"The buzz out here is like nowhere else on Earth. I'm incredibly fired up. There's so much upside in Asia right now for firms doing big corporate deals."
So says Kirkland & Ellis' Hong Kong senior partner David Eich, sentiments few leading law firms would apply to the West right now. With China already the second-largest global economy and forecast to overtake the US by 2020, and Asian M&A and capital markets remaining resilient despite growing turmoil in the eurozone and the US, Eich is far from alone in his thinking.
This year has seen an unprecedented wave of activity by international law firms not just in Hong Kong and China – where leading US law firms including Kirkland, Sullivan & Cromwell and Simpson Thacher & Bartlett have jolted the lateral recruitment market by abandoning their previous focus on New York law to launch local law practices – but also within the wider Asia-Pacific region, where UK firms have been targeting new markets such as Indonesia and Australia.
Firms have been executing or planning multiple office launches in a bid to win work not only from clients seeking to do business in the region, but also outbound investment work from the Chinese firms likely to become the global players of tomorrow.
But while pretty much every credible international law firm is expanding in the region, strategies diverge widely, generally splitting between the broad internationalism of City leaders on one hand and a focus on Hong Kong and China as a gateway to the whole of Asia by US firms on the other.
There has been nothing like it in the global legal community since more than a decade ago when US and UK firms fought for dominance in continental Europe. And even that comparison does not do justice to the intensity of the battle for strategic advantage. The push in Europe came amid a period of robust global growth and in relatively mature economies and, of course, the London firms retained home advantage. The Asia region, fired by blistering economic growth and a fundamental shift in economic power to the East, offers a huge potential upside to successful law firms and neither power bloc of the US and UK has come anywhere near dominating the market.
'The most exciting place on Earth'
The reasons why law firms are so keen to expand in the region are obvious. Asian issuers have dominated global initial public offering (IPO) activity in recent years, bringing in 65% of global proceeds over the five-year period covering 2006-2010, according to Ernst & Young's global IPO report.
The same report shows Hong Kong was the most active exchange in the world for the second year running in 2010, raising $57.4bn (£35.6bn) through 87 IPOs – a 162% increase on the previous year thanks in part to the largest and second-largest ever IPOs – the $22.1bn (£13.7bn) float of Agricultural Bank of China and the $20.5bn (£12.7bn) American International Assurance (AIA) Group IPO. Already, Hong Kong has fully established itself in the minds of many advisers as a key global financial centre alongside New York and London.
Similarly, M&A statistics from Mergermarket show that even though both the value and volume of M&A transactions across Asia-Pacific fell during the first two quarters of 2011, the drop was nowhere near as big as in most other regions of the world, with activity in the region also staying relatively resilient in Asia throughout the global financial crisis. And, even if local M&A is yet to truly rival the US or Europe, the 5%-10% annual growth rates currently sustained by some Asian economies suggest the market still has huge potential to develop.
As Clifford Chance's (CC's) Asia head Peter Charlton says: "There isn't a single major business in the world without an Asia strategy usually involving further investment and growth, so law firms need to be here to service their clients. It's about the most exciting place on Earth to be a lawyer right now."
Exciting and, for the firms securing the big mandates, lucrative. Last year Herbert Smith scored a role advising the underwriting banks on the Agricultural Bank of China IPO, with New York leader Davis Polk & Wardwell picking up the lead for AgBank. Meanwhile, Debevoise & Plimpton took the lead for AIA with Sullivan and Linklaters advising the underwriters on that deal.
To date 2011 has also been heavy on IPOs, with the market demonstrating the growing trend for European businesses, particularly luxury goods companies such as Prada, floating in Asia in a bid to build investment and profile in the market.
Linklaters and CC both advised on the landmark dual listing in Hong Kong and London by commodities trader Glencore, which valued the company at $59.2bn (£36.7bn), while Slaughter and May, Bonelli Erede Pappalardo and Davis Polk advised fashion giant Prada on its $2.1bn (£1.3bn) Hong Kong listing, which marked the first listing on the market by an Italian company, with the deal also generating a role for CC for the underwriters.
But if there is wide consensus on the market's huge potential, agreement falters on how best for foreign law firms to secure market share. Clearly, US firms are generally well behind the level of expansion London rivals have achieved. In essence, leading US advisers are approaching Hong Kong as a key financial centre and replicating the strategies they used in London 15 years ago.
As such, there is a clear focus on equity capital markets and banking work over general commercial and corporate. Indeed, the clearest trend in the market over the last 18 months has been the sudden push into Hong Kong law by a series of conservative Wall Street firms, among them Sullivan, Davis Polk and Simpson Thacher, typically with well established partners from the magic circle (see box, page 14). For related reasons, there is also substantial focus on the mainland China market, despite the current practice restrictions. But some US firms are taking a more aggressive approach to the market, a stance best demonstrated by Kirkland's hire of eight partners from Skadden Arps Slate Meagher & Flom, Latham & Watkins and Allen & Overy (A&O) in August. Not only is the size of the team hire (which includes a number of highly-rated individuals) notable but, given that Kirkland is more known for its private equity experience than its equity capital market (ECM) credentials, it shows the extent to which firms are determined to crack the market – even if it means effectively building a practice from scratch.
Prior to the hires, which include two finance partners, Kirkland had around 12 lawyers in Hong Kong, with none practising Hong Kong law. However, this number is expected to rise to between 40 and 50 lawyers including a number of associates following partners to Kirkland and several relocations from the US, including one partner specialising in the Foreign Corrupt Practices Act. Meanwhile, Kirkland's six-lawyer Shanghai arm is expected to grow to between 10-15 lawyers in the near term.
Kirkland looks quickly set to join the ranks of Skadden and Latham, which respectively have 178 and 101 lawyers in Asia, in building broad top-tier corporate practices.
Eich comments: "The hires appear to be a cliff investment as opposed to an incremental one but the strategy was always to send a small team out initially to scope out what we should do. When the markets came back we got to thinking about our strategy in Asia. We have built out extensively in London and New York but to do that in Asia you need a capital markets practice."
"US firms have realised, one after another, that this market has a lot of growth potential and that it isn't too difficult to crack the market and do meaningful work," says Davis Polk Hong Kong partner Paul Chow, who joined the firm earlier this year from Linklaters.
"Before, they kept themselves away from the Hong Kong and English law work as English firms had been around much longer and had bigger client bases and historic advantages. But US firms have their own strengths – including their banking links with Wall Street. If you're talking about capital markets, there are a lot of opportunities to do US and Hong Kong law work. Only doing US law meant firms were missing out on a lot of work and client links," adds Chow.
Certainly, the Hong Kong market is buzzing about the extent of US firms' hiring and their collective decision to practise Hong Kong law, with rivals watching New York leaders Sullivan, Davis Polk and Simpson Thacher in particular. In comparison, strategies focused on largescale expansion like Kirkland's are not without risks. In contrast to London and New York, pricing pressure, especially on IPOs, is considerable in Hong Kong and China, with many clients also using the turbulence in the legal market as an excuse to push firms on fees even if they do not choose to switch advisers. China's band of coveted statebacked enterprises are known for being particularly tough on lawyer fees.
The expansion also comes at a time when the wider global markets are experiencing significant stress and, while there is a tendency to think of Asia as de-coupled from the rest of the world, ECM activity has already been hit to some degree.
Despite the underlying growth of the market, more than a few local lawyers wonder if the Hong Kong market could reach saturation, at least in the medium term – not least because real estate costs are rising and competition for experienced lawyers, ideally locally born with some Western experience, is sending labour costs soaring.
By a similar token, there has been growing unease in the mainland Chinese market among foreign law firms at the startling growth of domestic practices like King & Wood. Already, some argue that the once lucrative stream of inward investment work in mainland China is being taken over by domestic firms.
Ashurst Asia head Geoffrey Green (pictured) comments: "Achieving topline growth in Asia isn't a problem, but getting it profitable is difficult because of the pricing and the cost base. All our offices in Asia are profitable, but the challenge for us is to limit the degree by which we dilute global profits per equity partner. The Hong Kong IPO market, for example, is very crowded and pricing is very competitive."
Linklaters Asia head Stuart Salt adds: "There is currently significant turmoil in the capital markets and this will likely put pressure on closing ECM deals throughout the region. We also believe that a sustained depression in capital market valuations could increase M&A activity levels. These market conditions will favour firms, such as ourselves, which have a diversified practice across M&A and corporate finance and will be more challenging for any firms that are dependent on a high volume of IPOs."
The London approach
In contrast to most US firms, leading UK practices are, with the partial exception of Slaughters, taking a broader approach to the Asia-Pacific region. Well established players in the area for decades, most of the firms currently bring in between 7% and 13% of their global revenues from
Asia-Pacific and have hundreds of lawyers across the region. And both of these figures look set to expand further through both lateral hires and relocations. Across the magic circle, many firms predict Asian revenues to increase to nearer 20% of revenue within the next four years, with some of this set to come from new markets such as Indonesia and South Korea.
And even the notoriously conservative Slaughters acknowledges the need to do something in Asia, with plans underway to tighten links with the network of leading independent firms it operates with, such as Kim & Chang in Korea and Allens Arthur Robinson in Australia. It is also talking to new firms in markets outside its existing referral work.
It is telling that Hong Kong is the only market in which Slaughters practises local law and the firm has made it clear that it regards maintaining a top-tier Hong Kong practice and raising its profile and referral links in China and India to be a major strategic goal.
Others, though, such as Ashurst, have their sights on more ambitious aims, with the firm planning to nearly double in Asia through a merger with Australian leader Blake Dawson's Asian operations, with the deal also including a joint venture in Australia that could ultimately end in a full merger. Should the tie-up go ahead it will make Ashurst the latest in a growing list of UK firms to open in Australia through either a launch or a merger, including CC, A&O and Norton Rose (see sidebar, page 16).
Indeed, Ashurst's apparent determination – despite mixed feelings within its partnership – to push ahead with the complex tie-up with Blake Dawson further underlines the current intense focus on Australia, as expanding the firm's Asia network appears to be a prime driver behind the deal.
For A&O, Australia is a strategy that seems to be paying off. While the firm's overall presence is small compared with Australian firms, at around 100 lawyers, the Sydney office is already the firm's second largest in Asia.
A&O Asia-Pacific managing partner Tom Brown comments: "We launched in Australia and Indonesia in 2010 because we were seeing a shift in capital flows around Asia, with a lot of investment from China into Australia and Indonesia, with energy and natural resources driving these capital flows."
The push into Australia demonstrates the extent to which strategy in Asia for most top London firms is about securing growth across the board. With more than 350 lawyers apiece in the region, CC and A&O are, by some distance, the largest magic circle firms operating in the area – although both fall significantly short of the numbers at Norton Rose and DLA Piper, where headcount has been boosted to well over 600 lawyers by large Australian mergers with Deacons and DLA Phillips Fox respectively. (In comparison, Davis Polk, Cleary and Sullivan respectively have 55, 50 and 42 lawyers in the region.)
Linklaters also has a sizeable practice with nearly 300 lawyers, leaving Freshfields an obvious odd man out, with just 152 lawyers. Geographic spread also differs markedly, with Freshfields present in Vietnam but notably absent from the increasingly important Singapore, where the firm closed an office in 2007. Nor is it planning any further expansion into other current hotspots such as South Korea, Australia or Indonesia.
In contrast, Linklaters and CC, not to mention Hogan Lovells and Ashurst, all have plans to significantly ramp up their Asian operations. CC, Linklaters and Ashurst are all planning to open in Korea, with Ashurst and Linklaters also planning office launches in Indonesia.
Similarly, the firms are also planning to significantly increase the amount of business they generate in the region – with both CC and Linklaters expecting somewhere between 15% and 20% of their work to come from Asia-Pacific in future, while Ashurst and Hogan Lovells are both looking at bringing their revenues from the region to nearer 10% of global turnover.
As Linklaters' Salt comments: "Our plan envisages significant growth in Asia over the next three to four years, both in terms of business volume and resource commitment. Hong Kong and China are central to the strategy. Other areas where we are seriously considering investment are Indonesia and South Korea."
Such commitment has so far paid dividends. Linklaters and CC, along with Herbert Smith, are highly-regarded in the local market across most practice areas, with Slaughters also seen as a strong player – demonstrating that links with local firms and a good domestic reputation can prove just as useful as high headcounts.
In the wake of a seven corporate partner walkout in Hong Kong to Latham nearly three years ago, A&O's strength in corporate has been affected, as partners within the firm admit. However, there is no denying its experience in other practice areas, in particular finance, where the firm has been taking a lead on work such as dim sum bonds – the renminbi-denominated bonds proving increasingly popular. Of the magic circle, perhaps the biggest question mark hangs over Freshfields. While five years ago it was considered one of the most effective operators in China and Hong Kong, the loss of several high-profile individuals and its relative lack of size compared to peers has led some to argue the firm must step up its investment.
However, Asia head Robert Ashworth is undeterred, stating: "What's important is the profitability of the work we do. We do quite a lot at the more complex end of the scale where we feel we can add significant extra value to transactions."
By a similar token, some see Herbert Smith as a firm that once punched well above its weight in Hong Kong but that has failed to keep pace with the rising competitive pressure in the market.
The competition UK firms argue with some credibility that their broader practice spread, which includes litigation, competition and larger finance offerings, and their wider geographic reach across Asia-Pacific as a whole will give them considerable protection against both US competition and shifts in the market.
As CC's Charlton (pictured) comments: "Any firm with any global ambition needs to look very closely at Asia so it's not surprising that we're seeing more US firms developing a practice in Asia and particularly Hong Kong. Their strategies have tended to be smaller scale and I doubt they would make the same scale of investment as we have."
UK law firms are probably right in believing they will be resilient. The US firms' expansion plans have clearly already had some effect; however, the scale of the UK firms' presence in Asia means that even the current wave of departures, which have particularly hit Linklaters and Freshfields, will not cause too much damage.
Many of their corporate client relationships are institutionalised and these firms have a pipeline of younger associates and partners ready to push through to take the place of marquee names that may be tempted by the American chequebooks. The biggest immediate threat is the extent to which US firms will pry away instructions from their key banking clients in the region – and here the magic circle will undoubtedly have a challenge on their hands.
There is also a threat to the younger ranks as more US entrants to Hong Kong law are paying New York rates across the board to associates – rather than just for US-qualified associates. The result is a panic that firms are reluctant to admit but that is certainly causing many to review how they retain and attract lawyers while remaining profitable in a very competitive marketplace.
While UK firms have resisted pressure to match US pay scales in London thanks to their home advantage, it will be harder to avoid in Hong Kong if Manhattan-style compensation starts to spread. Hong Kong, along with other parts of Asia, appears to be brewing the kind of full-scale pay war that occasionally sweeps the US and Europe legal markets during busy periods.
"It's a competitive market and clients are taking advantage of that – there's a lot less loyalty to either firms or individuals and clients are seeing it as an opportunity to be aggressive on terms," says Catherine McGregor, managing editor of Chambers and Partners.
"The impact on UK firms isn't yet clear. It's a question of whether there has been enough succession planning to ensure there are enough quality associates to create the next generation of partners. CC is doing well, Slaughters has a model that has withstood the economic crisis and
Linklaters is still a strong firm out there despite a number of losses."
For the magic circle, a key question is whether Hong Kong will play out like London over the last 15 years – a foreign market where their greater numbers and closer cultural links will make them resistant to all but the most dedicated and persistent US rivals. Certainly, the conservatism of their most dangerous New York rivals remains a blessing to the magic circle; while they have gained some highly-regarded individuals and the power of their brands generates industry excitement, it is hard to see topline firms like Sullivan and Simpson Thacher sustaining the level of recruitment they have over the last 18 months.
Yet for Asia to play out like the competitive dynamic in London and the wider European stage would appear to be a best case scenario for the magic circle – the likelihood is that they will only maintain their dominance if they are willing to even more dramatically shift their businesses towards Asia, rewarding more leading Asian lawyers with globally-competitive remuneration and positions of firmwide authority. In this context, pushing into promising markets in Australia and Singapore offers useful strategic ballast to what will likely prove a bruising battle for competitive advantage in Hong Kong.
Rupert Li (pictured), the former CC partner who joined China giant King & Wood last year, is probably more neutral than most on the subject. He believes US law firms' close links with financial institutions and Wall Street firms will make them serious competition for London's top firms in some practices.
He comments: "In London, work is more diverse, but in Hong Kong the plump mandates generally involve the bankers, and those firms beholden to the Wall Street houses will benefit more."
But while opinions differ on which model will best crack Asia, no-one doubts that the market offers both huge opportunity and strategic significance. Indeed, it could be argued that success or failure in Asia will be the issue that defines once and for all which firms will truly attain global leader status: a goal that has transfixed the upper reaches of the global legal market for the best part of 20 years.As Kirkland's Eich says: "In a market that's only going to grow and become more sophisticated, no-one can take their global significance and historical rank for granted... it's a new world out here."
US firms push into Hong Kong law – key hires
August 2011 – Kirkland & Ellis hires eight partners: Skadden Arps Slate Meagher & Flom's Asia corporate co-heads Nicholas Norris and Dominic Tsun and corporate partner Li-Chien Wong; Latham & Watkins' vice global corporate chair and co-chair of Greater China David Zhang and corporate partners John Otoshi and Benjamin Su; and Allen & Overy finance partner Ashley Young and senior associate Douglas Murning, who joined as a partner.
Skadden hires Freshfields Bruckhaus Deringer's former Hong Kong managing partner, Clive Rough, who retired from the magic circle firm in March 2010.
July 2011 – Herbert Smith's Asia head of US capital markets John Moore departs for Morrison & Foerster.
June 2011 – Sullivan & Cromwell launches Hong Kong law practice with former Freshfields Hong Kong managing partner Kay Ian Ng and counsel Gwen Wong.
May 2011 – Simpson Thacher & Bartlett launches Hong Kong law practice with hire of Celia Lam – Linklaters' joint Greater China managing partner – and Christopher Wong – head of Freshfields' China corporate practice.
December 2010 – Cleary Gottlieb Steen & Hamilton launches Hong Kong law practice with hire of highly-rated Norton Rose capital markets partner Freeman Chan.
November 2010 – Davis Polk & Wardwell recruits Linklaters' former Beijing head Paul Chow.
October 2010 – Milbank Tweed Hadley & McCloy announces local law launch with hire of Dieter Yih from Australian leader Mallesons Stephen Jaques.
August 2010 – Davis Polk launches Hong Kong law practice with hire of Bonnie Chan from the Hong Kong Stock Exchange and Antony Dapiran, Freshfields' high-profile Beijing managing partner.
January 2010 – Shearman & Sterling launches Hong Kong law practice with hire of Colin Law and Peter Chen from O'Melveny & Myers.
A busy summer – significant Asia developments in 2011
August – Squire Sanders & Dempsey agrees Perth launch with majority of Minter Ellison's local office.
August – Orrick Herrington & Sutcliffe strengthens Beijing corporate with Thomas Mann from Hogan Lovells.
August – Herbert Smith Asia managing partner Ashley Alder quits to join Hong Kong regulator.
July – Olswang announces Singapore launch.
July – Mallesons Stephen Jaques in talks to tie-up with King & Wood in a deal potentially uniting the largest law firms in Australia and China.
July – Ropes & Gray opens in Shanghai.
July – Reed Smith signs up Dorsey & Whitney former Asia head Jay Yan for Shanghai launch.
July – Linklaters recruits Morrison & Foerster corporate partner to China practice.
June – Canada's Gowlings prepares for Beijing launch.
June – Mayer Brown announces Singapore office launch.
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