Is the Magic Circle’s dominance in the UK M&A market under threat?

‘It’s a snowball effect. Look at private equity (PE) – that used to be dominated by Clifford Chance (CC), Freshfields and Ashurst but now it’s US firms,’ warns Weil London head Mike Francies. ‘The same hasn’t happened in M&A yet but nearly all of the top US firms here are now trying to build it. In my view, in the same way that a range of top UK firms have fallen behind the Magic Circle, it’s inevitable that the Magic Circle will end up falling behind the US firms for global M&A.’

On the face of it, there’s nothing new about the top US firms’ assault on the City legal market. Having pushed remuneration packages up to eye-watering seven or eight figure sums for the most coveted names, their extensive hiring sprees and growing dominance in areas such as PE and leverage finance have been well documented.

But, to date, they have largely been unable to replicate that success in the City’s highly competitive premium public M&A market, where relationships are held far tighter and the need for scale has tended to exclude all but the biggest UK players.

After all, if firms as established as CC and Allen & Overy (A&O) remain unable to break into the very top echelon of M&A advisers in the minds of some, what hope is there for US upstarts, even if they have been in the City for 30 years or so?

However, recent lateral hiring, backed up by deal data, suggests that in a booming M&A market enjoying record levels of activity – a full quarter of which is being driven by PE – this position may be about to change.

Hiring boom

US firms’ corporate ambitions in the City have tended to fall into three camps – those, like Kirkland and Simpson Thacher, which have aggressively and very successfully targeted the financial sponsor market; those like Sullivan & Cromwell, Cleary Gottlieb and Davis Polk, that have made one or two good hires to develop small but high-quality practices advising mainly US corporates/financial adviser clients; and finally, those like Latham and White & Case which have been trying to build something closer in form to a UK firm. (The latter perhaps challenged recently by the departure of Patrick Sarch to relaunch the M&A team at Hogan Lovells and the imminent departure of Ian Bagshaw.)

Surging levels of PE-driven M&A (PE investment hit its highest global total since the financial crisis in 2020 at $608.7bn according to Mergermarket) mean it has already been possible for US firms like Kirkland to climb UK and European M&A league tables without deviating from their PE-focused client base.

“Each of our partner hires has been a success and it has given us increasing confidence in our strategy and, in turn, has made us a more attractive proposition to laterals.”
Lorenzo Corte, Skadden

But the latest shift in focus and therefore the potential new risk to UK firms comes from the US firms which are now trying to grow their plc client base – a move which, if successful, would mean attempting to take on the UK’s top players on home ground.

Since January 2020, US or transatlantic firms have hired nine M&A partners in London (see box below) and a full five of these have joined leading US firms from the Magic Circle, with one, Philip Cheveley, joining Shearman & Sterling from Travers Smith.

Weil and Skadden have both picked up two laterals apiece in the shape of David Avery-Gee (ex Linklaters) and Murray Cox (a rare partner exit from Slaughter and May) at Weil, and Bruce Embley (Freshfields) and Simon Toms (A&O) at Skadden. Toms joined Skadden a few months after his former A&O colleague George Knighton, although both were hired at the same time.

Latham, meanwhile, picked up Freshfields’ rising star Sam Newhouse in April last year in a busy month that also saw the firm hire two other corporate partners from non-Magic Circle firms.

With the exits coinciding with some senior retirements/management moves at firms such as Linklaters and Freshfields, the impact of the departures could be magnified, not only on the firms they are joining but also on those they are leaving. So could they finally open the door to the US firms to the coveted plc market and are they a threat to the Magic Circle in the same way that private equity hires have been?

Skadden, which currently has more leading individuals ranked in The Legal 500 London M&A guide than any firm besides Slaughters, certainly seems to be on a mission to demonstrate its position after the retirement of Michael Hatchard left rivals questioning its bench strength in the City. Including PE partners Richard Youle and Katja Butler, the firm has added five corporate laterals in five years and has made up four new partners organically over the same period.

Lorenzo Corte, co-head of the London M&A group, comments: ‘Rich and Katja’s hires gave us the impetus to see what else we could do. We added Peter Newman [restructuring], then A&O had a period of instability [around the time of its failed merger talks with O’Melveny & Myers] and we hired Simon [Toms] and George [Knighton], and then Bruce [Embley] became available. Each of these partners has been a success and it has given us increasing confidence in our strategy and, in turn, has made us a more attractive proposition to laterals. We now have 16 equity partners in the London corporate group, which makes us one of the largest corporate teams at Skadden.’

Still only six months into his new role, Embley is clear about his motivation for joining. ‘If there was one thing that encapsulated the main reason I moved, it’s the transatlantic importance of M&A,’ he explains. ‘Being able to compellingly deal with both sides of the Atlantic is increasingly the gating item. Skadden is one of the very few firms able to do so.’

It’s a position shared by Cox and David Avery-Gee over at Weil, who both point to the strength of that firm’s buyout practice as well as the increasing investment from US corporates as advantages to their practices from their new home.

‘Being in a US firm we are very fortunate because a lot of corporate M&A has been driven from the US, both SPACs (special purpose acquisition companies) and traditional corporates, but also because of the importance of PE, even in corporate M&A,’ comments Avery-Gee. ‘A lot of work exists at the intersection of PE and public M&A and both Murray and I are very comfortable in that space.’

All three firms point to mandates that demonstrate the progress they’re making in the City. Skadden’s advisory roles since the start of 2020 include advising billionaire brothers Zuber and Mohsin Issa and PE house TDR Capital on their £6.8bn acquisition of a majority stake in Asda from Walmart, as well as advising Norway’s Adevinta on its $9.2bn acquisition of eBay’s classifieds business.

Weil, meanwhile, has been advising Willis Towers Watson on its $80bn combination with Aon from London and, significantly, is acting for the UK government as part of a 50/50 consortium with Bharti Global in the acquisition of OneWeb Global – a role that some may have expected to go to a Magic Circle firm like Slaughters or Freshfields.

Latham points to its role advising US company NVIDIA on its acquisition of UK software company Arm (one of the largest UK acquisitions last year) as one marker of its success in London, as well as its role in 2019 advising on the attempted sale and restructuring of UK-listed Thomas Cook.

London corporate co-chair Nick Cline tells The In-House Lawyer: ‘It’s one thing to be in the London M&A market but it’s another to be participating in truly business-critical and transformational deals. Winning those is a good indicator not only that you have a presence here, but also that you have traction. Over the last few years we’ve increasingly taken on meaningful roles on critical deals.’

And, with a bench that multiple partners at UK firms suggest is the broadest of the US firms in London, Latham is keen to up its share of mandates from UK-listed companies further.

Says Cline: ‘We’re now more than 500 lawyers in London and it’s important that we are advising a meaningful share of public companies. Increasing our public company practice in London has definitely been a strategic priority for us alongside PE and finance.’

Scott Hopkins at Skadden comments: ‘One of the big shifts has been our traction with plcs. We started to develop that business a few years ago and have acted for a third of the FTSE 100 in recent years, and have several ongoing defensive retained corporate counsel mandates. The relationships are ongoing, the work is broadening, we’re gaining traction. Asda was a sign of this: it was bringing a great British brand back into UK ownership – almost a reversal of what we’ve previously been known for.’

As a goal though, it remains an ambitious one, as Cline himself admits, saying: ‘Corporate is one of the hardest practices to grow – it takes time and perseverance. With deep-seated relationships it is a serious endeavour to break into the market in a meaningful way. You can’t do it overnight.’

But is it possible?

The UK position

With its reliance on best friends instead of international offices and its historic dominance of the UK-listed company adviser rankings, Slaughters is the firm rivals frequently like to flag as a candidate for coming under pressure from the rise of US firms and the globalisation of business. This scrutiny heightened when the firm failed to feature in Mergermarket’s top 20 law firms by global deal value in 2020 – a year in which the UK top 20 advisers by value notably included 12 US/transatlantic firms but no sign of the likes of traditional UK stalwarts like Ashurst, Travers Smith or Macfarlanes.

Corporate head Andy Ryde is relaxed about the firm’s position though, pointing to the strength of its core adviser relationships at both FTSE 100 and 250 level: ‘Every year we analyse whether the threat [from US firms] is raised, given the relentless ongoing partner hires, but we’re conscious that US firms face the challenge of whether they are willing and able to break through and become full-service practices that can act in full relationships for large corporates. They’re nowhere near there yet. The main threat has remained on the PE side. Obviously, our partners get calls from US firms who can pay a lot of money but we look at it for the long term – we’re fortunate in having an embedded, collegiate culture and fantastic relationships. As a result, we rarely lose partners and we’ve only hired in two partners ever.’

“No large [UK] corporate has got to the stage where they would say ‘let’s use a US firm instead of Slaughter and May, Freshfields or Linklaters’ as their principal adviser.”
Andy Ryde, Slaughter and May
He adds: ‘No large [UK] corporate has got to the stage where they would say “let’s use a US firm instead of Slaughter and May, Freshfields or Linklaters” as their principal adviser. If US firms want to mirror what Kirkland and Latham have done on the PE side, then they have the resources to invest in hiring partners and who’s to say that the pendulum will not swing eventually. But it’s expensive to do and takes time.’

Clifford Chance corporate partner Melissa Fogarty is equally confident on the back of a year that saw the firm act for Telefónica on the O2/Virgin Media merger and Intact Financial Corporation on its offer for RSA Insurance Group, among other highlights.

‘For me, this sort of work isn’t about having a single big-name partner. It’s about decades of expertise cultivated within the team and deep bench strength to support public M&A transactions. It’s also about focusing on building relationships with clients over the long term – not just the one big public M&A event. I find it hard to imagine a corporate client saying: “I have my relationship firms but I’m now going to look for a new firm for takeover defence.” That relationship comes from all the other advice – not just corporate – that we provide. You build these relationships over a number of years and this means you’re then in a good place to support clients when there is a public M&A event.

James Inglis at Linklaters notes: ‘It’s a competitive market and [US firms] continue to invest significantly but you need quite broad teams to be able to do those big strategic deals. Many wouldn’t have the depth across the board to execute multiple deals, they can’t deliver in the same way as us. You also need specialist lawyers who understand the nuts and bolts of how things work, particularly in some of the regulated sectors which are very active at the moment. With the largest corporate practice in London, we are well-positioned.’

Despite rivals suggesting that Linklaters’ current M&A line-up is a little lighter on big personalities than it used to be following the retirement of Charlie Jacobs, Inglis and fellow partner Jessamy Gallagher point to a roster of up-and-coming partners set to carry the practice into the future. These include women such as Sarah Flaherty, Lisa Chang, Kanyaka Ramamurthi and Fionnghuala Griggs, developed under the corporate leadership of incoming senior partner Aedamar Comiskey, as well as the likes of Dan Schuster-Woldan, Owen Clay and Simon Branigan among its core bench.

The bench-over-star-individuals strategy is also in favour at A&O, where corporate head David Broadley says: ‘Our corporate practice has really grown dramatically over the last decade. The deals we’ve been involved in are really a reflection of that growth. We always present a bench of partners. While we have leading individuals, we’re not a practice that has promoted individuals over the team. This may not always have helped raise external profile, but our clients like it and it works culturally. And in practice, as we now advise about a quarter of the FTSE 100 and have shown some of the biggest growth in the FTSE 100 rankings.

‘We’re not blind to the ambitions of US firms though. They’re focusing hard on it and will seek to build momentum but corporate clients rely on firms like ours on multiple levels.’

“This sort of work isn’t about having a single big-name partner. It’s about decades of expertise cultivated within the team and deep bench strength to support public M&A transactions.”
Melissa Fogarty, Clifford Chance

Meanwhile, at Herbert Smith Freehills (HSF), which has managed to avoid seeing any of its M&A partners defect to US rivals in recent years but has added a couple of partners to its wider corporate practice, including former Kirkland PE partner David D’Souza, Caroline Rae points to the need for Takeover Panel-experience as another barrier to US firms.

‘There aren’t that many firms that have the public M&A experience we do. We have a bench of partners of all levels who are very experienced in public M&A work. Code work is something you have to live and breathe – there’s a need to understand how the Panel thinks, what the practice is and how the market works. That’s why the top UK firms still have an advantage – and because of the depth of their UK-listed client base.’

The data

Looking at the data from Mergermarket (see below) since 2010, it’s clear that while there have been significant changes in the European, UK and global legal adviser rankings, with the growing dominance of US firms impossible to miss, so far the biggest UK players have held their positions pretty well.

Indeed, five UK firms feature in the global top 20 by value, which is the same number as in 2010 and more than in 2015 (albeit most are slightly lower in 2020 than 2010). Those firms coming out of the global rankings have primarily included some international independents, while many of those coming out of the UK rankings have been firms in the next tier down from the Magic Circle.

The perennial question though is whether this will remain the case if UK firms remain unable to crack the US legal market in any meaningful way, given so much overseas investment comes from across the Atlantic, whether public or private.

‘Where does capital come from now?’ asks Cox at Weil. ‘A lot is from the US. Being able to advise on transactions such as de-SPACs, on both sides of the Atlantic when they’re buying European targets, is another tool in the M&A armoury.’

Hopkins at Skadden adds: ‘US firms are achieving gains in the UK but the reverse isn’t true to any extent in the US. We’re able to say to clients “we can cover you in Europe and we lead in the US” – that’s an important asymmetry and it isn’t going away. SPACs, de-SPACs, activism, national security infrastructure, foreign investment – 30 years’ experience in the US in these areas is helping to drive us in the UK.’

The US problem is one few can deny, however with the likes of CC, Freshfields and HSF advising on the biggest global (and US) deal of Q1 this year – AerCap’s $31bn bid for GE Capital Aviation Services – not to mention Freshfields’ role earlier this year on the high-profile sale of British online car retailer Cazoo to a US SPAC (a deal some may have expected to be handed by a US firm) – they are arguably holding up to scrutiny better than expected.

In the longer term though, as numerous lockstep rejigs and failed merger attempts testify, they are far from unaware of the challenge.

Piers Prichard Jones at Freshfields comments: ‘Since the financial crisis it’s been increasingly difficult to sustain a top-tier practice in London without having a credible US practice. I’d say it’s increasingly difficult to be a top player in London without it. We can do it without a merger; it’s the most competitive legal market in the world so you can’t take on the challenge lightly but it’s a strategic imperative and we’re ambitious to develop. We’re very pleased with how it’s going in New York and Silicon Valley.’

Says Inglis: ‘We are constantly looking at opportunities in the US region. We recently have a new head of the US practice in Tom McGrath – we are aware that the Americas, and the US in particular, offers a significant market we haven’t yet fully tapped.’

Whether this necessity to build in the US ultimately drives more merger activity or a continuation of the lateral recruitment drive that saw Freshfields add Hogan Lovells tech partner Adam Golden remains to be seen but in the interim one thing is clear.

“It’s naïve to think US firms are not going to compete fiercely to try to get that work. You can’t sit in your citadel and think everything is going to be fine. You have to go out and engage.”
Jennifer Bethlehem, Freshfields

The UK elite are facing greater challenges on their own turf than ever before. In truth, the investment barrier to cracking the public M&A market means that in the UK they are unlikely to lose their position as key corporate advisers. However, the odds are that they will have to fight harder to retain their client base and it is inevitable that there will be some client casualties in the short term.

As Cline comments: ‘They will always play a significant role in the UK corporate arena but they know that they also have to fight to retain their market share more – a number of US firms are a really credible alternative in the London market now for big-ticket work.’

The greater long-term risk is in the global M&A space. In a market where US corporates, including tech companies, are dominating M&A investment, not to mention the surge in financial sponsor activity, the pressure is on to come up with a solution.

‘We’re not complacent’ says Freshfields’ Jennifer Bethlehem. ‘We see the advances they’ve made in PE but it feels like they’ve got some distance still to go to challenge in public M&A. I don’t think it’s going to happen quickly – if at all. It’s naïve to think they’re not going to compete fiercely to try to get that work though. You can’t sit in your citadel and think everything is going to be fine. You have to go out and engage in the market. You can fear these things or go out with confidence and say “let’s compete”. We’re not defensive. The firms that recognise that they have to change; to be agile, ambitious and to think unthinkable thoughts will be the ones who are most successful. Not trying to hold on to what you’ve had, but to embrace the challenges.’

Key City M&A hires – a timeline

Top legal advisers by global deal value: Q1 2021 – Mergermarket

Rank Law firm Value ($bn) Deal count
1 White & Case 172.4 117
2 Kirkland & Ellis 158.9 212
3 Skadden 155.8 74
4 Cravath 152.1 22
5 Latham & Watkins 134 122
6 Davis Polk 128.9 54
7 Sullivan & Cromwell 125.1 47
8 Freshfields 101.6 58
9 Paul Weiss 94.8 44
10 Wachtell, Lipton, Rosen & Katz 94 22

Top legal advisers by UK deal value: Q1 2021 – Mergermarket

Rank Law firm Value ($bn) Deal count
1 Cravath 44.8 6
2 Slaughter and May 44.2 17
3 Skadden 42.2 12
4 Davis Polk 37.5 12
5 Ashurst 37.2 8
6 Kirkland & Ellis 36.3 35
7 Herbert Smith Freehills 27.1 12
8 Linklaters 20.5 13
9 Freshfields 17.2 23
10 Morgan Lewis 16.6 6

Top legal advisers by UK deal value: 2020 – Mergermarket

Rank Law firm Value ($bn) Deal count
1 Freshfields 134.2 65
2 Latham & Watkins 131.4 72
3 Herbert Smith Freehills 99 47
4 Cleary 92.3 14
5 Wachtell, Lipton, Rosen & Katz 84.8 7
6 Simpson Thacher 79.2 19
7 Linklaters 73.2 70
8 White & Case 72.1 66
9 Weil 70.7 44
10 Clifford Chance 64.9 56

Top legal advisers by UK deal value: 2010 – Mergermarket

Rank Law firm Value ($bn) Deal count
1 Slaughter and May 32.7 42
2 Linklaters 30.6 34
3 Herbert Smith/Gleiss Lutz/Stibbe 30.1 28
4 Freshfields 30 41
5 Allen & Overy 25.6 34
6 DLA Piper 17.9 87
7 Clifford Chance 14.7 25
8 CMS 13.4 46
9 Travers Smith 11.7 49
10 Latham & Watkins 10.2 12

Top legal advisers by global deal value: 2020 – Mergermarket

Rank Law firm Value ($bn) Deal count
1 Latham & Watkins 470.2 455
2 Sullivan & Cromwell 398.1 140
3 Wachtell, Lipton, Rosen & Katz 394.8 71
4 Freshfields 363.8 199
5 Cleary 332.8 106
6 Skadden 331 197
7 Kirkland & Ellis 329.6 604
8 Davis Polk 324.2 171
9 Weil Gotshal 282.7 245
10 White & Case 277.7 360

Top legal advisers by global deal value: 2010 – Mergermarket

Rank Law firm Value ($bn) Deal count
1 Skadden 347 210
2 Sullivan & Cromwell 337.2 158
3 Cleary Gottlieb 280.2 132
4 Latham 276.7 302
5 Simpson Thacher 266.8 151
6 Freshfields 265.4 230
7 Linklaters 213.6 246
8 Davis Polk 181.1 99
9 Allen & Overy 176 236
10 Weil 166.3 169

UK legal 500 premium M&A rankings since 2009

Firm 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Allen & Overy 2 2 2 2 2 2 2 2 2 2 2 2 2
Cleary Gottlieb 7 5 4 4 4 4 4 4 3 3 4 6 6
Clifford Chance 1 2 2 2 2 1 1 2 2 2 2 2 2
Davis Polk 7 7 7 7 6 5 5
Freshfields 1 1 1 1 1 1 1 1 1 1 1 1 1
Herbert Smith Freehills 2 2 2 2 2 2 2 2 2 2 2 3 3
Hogan Lovells 4 4 3 3 3 3 3 3 3 3 3 4 5
Latham 7 6 5 4 4 4 4 4 4 4 3 3 3
Linklaters 1 1 1 1 1 1 1 1 1 1 1 1 1
Shearman & Sterling 7 6 4 4 4 4 4 4 3 3 4 5 5
Simpson Thacher 8 8 6 5 5 4 4 4 4 4 3 3
Skadden 4 4 3 3 3 2 2 2 1 1 3 2 2
Slaughter and May 1 1 1 1 1 1 1 1 1 1 1 1 1
Sullivan & Cromwell 9 8 8 6 5 4 4 4 4 5 5 4 4
Weil 5 5 4 4 4 3 3 4 4 4 4 4 4
White & Case 7 5 4 5 5 5 4 4 4 4 3 4 4

Total leading individuals by firm – UK Legal 500 premium M&A rankings since 2009