement, meaning the fi rm

cannot open an offi ce in Germany until next year at the very earliest. It leaves Herbert Smith with a gaping hole in a continent its Magic Circle rivals conquered years ago.

‘The alliance served us well, but it only took us so far,’ comments David Willis, the fi rm’s global managing partner. ‘We wanted to move on.’

The collapse of the alliance has left Herbert Smith with little to no presence in Europe, putting it miles behind its competitors. The fi rm has just 32 partners and 141 fee-earners across its Paris, Brussels and Madrid offi ces. Allen & Overy (A&O) houses 150 lawyers in Paris alone.

One might argue that Europe as a whole is a dead market for the ambitious Global Elite fi rms, who have moved on to new and exciting markets in Asia and Latin America. There is a school of thought that losing the alliance has allowed Herbert Smith to ditch some heavy baggage. However, this is naive. As Skadden, Arps, Slate, Meagher & Flom’s recent hires in Frankfurt show, Germany has plenty to offer. The US fi rm hired capital markets partners Stephen Hutter and Katja Kaulamo from Shearman & Sterling.

‘Germany is without doubt a very important market,’ says Austin Sweeney, Herbert Smith’s South-East Asia managing partner. ‘Europe is not dead. Germany has withstood the ravages

TOP 20 LEGAL ADVISERS ADVISING ON EUROPEAN M&A – 2011Rank House Value ($m) No. of deals1 Freshfi elds Bruckhaus Deringer 223,338 2252 Linklaters 198,047 2103 Sullivan & Cromwell 129,468 434 Allen & Overy 128,260 1765 Shearman & Sterling 115,682 436 Clifford Chance 103,518 1927 Cleary Gottlieb Steen & Hamilton 96,122 618 Simpson Thacher & Bartlett 85,260 389 Wachtell, Lipton, Rosen & Katz 77,756 1710 Latham & Watkins 64,189 12311 White & Case 61,871 11612 Herbert Smith/Gleiss Lutz/Stibbe 60,144 9413 Slaughter and May 59,805 6714 Skadden, Arps, Slate, Meagher & Flom 58,906 6515 Cravath, Swaine & Moore 54,906 1916 Weil, Gotshal & Manges 53,492 8617 Blake, Cassels & Graydon 52,893 2118 Fried, Frank, Harris, Shriver & Jacobson 51,660 1619 Uría Menéndez 49,675 4420 Dewey & LeBoeuf 49,092 47

Source: mergermarket

‘Australia is signifi cant, as big Australian banks are well capitalised.’Martyn Hopper, Herbert Smith

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May 2012 Legal Business 25

of the last couple of years and we should be there,’ he adds.

But despite this setback, the fi rm still has its sights on bigger merger opportunities in key markets. At press time, Herbert Smith was still in talks with leading Australian fi rm Freehills about a possible merger. This would greatly enhance its already formidable Asian presence and put the fi rm back on the global map.

‘Australia is signifi cant, as big Australian banks are well capitalised. Asia is very interesting and Australia is strategically important in that region,’ says Martyn Hopper, who heads Herbert Smith’s fi nancial services litigation practice.

The proposed merger with Freehills excites partners based in Asia. Sweeney sees it as a good opportunity to increase the fi rm’s bench strength in the Asia-Pacifi c region, but he did have some reservations at fi rst.

‘I was initially sceptical, I just didn’t get it. Although after meeting with its [ Freehills’] people, seeing the quality of the clients and the transactions, I am a fan,’ he says.

Sweeney thinks that the merger is important as he sees future growth coming from emerging markets such as those in South East Asia (see box, ‘Asian Dominance’, page 27). Increasing Herbert Smith’s footprint in the region would secure the fi rm’s ability to tap into these markets.

‘This [ Freehills merger] will be expensive. There is a lot of risk around it. The real issue is if it doesn’t happen. That will be a big problem in terms of strategy. Herbert Smith’s place in

the Magic Circle depends on whether it can pull it off,’ says one ex-partner.

Complications may arise depending on the type of merger the fi rm tries to use. Some former Herbert Smith partners have questioned the way in which the fi rm is going about the merger, particularly given its suspicion of the Swiss Verein structure adopted by the fi rm’s more progressive international rivals.

According to another former partner: ‘ Freehills is a 100% equity fi rm. Herbert Smith doesn’t know what to make of it. They are moving ahead very slowly. They are not considering a Swiss Verein.’

Members of the Magic Circle have also already swamped Australia. A&O moved into the region in early 2010 after initially hiring 14 partners from local heavyweight Clayton Utz. Clifford Chance (CC) followed a year later, taking over Chang, Pistilli & Simmons in Sydney and Cochrane Lishman Carson Luscombe in Perth. Linklaters has just signed an alliance agreement with heavyweight Allens Arthur Robinson.

However, Herbert Smith should look out: according to Australian site fi rmspy.com, Freshfi elds has even been alleged to be in the frame for a tie-up. While this is pure speculation, the last thing Herbert Smith would want is to be gazumped in Australia by a bigger rival. Outside of confi rming that

the fi rms are in talks, Herbert Smith partners refuse to say anything more.

If the fi rm pulls off the Freehills merger, it could be the most signifi cant the market has seen to date. If it goes through, it would propel the fi rm into the top 15 law fi rms globally by revenue, pushing past the $1bn mark, gifting Herbert Smith an added 199 partners and would make the fi rm a true global force.

Also contained within ‘Project Blue Sky’ is the fi rm’s desire to fi nally expand Stateside.

POWER FORWARD Herbert Smith’s energy practice is often forgotten in the midst of the hullabaloo that surrounds the fi rm’s corporate and litigation practices. But the energy practice, one of the fi rm’s fi rst sector focus practices, is highly revered among energy-centred fi rms.

‘People don’t understand how good Herbert Smith is in the energy area. It is up there with Vinson & Elkins and Baker Botts,’ says a peer with a rival fi rm.

Roughly 78 partners and over 100 associates across the fi rm’s international network focus on energy-related work, with the practice contributing roughly 25% of Herbert Smith’s revenues and profi ts, according to its energy head Mark Newbery.

He says that 50% of global M&A is energy related, and he’d like the practice to mirror

that. The practice focuses on oil and gas, power and mining.

The deal list is enviable. In late 2008, the fi rm acted for EDF Energy on its £12.5bn cash and CVR take-over of British Energy Group and the associated plans for new nuclear build. In Moscow, the fi rm was appointed as lead project fi nance counsel on Shtokman’s $40bn liquefi ed natural gas project. And in Asia, Herbert Smith advised the China National Offshore Oil Corporation (CNOOC) on the sales and purchase agreements to acquire Tullow Oil’s interest in exploring areas 1, 2 and 3A in Uganda. The deal was an estimated $1.47bn and launched in 2011.

‘Clients come to Herbert Smith because we are energy lawyers, which means less catch up. An energy lawyer will do the M&A and that makes us more effi cient,’ says Newbery.

Herbert Smith counts EDF, the Tata Group and the State Unitary Enterprise Tajik Aluminium as some of its clients, and sits on a number of panels, including BP’s UK legal panel.

Partners point to a natural harmony between Herbert Smith’s energy practice and that of potential merger partner Freehills.

‘The business synergies are excellent,’ according to disputes chief Sonya Leydecker. ‘They have a great energy and natural resources practice which complements our own, particularly in Asia.’

In March alone Freehills acted for the Energy Development Corporation (EDC) in two joint ventures to develop geothermal projects in both Peru and Chile, and acted for India’s Adani Group on it’s A$1.25bn refi nancing of the Abbot Point X50 Coal Terminal.

LB123: a decade ago Herbert Smith joined the Magic Circle

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This will see the fi rm open in New York later this year.

‘We looked carefully at the States and have deliberately chose to establish a focused disputes capability in New York,’ says Willis.

Willis insists that the New York offi ce will not take on the US fi rms in New York and will concentrate solely on international arbitration, investigations work and other litigation. Another benefi t of having an offi ce in New York could be access into Latin America as the area traditionally looks north to New York for legal advice.

‘Brazil is an important jurisdiction. I fully expect us to open a Latin American offi ce at some point but no decision has yet been taken as to when,’ says Malcolm Hitching, who heads the global fi nance practice.

Other partners agree that Latin American plans are still in the ‘embryonic’ stage, while there are more concrete plans for South Korea. The fi rm has already sussed out offi ce space in Seoul and is in the process of applying for a local licence to operate in the jurisdiction. CC is the only other Magic Circle fi rm to apply for a licence in the region.

The fi rm can also stake claim to possessing a strong India-focused practice, run out of its London offi ce by corporate partner Chris Parsons.

‘The starting point for anyone who wants to be successful in India, is to ask “how can I help India?”,’ he says.

Clients in the region include the Tata Group, which has turned to the fi rm for advice on its acquisitions of Corus, Land Rover and Tetley Tea. Parsons says that on the back of the Tata work, the fi rm has one of the

leading cross-border practices for outbound work from India.

The fi rm famously acted for India’s Bharti Airtel on its $10.7bn acquisition of Zain Africa in 2010.

However, Herbert Smith is not alone in enjoying success there. Parsons freely admits that Freshfi elds and Linklaters are also strong in the region, with the latter having a particularly strong capital markets team. Nonetheless, the fi rm does seem to have the formula right, enjoying close relationships with corporate and governmental clients in the region.

Despite mistakes in the past, Herbert Smith realises that having international outposts is vital in convincing its peers that the fi rm belongs in the Magic Circle. Having little European coverage is damaging and Herbert Smith is late to the game. It also seems that the fi rm’s Global Elite status is now pinned on securing the Freehills merger. For now at least, the fi rm is way short of the mark as far as global coverage is concerned.

Willis believes the concept of the Magic Circle is outdated: ‘Our objective is to be regarded as one of the Global Elite fi rms, so inevitably this now has more relevance to us than the Magic Circle term.’ Which is in itself an admission that Herbert Smith isn’t a Global Elite fi rm yet.

MANAGEMENT QUESTIONSUp until 2008, the fi rm didn’t have a managing partner, with partners putting sole reliance on the then senior partner David Gold. Willis is the fi rm’s fi rst managing partner since 1992, and entered the leadership role as the global markets went into meltdown and the fi rm was facing

all kinds of performance issues. One year later Jonathan Scott was elected to the senior partner role taking over from previous incumbent Gold, who has since retired from the fi rm.

Priority number one is fi nancial performance for this relatively new team. During the last ten years, the fi rm’s fi nances have gone off the boil. The big question is whether the fi nancial crisis provides an excuse that masks inherent problems within the fi rm.

While Herbert Smith has steadily grown global revenues over the last fi ve years, predominantly on the back of the fi rm’s litigation and fi nance practices – the only two practice areas to grow through the recession – profi tability has waned.

Litigation revenues grew 69% between 2006/07 and 2010/11, growing from £99m to £168m. Finance went from £29.4m to £44.2m during the same period, growing almost 50%.

But the fi rm’s profi ts have continued to struggle behind Magic Circle competitors. In 2010/11, the fi rm’s PEP stood at £892,000, placing it behind A&O (£1.05m), CC (£1m), Linklaters

‘Europe is not dead. Germany has withstood the ravages of the last couple of years and we should be there.’Austin Sweeney, Herbert Smith

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(£1.16m), Freshfi elds (£1.3m) and Slaughter and May (£1.7m). Its profi t margin is comfortably the lowest of the Magic Circle at 25%.

Similarly, profi t per lawyer (PPL) has also signifi cantly lagged and last year came to £87,000. By contrast, two of the fi rm’s Magic Circle rivals posted PPL of over £100,000, while the other three saw PPL above £200,000.

Managing the fi rm’s fi nances has been a top priority for Herbert Smith management. In a presentation delivered to partners in May 2011, Scott told partners that despite some outstanding performances, the management team was ‘disappointed by the overall outturn’ of the fi rm’s fi nancial performance. He also told partners, according to documents seen by LB that the fi rm had to ‘distinguish between diffi cult markets and structural issues’. Criticism of the fi rm by former partners and competitors centres on the fi rm’s ‘nice’ culture of keeping underperformers in place, which can weigh down on profi ts.

‘The corporate practice, for years, was made up of people who weren’t go-getters,’

comments a partner at a rival fi rm. ‘ Herbert Smith has 30% too many people.’

At the May 2011 meeting, Scott said to partners: ‘The challenge for Herbert Smith is always our apparent lack of self confi dence.’ He also insisted that the fi rm was not advocating that it becomes a clone of Linklaters and Freshfi elds, but that if it were to ‘deliver strategy and

increase profi tability, we will need to move the dial’.

Willis smiles when asked whether the fi rm has been complacent about managing out underperformers. He says the fi rm never underwent the same kind of headcount management process that other Magic Circle fi rms went through during the downturn.

In 2009, A&O reduced its global partnership by 9%, while CC went through the same exercise and saw the departure of 15% of its global partnership.

‘Performance management is an important part of running our business and we have developed our own approach,’ according to Willis. ‘It’s not straightforward – measuring contribution is important but we are also a supportive culture and want to give partners the opportunity to get it right.’

The fi rm has been quietly de-equitising partners and last year had more non-equity partners than equity partners. It operates a nine-year lockstep, which starts at 43 points and plateaus at 100 points. Like most fi rms, it has

ASIAN DOMINANCEFor a UK-based fi rm, Herbert Smith has, by far, one of the best Asian practices. It counts 42 partners and almost 200 fee-earners in the region, who are spread across seven offi ces ranging from Bangkok and Jakarta to Shanghai and Tokyo.

Having opened its fi rst Asian outpost in Hong Kong in 1982, the fi rm now boasts one of the largest Hong Kong offi ces out of its competitors. The fi rm’s dispute resolution chief Sonya Leydecker points to Hong Kong and mainland China as one of the fi rm’s strongest regions for disputes work, which is unusual as most fi rms focus on corporate and the capital markets.

‘We have a big presence in Hong Kong and Asia,’ says Leydecker. ‘We’re doing a lot of international arbitration and investigations work in Asia, as well as commercial litigation in jurisdictions where we can practise locally.’ The fi rm also has offi ces in Beijing and Shanghai.

Outside of China and Hong Kong, Herbert Smith has made its mark, particularly in Tokyo – a market that foreign law fi rms have had a tough time cracking. The fi rm launched in the Japanese capital in 2000 and now counts eight partners and 38 fee-earners.

The offi ce mainly assists large trading houses and telecoms companies with

outbound investments. ‘The model is shaped by capital fl ows. The strength of the yen has seen an increase in outbound investment,’ says Austin Sweeney, managing partner of Herbert Smith in South-East Asia.

The fi rm does not advise on inbound investment into Japan as this is governed by Japanese law. Herbert Smith has referral relationships with a number of local Japanese fi rms and has made the clear decision not to advise on local law. ‘We don’t do this, we have a good relationship with Japanese law fi rms, we get a lot of referral work from them because we don’t stand on their toes,’ explains Sweeney.

The extensive Herbert Smith network in Asia allows partners to advise clients investing into South-East Asia. The fi rm operates an offi cial alliance with Jakarta-based Hiswara Bunjamin & Tandjung (HBT), which is ranked in the top tier of The Legal 500 for its corporate and M&A, dispute resolution, and energy and infrastructure capabilities.

Similar to the Indian market, Indonesia is tightly regulated and fi rms cannot open directly. Herbert Smith struck up the HBT alliance ten years ago and has celebrated much success since. In late 2011 the pair acted for Citi and Deutsche Bank as standby

purchasers in the PT Bank Danamon Indonesia Tbk $560m rights issue.

According to Sweeney, Indonesia is a diffi cult place to do business. ‘Despite some improvements, there continues to be serious levels of corruption [in Indonesia]. Accordingly corporates need a lot of guidance on entry into that market or they fall foul and end up in disputes,’ he says.

Singapore, where the fi rm has ten partners, is an important fi nancial centre and is equally important in Herbert Smith’s Asian strategy. ‘We use Singapore as a hub to serve most of South and South-East Asia, which is the target of inbound investment,’ says Sweeney, who is based there.

Herbert Smith is not the only Global Elite fi rm in Singapore and Freshfi elds Bruckhaus Deringer recently announced intentions to re-open.

Herbert Smith’s wider success in Asia is due to the dual focus of corporate and litigation, which ‘serves us well’, according to Sweeney. In fact it is the litigation practice that Sweeney views as integral to the fi rm’s success: ‘Our reputation for [litigation] is very useful. When carrying out client visits, I will regularly take along one of our litigators.’

‘There are two options – to be a global fi rm or one of the top three fi rms in your market.’Olivier Clevenbergh, Stibbe u


HERBERT SMITH


been accused of keeping too many partners at the top, putting a strain on profi ts. The fi rm also paid out a reduced instalment to partners during its February distribution, which Willis says is not a big deal as the fi rm had a slightly disappointing cash collection period, which it has sorted.

‘The biggest challenge at Herbert Smith now is convincing people to stick around. The profi tability needs help and the lockstep needs an overhaul,’ says a former partner.

In 2002, LB pointed to the fact that Herbert Smith, much like Slaughters, retained its top talent making it a leading fi rm. But ever since there has been a trickle of stars leaving for greener pastures. In 2007, real estate heavyweight Chris de Pury left the fi rm for Berwin Leighton Paisner, kickstarting a steady stream of partner departures. In 2009, highly regarded litigation partner Christa Band left the fi rm for Linklaters. Her departure, according to some, ‘shocked management’.

2011 has seen the highest number of partner departures, with the exit of investigations and corporate crime chief Peter Burrell, who left for Willkie Farr & Gallagher; energy duo Paul Griffi n and John Geraghty who joined A&O; and a trio of partners quitting the fi rm’s Paris offi ce.

The fi rm’s small but at one time formidable capital markets practice has also been drained by departures (see below).

CORPORATE SPEAKIn 2002, we praised Herbert Smith for ‘making bigger fi rms jealous’ of its M&A practice and pointed to the fi rm’s ability to win equity capital market deals in a depressed market.

Ten years ago, the corporate practice made up 50% of Herbert Smith’s business and accounted for £100m of the fi rm’s £209m global fees. This even eclipsed litigation (£70m) and fi nance (£21m), while the remainder came from the fi rm’s real estate practice.

By 2010/11 corporate contributed just 35% of the fi rm’s £465m turnover, bringing in £165.4m in fees. In 2010/11, CC’s corporate practice made the fi rm £365m, accounting for 30% of the fi rm’s business, while Linklaters’ corporate practice made £475.3m, 39% of the fi rm’s business.

Herbert Smith’s corporate practice truly thrived during the M&A boom leading up to the fi nancial crisis.

In 2006, the fi rm took front seat on a plethora of big money deals, including acting for Mittal Steel on its £21.9bn acquisition of Arcelor; BAA on its £15bn takeover by Spain’s Ferrovial Group; and Tata Steel on the £6.2bn contested takeover of Corus.

The fi rm’s Asian arm acted for Industrial and Commercial Bank of China (ICBC) on its 2006 $12bn IPO.

Even during the crisis, Herbert Smith landed roles on a number of rights issues. ‘During the [wave of] UK rights issues, the market saw a lot more of Herbert Smith,’ comments Stephen Thierbach, who joined the fi rm from rival Linklaters in March 2010 and now leads the capital markets practice. ‘We consolidated our position with the investment banks and now we’re seeing some high-quality work.’

Herbert Smith acted for Bradford & Bingley in 2008 on its £300m rights issue under a team led by corporate partner Michael Walter. In

‘Asia is very interesting and Australia is strategically important in that region.’Martyn Hopper, Herbert Smith

MAGIC CIRCLE REVENUE 2002-11

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2009, the fi rm acted for longstanding real estate client Hammerson on its £584.2m capital raising and acted for Deutsche Bank, Bank of America Merrill Lynch and Morgan Stanley on National Grid’s £3.3bn rights issue in 2010.

‘The volume of transactions is down signifi cantly. There is uncertainty among buyers and sellers,’ comments Thierbach on the current state of the capital markets across the fi rm’s major network of offi ces.

Herbert Smith, much like its peers at the top, has struggled with the lack of activity in both the equity and debt capital markets. With deals continuing to dwindle, the cracks in the fi rm’s corporate practice started to appear in the summer of 2011, when a chunk of capital markets partners started to exit the fi rm.

The fi rm’s Hong Kong practice saw the biggest losses. In July 2011, Asia US capital markets chief John Moore kickstarted a stream of exits from the fi rm’s Asian hub. He headed to US rival Morrison & Foerster and was followed by Melody He-Chen a few months later. In November 2011, capital markets partner Carolyn Sng left for Fried, Frank, Harris, Shriver & Jacobson.

But the biggest blow came when rival A&O hired the fi rm’s capital markets head Jim Wickenden and fellow partner Adam Wells in London. Some partners cite management’s refusal to deal with underperforming partners as a reason to leave, while others say the true lack of cross-border capabilities pushed them out the door.

Thierbach says that to a certain extent, reduced levels of activity in the global capital markets has given the fi rm the opportunity

to consider its strategy at a time when activity levels are down. The fi rm also doesn’t have a glut of work.

‘It wanted to compete at the top table in capital markets work but the market doesn’t see it as being top notch,’ says a partner with a rival City practice. ‘It’s not like Slaughter and May and I think Herbert Smith forgets its strengths because fundamentally it is a good fi rm, it just spends too much time thinking about what everyone else thinks.’

Herbert Smith’s global corporate group, which organises itself by practice, sector and client and counts 104 partners globally, continues to lag. According to global corporate head James Palmer, the practice is unlikely to meet its targets for a second year running.

Last year the corporate practice missed targets for the year by £20m, resulting in a retuning of the practice’s partnership. Roughly 20 partners were asked to leave the practice, with Palmer now insisting that each partner

fully focus on both retaining and winning clients and work.

According to mergermarket data, Herbert Smith doesn’t even factor in the top fi ve for European M&A deals during the fi rst quarter of 2012 by either volume or value. Linklaters sits comfortably at the top of the table, having advised on 41 deals worth $76.6bn. Freshfi elds advised on 33 deals worth $76bn, A&O acted on 28 deals worth $22.2bn and CC acted on 31 deals worth $19.7bn.

‘We are still below what we want it to be,’ explains Palmer, who took over leadership of the group in 2010 from Michael Walter. ‘We’re looking at how much of that is due to the markets and how much of that is down to ownership.’

Therein lies Herbert Smith’s biggest issue when it comes to the way its business has performed during the downturn and indeed during the last decade. It has failed to maintain work levels during depressed markets, relying heavily on one-time deals to see it through, just as it relied on the Gleiss and Stibbe relationships to prop up its European M&A practice. ‘We are building continued greater focus, on clients and client service, says Palmer.

While the fi rm can’t solely be blamed for struggling during diffi cult markets (Magic Circle peers did see a fall off in activity and some fi rms cut partners as a result), Herbert Smith has had a hard time pulling itself back together again. The Magic Circle hasn’t.

CONTENTIOUS ISSUEDespite transactional woes, Herbert Smith has always enjoyed a fearsome reputation

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‘Clients come to Herbert Smith because we are energy lawyers.’Mark Newbery, Herbert Smith

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for litigation. As Hanen puts it: ‘Once you see one of the big Herbert Smith battleships [litigators] turning towards you with the guns rolling out, it’s just an awesome sight.’

But Herbert Smith, as it was when we looked at its business ten years ago, is still trying to shake its image as a pure disputes heavyweight.

‘When you think of Herbert Smith, you think of litigation,’ says a partner at another fi rm.

Sonya Leydecker, Herbert Smith’s global head of disputes, points to the successes of the practice. ‘There currently seems to be more appetite for litigation,’ she says. ‘Businesses are now more confi dent about litigation than immediately after the fi nancial crisis.’

Last year, litigation heavyweight Ted Greeno led a team advising BSkyB in a claim for deceit, misrepresentation and breach of contract against IT supplier EDS and successfully recovered £300m. The work won the fi rm the Dispute Resolution Team of the Year award at the 2011 Legal Business Awards.

Herbert Smith has benefi ted from the counter-cyclical nature of litigation and as Leydecker says: ‘When there is an economic downturn, contentious issues tend to arise.’

Disputes undoubtedly remains a core part of Herbert Smith’s business. The practice has 85 partners globally, 58 based in London and the fi rm is diversifying into specialist contentious areas. During 2010/11, the disputes

practice billed £168m, making up roughly 40% of the fi rm’s overall global business. This is a signifi cant increase from 2006/07 when the disputes practice made £99m and contributed to 30% of overall revenues.

‘There is a danger of us being apologetic about our litigation brand,’ says Hopper. ‘Increasingly what we are doing is seeing how to use that brand. Litigation is a key selling point and we shouldn’t be apologetic about it.’

In fact, Hopper says that one of the things that attracted him to Herbert Smith from the Financial Services Authority (FSA) in 2004 was its strong litigation brand. He found it odd that a fi rm known for its litigation prowess was not often at the other side of the table when he worked for the FSA.

The success of Hopper’s practice is demonstrated not only by its growth from one partner to its current tally of fi ve, but also the number of high-profi le mandates his team has won from the banks. For example, Hopper’s team is understood to have acted for The Royal Bank of Scotland (RBS) last year after the FSA conducted an investigation into the bank and its board to determine whether any fraudulent behaviour had taken place in the lead up to its part-nationalisation in 2008. The FSA cleared the bank’s name, thanks to Hopper and his team.

Part of Leydecker’s strategy to move the practice forward is to bolster its offering outside of straight litigation. In 2005, Herbert Smith set up an arbitration practice based in London and Paris. But the severity of the 2008 fi nancial crisis arrested its development. ‘When we had the big crash in 2008, arbitration plateaued,’ says Paula Hodges, who co-heads the global practice with Paris-based partner Charles Kaplan.

But this drop off in work did not last long and according to Hodges, there has been a deluge ever since, returning to the traditional model in which a downturn sparks disputes.

The strength of the international arbitration practice complements the ‘twin-engined’ model of the fi rm mentioned by almost every single partner interviewed for this piece, who consistently speak about the twin forces of corporate and disputes driving the fi rm forward. And while litigation and corporate complement each other well, arbitration and energy also make good bedfellows.

‘Arbitration and energy go hand in hand,’ says Hodges. ‘Corporate and disputes have always worked together incredibly closely and to great effect.’ Justin D’Agostino, head of the Greater China arbitration practice, says the fi rm always brings in an arbitration partner

TOP 20 LEGAL ADVISERS ADVISING ON UK M&A – 2011Rank House Value ($m) No. of deals1 Linklaters 85,801 802 Freshfi elds Bruckhaus Deringer 79,832 803 Allen & Overy 72,032 664 Slaughter and May 52,423 585 Hogan Lovells 32,607 446 Shearman & Sterling 31,564 137 Herbert Smith/Gleiss Lutz/Stibbe 30,482 358 Clifford Chance 27,740 709 Ashurst 25,036 3710 DLA Piper 21,053 11911 Latham & Watkins 16,666 3612 Simpson Thacher & Bartlett 16,632 1713 Allens Arthur Robinson 16,414 914 Baker & McKenzie 16,305 3715 Weil, Gotshal & Manges 15,779 4116 White & Case 15,482 2617 Blake Dawson 15,181 918 Skadden, Arps, Slate, Meagher & Flom 14,891 1619 Wachtell, Lipton, Rosen & Katz 14,830 720 Gibson, Dunn & Crutcher 14,818 12

Source: mergermarket

‘Businesses are now more confi dent about litigation than immediately after the fi nancial crisis.’Sonya Leydecker, Herbert Smith

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HERBERT SMITH


for international energy projects in Hong Kong because arbitration is essential for clients who do a lot of work in energy markets where they don’t want to be involved in local courts.

It is specialist contentious work, such as international arbitration, that sees the fi rm fi nally expanding across the Atlantic. By the end of 2012, Herbert Smith plans to launch an offi ce in New York. The fi rm is currently recruiting on the ground.

But despite the undisputed strength of its disputes practice, which has won successes for clients such as Goldman Sachs (2006), Eurotunnel (2007), Apple (2007) and Chevron (2009), the fi rm is still keen to shake off the suggestion that it is ‘litigation heavy’.

‘We are a full practice offi ce, not just litigation. This idea of Herbert Smith as a litigation fi rm is changing in clients’ minds and the market perception is also changing,’ comments Paris-based corporate partner Hubert Segain.

Some former Herbert Smith partners fi nd it odd that the fi rm may be distancing itself from litigation. ‘The decision to downplay litigation by [former senior partner] David Gold was a big mistake. It really needs to defi ne itself through litigation. It’s not one or the other. It’s not a corporate fi rm,’ says a former partner.

A senior partner at a City fi rm argues that many fi rms have built their reputation on their litigation prowess. US disputes powerhouse Quinn Emanuel Urquhart & Sullivan is one such example. In 2011, the fi rm made $723m, a 31% rise on the previous year.

By numbers, Herbert Smith’s disputes practice sits very close to CC. The former’s practice billed

£168m during the 2010/11 year while the latter’s contributed £183m, or 15%, to global revenue. But neither can touch Freshfi elds’ disputes practice, which billed £275.9m last year, making it the biggest in the City.

But can Herbert Smith be evaluated as a Magic Circle fi rm based on the strength of its disputes practice? Arguably no. In 2002, Herbert Smith was ranked as the leading disputes fi rm in the The Legal 500 UK. By 2006, it was forced to share that crown with CC and Freshfi elds. CC and Freshfi elds now arguably have stronger disputes practices in London and abroad, while both fi rms are signifi cantly stronger in corporate or fi nance. It appears that Herbert Smith’s greatest strength has in some ways become its greatest weakness.

LEAVING THE CIRCLE‘While I think the Magic Circle term is now less relevant to us, we are stronger now than we were ten years ago,’ comments Willis.

Partners interviewed at the fi rm are all on message that they don’t believe that Herbert Smith is a Magic Circle fi rm anymore.

Palmer challenges the term Magic Circle, while the fi rm’s energy chief Mark Newbery asks what the relevance of the classifi cation is anymore.

Leydecker says that the term ‘Global Elite’ is better suited to the fi rm. While Herbert Smith partners wish to waste time debating whether the Magic Circle is still a valid term, it all smacks of throwing up a smokescreen. Put another way, does Herbert Smith still belong alongside those fi rms with UK origins that make up our Global Elite? The answer is not right now.

And Herbert Smith partners’ views are fi rmly in tandem with the market’s perception of the fi rm: it is no longer part of the Magic Circle. Reaction from partners at peer fi rms, former partners and members of the legal community alike, is that the fi rm’s challenged corporate practice, lack of international reach and struggling profi ts puts it behind A&O, CC, Freshfi elds, Linklaters, and Slaughters.

While there is no doubt that Herbert Smith remains a top quality fi rm with talented lawyers, it still has a lot of work to do to lift it to the next level, much like it did in 2002. So far it hasn’t lived up to its promise. LB

[email protected]@legalease.co.uk

MAGIC CIRCLE PROFIT PER LAWYER 2002-11

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‘This idea of Herbert Smith as a litigation fi rm is changing in clients’ minds and the market perception is also changing.’Hubert Segain, Herbert Smith


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