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Losing your touch The Magic Circle’s market share of the LB100 is falling. Legal Business talks to the Magic Circle clients who have taken their business elsewhere – and finds out why VANESSA PAWSEY
‘I THINK THE VIEW OF THE MAGIC Circle is a self-perpetuating myth,’ says Nestlé European general counsel Trevor Brown. ‘I can’t see the difference between those firms and our corporate counsel, Norton Rose.’ Brown should know. Prior to December 2002, the Swiss food giant had favoured Allen & Overy for its corporate and capital markets transactions, and Freshfields Bruckhaus Deringer for competition work. This all changed in January 2003 after an extensive panel review that saw 30 firms across Europe vie for a place at Nestlé’s table. The result was hardly a ringing endorsement for the Magic Circle. While Freshfields remains the main competition adviser, Allen & Overy was given the heave-ho. Of all the firms that could have stepped into the breach, it was ultimately Norton Rose that got the nod – a lucrative reward for a persistent four-year courtship. Brown’s choice is becoming less and less unusual. Dream clients that automatically turned only to Magic Circle firms in the past are now starting to look elsewhere. For the chasing pack, persistence is key – and working those contacts tirelessly.
How to win it In December 2002, Nestlé announced that, as part of a review of its legal function, it was going to set up a panel.
Norton Rose corporate finance partner Campbell Steedman had a long standing relationship with Nestlé’s Trevor Brown from his previous firm Sinclair Roche & Temperley, now part of Stephenson Harwood. When he moved to Norton Rose seven years ago he carried on building the relationship – this despite receiving a negligible amount of work from Brown’s company. ‘I would meet Trevor in Geneva every six months for a catch-up,’ Steedman says. ‘Over time we got other partners to meet the legal team and soon the relationship was pretty comfortable. At this point we still hadn’t been instructed on anything substantive, but we got the impression that the attention we gave them was very welcome.’ Four years later, when Norton Rose was finally invited to pitch for a place on the panel, Steedman knew he needed to come up with a presentation that would stand out, and knowing he was pitching
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> against the Magic Circle, he shied away
the cheapest, but it made sense from selling Norton Rose as a large to us because we have so international firm. many interests in so many ‘We turned it round and looked at jurisdictions,’ Brown says. Nestlé’s business rather than our own. We ‘Lots of firms come out with built on the idea of relationships and trust the usual stuff about efficiency and adding value to their being much more business,’ Steedman says. ‘The important than market perception of our hourly rates but weakness was that our internaif you can’t tional offices didn’t have the benchmark hourly right skills. But because I was rates then you can’t based in Frankfurt, I had a good make any feel for the European network comparisons.’ and was very open about its He also felt that ability.’ a lot of the firms Steedman saw the written pitching were presentation as the hardest part, only interested in knowing that the Magic Circle the top-end work, firms could claim historically to and while they have stronger figures and better would throw their league tables. So once Norton best people at those Brown: Norton Rose is no different to Magic Circle Rose was selected as one of the transactions, the final 16 that would make an low-value deals oral presentation, Steedman felt victory was would be staffed by a different very much up for grabs. team of more junior lawyers. ‘At this point we turned up with a team Norton Rose’s international including associates, rather than wheeling network isn’t as developed as some of its competitors but after a tour of its main offices, Brown was happy to leave the resource issues to Steedman. Norton Rose was picked from a shortlist of six which included John Murray, Ecofin Allen & Overy, Linklaters, Mayer, Brown, Rowe & Maw and Freshfields. Slaughter and May out the senior or managing partner. Our refused the offer to pitch on the attitude to Nestlé is that we are very happy basis that it had a conflict, while to be seen as an extension of its in-house Clifford Chance was ruled out team and we wanted the company to see because it acts for Findus. the people it would be working with,’ he ‘Overall,’ Brown summarises, told Legal Business. ‘we felt very comfortable with Nestlé was duly influenced. According to Norton Rose and believed that Trevor Brown, simple efforts paid off: when they would look after all our Norton Rose noticed that the company had deals appropriately.’ big interests in Spain, a jurisdiction where it doesn’t have an office, it teamed up with Spanish law firm Garrigues for the pitch. Simmons strikes gold Norton Rose also proposed charging a single Simmons & Simmons’ highly European rate (as opposed to the more publicised work for the consorcommon variable of local rates). ‘It wasn’t tium which put together
‘We were very impressed with Slaughters, which was much more competitive than we had anticipated.’
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Aquavit, last year’s successful bidding vehicle for Northumbrian Water, is one of the most high-profile examples of big-ticket work moving outside of the Magic Circle against expectations. Simmons pitched for the work against a number of firms including Freshfields, Slaughter and May and Clifford Chance. The deal hit the headlines because the consortium, comprising Ecofin, Collins Stewart and Deutsche Bank, put together an unusual structure which has since become known as an accelerated IPO. The consortium assembled a group of institutional investors which agreed to buy shares in a special purpose vehicle that competed in a public bid for Northumbrian Water and then funded the successful bid by listing within days of the deal closing. According to the chairman of Ecofin, John Murray, the consortium was looking for a firm that was willing to accommodate success fee terms, had decent relevant experience and had the ability to see what the consortium was trying to do. With Allen & Overy conflicted and Linklaters acting for the seller, Simmons had to beat off competition from three Magic Circle firms: ‘Clifford Chance was of the view that it wasn’t conflicted but we took a different view, while Freshfields had relevant experience but appeared to be sceptical of our chances of success and were
BANKING ON IT The Magic Circle’s dominance of the investment banking world is not about to collapse: banking relationships are the hardest to crack. It remains rare for any bank to venture far from its established relationship in any given area. According to one major investment banker, there are two reasons for this. ‘First, the opportunities where we choose the legal adviser are not that frequent and we are often working for a client that has his own relationships,’ he says. ‘Secondly, there’s a number of firms that we know very well. Advising on one big deal doesn’t necessarily lead straight away to the next one. All it does is give a better chance of being on our radar screen.’ The radar is detecting movement: in terms of the Legal Business 100’s top UK firms, the Magic Circle’s market share is slipping.
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NORTON ROSE AND NESTLÉ
1 What’s happened: Norton Rose has won the role as Nestlé’s corporate and capital markets adviser, fending off competition from its previous corporate firm of preference, Allen & Overy. It didn’t succeed in usurping the competition work from Freshfields Bruckhaus Deringer, which continues to advise – but for how long remains to be seen. Nestlé general counsel Trevor Brown is unhappy with Freshfields, which is advising one of the Swiss confectionery conglomerate’s competitors in litigation against Nestlé on the Continent. How it was won: Trevor Brown has been bowled over by the dedication of corporate finance partner Campbell Steedman, who courted the company for four years before being given a chance to pitch for this role. Who lost out: Allen & Overy.
What it’s worth: The win will deliver fees of between €1m and €2m per year to Norton Rose.
less commercial on fees than other firms,’ Murray says. ‘We were very impressed with Slaughters, which was much more competitive than we had anticipated,’ Murray adds. ‘But in the end, Simmons emerged as the compromise candidate because it had worked on Southern Water and had been recommendation by Veolia, but also because it came up with a proposition over fees which met our requirement.’ The firm devised a system of charges so that if the consortium got into the second round of the bidding, in which the vendor had agreed to provide substantial reimbursement, the firm would recoup some of the fees from the first round. At Simmons, Steven Bryan led on the M&A, while Tim Field led on the accelerated
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LB says: Great persistence from Norton Rose paid off. The next challenge must be to win the competition work.
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Nestlé says: The Magic Circle is a selfperpetuating myth.
IPO; Nick Fisher led Berwin’s GUS on the debt side. Large financing deals have The corporate tended to be the domain of a department faired small group of elite banking particularly well on firms, so last year Berwin the transaction – Leighton Paisner turned some Ecofin is a new heads when it won an instrucclient to the firm, tion from GUS to advise on its while Collins £900m multi-currency credit Stewart and facility. Marc Palley, BLP’s head Deutsche Bank are of banking and capital markets, new clients to the led the team. corporate departBLP and Linklaters are GUS’s ment – giving the two firms of choice. Traditionalfirm the chance to ly, BLP advises on commercial capitalise on three matters, while the big-ticket Bryan: led Simmons’ M&A team in Deutsche deal new relationships. corporate and banking work It’s done pretty well. goes to Linklaters. No surprises there. But Ecofin is currently launching on this occasion, BLP was asked to pitch a global utilities hedge fund on against Linklaters (and one other Magic which it has instructed Circle firm). It won. Simmons. Meanwhile Collins According to group finance director Peter Stewart has instructed the firm Blythe, the company liked the BLP approach. on the accelerated IPO of ‘It wasn’t just cost. It had the best idea on Center Parcs and is understood how the structure should work,’ he explains. to be instructing it on National Grid Transco’s disposal of five SIMMONS & SIMMONS of its eight gas distribution AND DEUTSCHE BANK networks. Simmons made headlines when it lost out – to Norton What’s happened: In a head-turning move, Rose, no less – on the acceleratSimmons & Simmons won a pitch to act for ed IPO of PD Ports, but the winning bidder (the consortium that put according to corporate partner together Aquavit) in the highly publicised Tim Field, the relationship is acquisition of Northumbrian Water. This is intact. Norton Rose is close to the first time that the corporate team has Hawkpoint, which is the been instructed by Deutsche Bank. financial adviser on the PD Ports deal. How it was won: The consortium was won The hardest relationship over by a recommendation from Veolia, a to consolidate has been with clever fee structure, and the firm’s willingness Deutsche. The bank is a subto understand what the consortium was trying stantive client of the firm’s to achieve. capital markets practice, so Simmons sits on its general Who lost out: Clifford Chance, Freshfields panel. But since Northumbrian Bruckhaus Deringer and Slaughter and May. Water, the corporate department has been left high and LB says: Northumbrian Water was one of the dry. most high-profile deals in 2003 and winning ‘It’s a long game and no one the work is a real coup for Simmons. expects fireworks straight away,’ However, it needs to capitalise on the relaField says. ‘Deutsche has longtionship with Deutsche to reap the long-term standing relationships with a benefits. number of firms – in the context of that background we What it’s worth: This win brought Simmons think we’ve made significant a windfall of £1.5m. progress.’
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‘I haven’t used a non-Magic Circle firm in the past on financing but I have seen them on the other side and have been very impressed. We know from previous experience with BLP that they have some strong people in other areas and it made sense to have a look at their banking people. I was entirely satisfied that the quality was just as good. The key thing is to have a very good partner.’ He adds that the company would consider using BLP on any future financing, whatever the size.
Trendsetting There is an increasing tendency for clients to stick with their day-to-day corporate
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What’s happened: DLA won the role of adviser to Ping An Insurance in a pitch for the company’s $1.84bn IPO.
How it was won: DLA advised Ping An on its corporate and insurance work for six years and when it came to its IPO, Ping wanted the firm on board. Who lost out: Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters (who subsequently acted for the underwriters).
LB says: It’s an increasing trend. Companies like having a single adviser. What it’s worth: DLA reaped £300,000£400,000. Woodman: likes to choose best lawyers for each job
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BERWIN LEIGHTON PAISNER AND GUS
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‘I haven’t used a nonMagic Circle firm in the past on financing but I have seen them on the other side and have been very impressed.’ Peter Blythe, GUS
advisers even when major transactions come along. Two years ago, the market gasped when NTL instructed Travers Smith Braithwaite, its corporate adviser, on its massive restructuring. A more recent example is DLA, which in June closed the giant $1.84bn IPO of Ping An Insurance – currently the largest IPO in Hong Kong and expected to be one of the largest of 2004 worldwide. The team was led by corporate finance partner Andrew Lui and included partners Mabel Lui and Roy Chan. Chan brought the relationship with Ping An to DLA when he moved there from Ince & Co in 1998. In the last four years the firm has advised the company on all of its corporate and insurance work. When it came to the IPO, DLA was asked to pitch in a beauty parade to select company and underwriter counsel alongside Clifford Chance, Freshfields and Linklaters. According to Chan, DLA won because it knew the company so well. The fact that it couldn’t offer US capability didn’t matter: Sullivan & Cromwell was brought in to advise on the 144a placing. Another area where smaller firms have been able to
What’s happened: Berwin Leighton Paisner was asked to pitch against GUS’s usual corporate and banking counsel Linklaters and one other Magic Circle firm on a £900m multi-currency credit facility. GUS is not a new client for BLP but it is the first time the firm has been considered for, let alone won, a major piece of transactional work. How it was won: Peter Blythe was impressed by the effort BLP put into the pitch and the structure it came up with for the deal. Who lost out: Linklaters.
LB says: According to Peter Blythe, BLP will be considered for all financing deals in the future – and that could be worrying for Linklaters. What it’s worth: BLP notched up £50,000£100,000, and the future looks rosy.
make particular headway is private equity, because of the Magic Circle’s late entry to the market and the current absence of trade buyers. Some of the largest private equity deals are lawyered by non-Magic Circle firms. Macfarlanes recently advised Alchemy Partners on Allianz Capital Partners’ €1.2m acquisition of Four Seasons Health Care. Four years ago, Macfarlanes pitched against Clifford Chance, Shearman & Sterling, Eversheds, and Nabarro Nathanson – and won the role as sole adviser. Sue Woodman at Alchemy explains that the company decided on a single provider because it finds it works better to be considered an important client. ‘Having one firm that knows you inside out and doesn’t have to relearn all the facts is an economy of sorts,’ she says. Alchemy doesn’t do a huge amount of European work, but Woodman is happy for Macfarlanes to co-ordinate the work it does. She says, in her experience, it works better than instructing an international firm. ‘We think, for example, that fund work and M&A is done best at different firms and
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Steedman: spent four years building links with Nestlé
we like having the ability to choose the best lawyers for each job,’ she says.
Decreasing circles
MACFARLANES AND ALCHEMY PARTNERS
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All of these examples are large transactions on which any Magic Circle firm would have been commercially excited to advise. In each case, the firm that won did so in a pitch and was selected after close scrutiny. None was awarded the job on the basis of lower fees, which is often the assumption. In every case clients have found a quality of work equal to that in a Magic Circle firm, and a firm able to offer something extra. Listening to the client’s needs, understanding what it is trying to achieve and coming up with innovative fee structures that aren’t necessarily the cheapest but which suit both parties, are key. Norton Rose wooed Nestlé for four full years before it was asked to pitch for the panel. But winning the Switzerland-based client is proof that international clients don’t accredit everything to a highly developed European network. The attributes of the Magic Circle firms are welldocumented, but Brown says his protracted research found disadvantages. For example, he says, service departments such
as IP and employment can be weaker. For Simmons, its relationship with Deutsche is less clear cut. The bank hasn’t used Simmons’ corporate team since Northumbrian Water. Still, the team impressed the consortium and the bank is likely to at least consider the firm on future transactions. Simmons’ best bet is to take a leaf out of Norton Rose’s book and sit tight, keep up the contact and be patient. Last year, the Magic Circle firms’ profitper-partner figures were down, while many of the mid-tier firms managed significant hikes – the glaring message is that it’s anyone’s market right now. Clients are just waiting to be won over. The Magic Circle can’t ignore the evidence. But are they worried? According to Allen & Overy partner Gary McLean, who led the pitch for Nestlé and ultimately lost, the deal shift isn’t a threat. ‘The change is incremental – it’s noticeable but not so great that our business model needs to change.’
What’s happened: Macfarlanes advised Alchemy Partners on its disposal of Four Seasons Health Care to Allianz Capital Partners for €1.2m. It wasn’t unexpected and Macfarlanes is sole adviser to Alchemy. This is work that any Magic Circle firm would love to get its hands on. How it was won: Macfarlanes won a pitch four years ago against four other firms. Who lost out: Clifford Chance, Shearman & Sterling, Eversheds and Nabarro Nathanson. Alchemy says: It’s more than happy instructing Macfarlanes as its sole adviser.
LB says: When it comes to advising the private equity houses, the Magic Circle firms would love a tighter grip (except Clifford Chance, which is already top tier). They’ll have to fight for it – Macfarlanes shows no signs of letting go. What it’s worth: Last year, Alchemy accounted for over £4m in fees to Macfarlanes.
THE MAGIC CIRCLE’S MARKET SHARE: SLOWLY, SLOWLY FALLING 2002
£3.42bn (40.6% of £8.42bn total) 2003
£3.63bn (40.4% of £8.98bn total) 2004
£3.6bn (39.6% of £9.11bn)
He admits that the firm was disappointed to lose the pitch and that Nestlé is a good client to have on the books. But he rejects the idea that there is a threat to the Magic Circle’s core top-end work. ‘Typically we aim to do the high-value work and it is the mid-market work where there is more competition,’ he says. ‘For Nestlé the scope of the panel was Europe but many of the big deals have been in the US.’ He also points out that A&O got down to the last two firms and he doesn’t believe that it lost out on grounds of quality of work or because of its international network. ‘I don’t think we would castigate ourselves for lack of effort or imagination, but sometimes other propositions made to the client make more economic sense,’ he says. It would be naive to think that flexible fee structures don’t play a part in today’s market but as these examples show, firms are making big bucks for the deals they’re winning. More disparaging for the Magic Circle is that clients aren’t finding any difference in quality and instead just reap the rewards of eager firms bending over backwards to meet their needs. The hard work doesn’t go unnoticed. ‘There are a lot of firms in the top 20 that have a lot of good people,’ says GUS’s Peter Blythe. ‘The idea that there are areas that only the Magic Circle can do is not a sensible assumption.’ LB vanessa.pawsey@legalease.co.uk
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