Highest-Grossing U.K. Law Firms’ Profit Stagnates as Deals Fall

Four of the highest-grossing U.K. law firms will probably say their annual revenue has stagnated as they deal with a legal market where one lawyer said there isn’t “a lot going on.”

Clifford Chance LLP, Linklaters LLP, Allen & Overy LLP and Freshfields Bruckhaus Deringer LLP -- four of the five London-based firms known as the Magic Circle -- will report as soon as this week that revenue has grown only slightly since the prior year, two law firm advisers said. With revenue of more than 1 billion pounds ($1.5 billion), they are four of the largest in the world.

“When you’re a billion-pound business you have to put a lot of coal in the furnace every day,” Tony Williams, the founder of Jomati Consultants LLP, said in a telephone interview. “You’ve got a market where there’s not a hell of a lot going on.”

The firms have been relying more heavily on fees from litigation and regulatory advice as restructuring, deal work and advice in emerging markets slowed. The value of global deals shrank by 20 percent during the year that ended April 30 compared to the prior year, according to data compiled by Bloomberg.

Williams, who was previously the managing partner of London-based Clifford Chance, predicted that earnings at the four firms will remain close to flat. Revenue at the U.K.’s 10 largest law firms increased by 1.5 percent in the year that ended April 30, 2013, according to the accounting firm Deloitte LLP, which doesn’t do a separate breakdown for the five firms.

Cost Pressure

Hiring across the group increased by just over 0.5 percent in the same period, according to the accounting firm, which publishes a quarterly survey on the legal sector, without naming individual firm results.

“Firms are a lot more focused on running the business in as an efficient a way as possible,” Jeremy Black, a partner at Deloitte, said in a phone interview. “They are much more active in managing their headcount. There is a cost pressure.”

In a sign of an improving outlook, three of the five law firms raised pay for junior lawyers this year. The five firms cut or froze pay over several years as the deal work slowed down during the financial crisis.

“Profit has stagnated, but I think that’s where we are in the economy,” Williams said. “I’m more optimistic for the second half of the financial year. I think we’ll look back at 2013 as the start of the recovery.”

Pre-Lehman

Clifford Chance was the highest-grossing law firm of the group in the year that ended April 2012, with 1.3 billion pounds in revenue, a 7 percent increase. Linklaters was second with 1.2 billion pounds in earnings, Allen & Overy third with 1.18 billion pounds, and Freshfields said its revenue was 1.13 billion pounds.

DLA Piper LLP is the largest law firm in the world by revenue with $2.4 billion in 2012, according to the American Lawyer, a trade publication.

“It may be some time or a very long time before things get back to where they were pre-Lehman,” Black said, referring to the bankruptcy of Lehman Brothers Holdings Inc. in 2008, which roiled financial markets around the world. Top law firms benefitted from advising on a boom in mergers and acquisitions prior to the bank’s collapse, and on bankruptcy and restructuring work afterward.

“All of the people at the firms are having to work harder to stand still,” Black said. “Their results aren’t stellar but they’re still managing to increase profitability.”

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