‘We want to use this combination to forge a new global elite,’ Herbert Smith Freehills (HSF) CEO Justin D’Agostino tells Legal Business as he discusses the firm’s ambitious merger plans with New York’s Kramer Levin.
So opens LegalBusiness’ main article[1] late last month providing background coverage of London-based Herbert Smith Freehills’s merger with [acquisition of] New York-based Kramer Levin.
D’Agostino goes on to call the combination “the first real transatlantic and transpacific merger,” which strikes me as having some genuine substance to it, despite the scent of PR-speak which wafts off the phrase. Nor does the combination appear to have been an example of the all-too-common Go-To move in Law Land when firms are feeling threatened or outpaced: The shotgun wedding.
Rather, HSF reportedly (no reason to doubt it—I just have no first-hand knowledge) was quite deliberate about spec’ing out the financial and other parameters of a potential merger-mate and winnowing the field of plausible and desirable targets in a disciplined way.
Finally, HSF smartly avoided the shoals of pursuing a “merger of equals,” calling those deals, with perfectly understated clarity, “very, very difficult to do.” Ultimately, the characteristics of a firm they might dance with came down primarily to two: a “strong” US firm and limited or minimal client overlap (read: conflicts, which are revenue-dilutive externally and introduce partnership feuds internally).
Now, the financial analyst in me could point out that Kramer Levin’s financial performance over the past five years has seriously lagged industry averages. Also according to Legal Business, [2] Kramer Levin’s revenue has grown only 2.9% over the 2018-’23 timeframe, and its PEP only 3.4%, compared to HSF over the same span, which was roughly on par with the Global 100 at +26.8% for revenue and +29.9% for PEP.
But enough about these two firms and this evidently sane and sensible combination.
The deal highlighted and brought present-here-and-now currency to a question we’ve been entertaining here at Adam Smith, Esq. for some time: Is the AmLaw growing more concentrated? In other words, are the big getting bigger faster than the mid-size or smaller firms?
As is our practice, let’s look at the numbers:
- The 2023 AmLaw 100 reports a nice round 50 firms with annual revenue over $1-billion, ranging from Kirkland/#1 at $6.514-billion to O’Melveny/#50 at $1.025-billion.
- Of note, 18 firms were over $2-billion and just two (Kirkland and Latham) over $5-billion.
- By contrast, ten years ago the 2013 AmLaw 100 reported 20 firms over $1.000-billion, from DLA at $2.440 to Morrison & Foerster at a nice round $1.000-billion. (Kirkland was then 5th at $1.937-billion.
- Adjusting for inflation—statistical hygiene we try to practice whenever we can in contexts such as this–$1-billion in 2024 dollars translates to $757-million in 2013, so by that yardstick 33 firms (not 50) made the “adjusted $1-billion” cut ten years ago.
Does this mean concentration is increasing?
Let’s look at it another way:
- In 2013 the total revenue of the 100 was $73.400-billion, and the “$billion plus” club (CPI adjusted) accounted for $42.699 of that total.
- For 2023, the nominal total was $130.838-billion in revenue for the 100 and $97.464-billion for the billion plus members.
- So as of 2013 the billion+ ‘ers garnered 58.0% of the revenue of the top 100
And in 2023 the revenue share of the billion+ er’s had grown to 74.5% of the top 100.
We can go back even further while we’re at it; let’s try 20 years. So:
- Using the AmLaw 2003, the nominal $$ revenue of the AmLaw 100 was $38.103-billion.
- This equates to $66.20-billion in 2024 dollars
- And the number of 2003 firms over $1.0-billion in 2024 dollars ($599 million in 2003 money) was just 12, at 25.3% of the total AmLaw 100 revenue.
Shall we recap? Using $1.0-billion in 2024 dollars, inflation adjusted, the revenue share of firms exceeding that number, as a share of total AmLaw 100 revenue, was:
- In 2003 , 25.3%
- In 2013, 58.0%, and
- In 2023, 74.5%
Here at Adam Smith, Esq. we have regularly observed that, compared with almost any other sector of the US economy, Law Land is about as far from “concentrated” as any high-profile B2B sector you could possibly point to.
But:
Could that be changing? Keep your eyes on this, friends.
[1] https://www.legalbusiness.co.uk/blogs/all-options-are-on-the-table-hsfs-ceo-on-why-they-chose-kramer-and-whether-more-mergers-could-follow/
[2] https://www.legalbusiness.co.uk/blogs/getting-to-know-kramer-levin-a-guide-to-hsfs-merger-partner/
Photo by anthony mcgee on Unsplash
Bruce — always cogent analysis. But law firm mergers generally simply create larger hotels for lawyers — not more efficient legal delivery service platforms. While back office cost may be streamlined & marketing costs leveraged, inevitably rates go up to the highest joint level, and “cross-marketing” to exiting customers becomes even more intensive, irritating and intrusive. Law firm mergers, while touted as customer driven, are not. They are about lawyer hubris — growth in revenue, not in profitability. I’ve been waiting 40 years for a merger or a structure based on changing the way legal services are delivered at a deeply fundamental basis. To a focus on Delivered Value (Effectiveness | Efficiency | Experience), a dedication to outputs not inputs, to results not activity. I’m out of the game these days, but wager I’ll still be waiting for many years to come.
Thanks, Jeff; always appreciate your (blessedly and thoughtful in the best way!) unorthodox perspective; you point out things more polite/conventional commentators never would.
I tend to agree with you that fundamental/substantive change from mergers and/or simple growth in scale are essentially nonexistent. The change is quantitative, not qualitative.
The next question–which will require far more analysis and exposition than was appropriate for today–will be whether tech-centric “non law firms” on the cutting edge of Generative AI will disintermediate run of the mill, keep-the-trains-running, middle market lawyers.
Thanks again, as always.