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Birmingham focus: The Pinsent Masons merger
All aboard Pinsents has had a rough ride of late, with static turnover and profits, London in a rut, and a client list light on blue-chip corporates. Legal Business examines its latest pickup RICHARD LLOYD
FORGET WRAGGE & CO – IN THE LATE 1980s the Birmingham firm that everyone talked about was Pinsent & Co, the most bluechip adviser in Brum. Now senior partner Julian Tonks is hoping to rekindle some of the old magic with Masons. Tonks brokered a deal with Masons, offering partners £10.8m from the combined Pinsent Masons partnership equity pot in return for being absorbed into the Midlands giant. Hop aboard Masons did, one dank autumn afternoon. This acquisition has come not a moment too soon: over the past few years Pinsents has stalled. It all started back in the late 90s, when the competition in its home city really began to hot up. Wragge & Co was at its barnstorming best; Digby Jones and a coterie of corporate partners dragged Edge Ellison (now Hammonds) out of the shadows; and Eversheds Wells & Hind pulled its finger out, and realised that it could be the driving force in a united national firm. Suddenly Pinsents had lost its lustre. Mergers followed, first with Simpson Curtis in Leeds in 1995, and then with City boutique Biddle & Co. Senior partner Julian Tonks finally got his wish for a
north-west presence with an underwhelming raid on local Manchester player Chaffe Street. Thus Pinsents went national. However, by 2003 the firm was struggling to break through the £100m turnover ceiling and, after Addleshaw’s tie-up with Theodore Goddard, Pinsents in London was looking somewhat dwarfed by its national firm rivals. A solution was sought first in the shape of Nicholson Graham & Jones (merger talks collapsed in December 2003) and then, at the beginning of 2004, in the shape of Masons.
Going nowhere Masons – once the undisputed king of construction specialists – also needed a lift. The firm’s turnover slipped from £69.4m in 2001 to £62m in 2004. Average partner profits dropped from £334,000 to £247,000.
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> Outposts including Bristol and Ireland were costing money. Its Asia practice – Hong Kong, Shanghai and Singapore – was also a mess. While turnover in the UK basically stood still, Hong Kong’s turnover fell from £10m to £4m. ‘Until the last three years, Asia had been very good for us,’ Anthony Bunch, part of
firm converted its salaried partners to fixed-share partners to give them more of a say in the running of the firm. What was holding Masons back, they insist, was a lack of breadth and depth. A strategic review in spring 2002 outlined
‘Masons is the favoured firm for a lot of these contracting companies. They’re just not on the corporate or finance side.’ Julian Tonks, senior partner, Pinsent Masons
Masons’ merger negotiating team, says somewhat wistfully. Construction rivals snipe that the firm failed to embrace key changes in the construction industry. The rise of adjudication was putting an end to the megaconstruction disputes which pained clients, but lined lawyers’ pockets. ‘I think Masons thought that adjudication wouldn’t be popular with the contractors,’ says one rival. While adjudication was saving clients money, Masons was missing its day in court. Nonsense, says Masons construction head, Alastair Morrison. ‘We’ve achieved sustainable levels of profitability and turnover,’ he protests. The trouble is that margins in the construction industry are notoriously low. Large contractors such as AMEC often pay around £200 an hour for partner time. When the dotcom bubble burst, rumours of internal friction started to circulate alongside stories of partners at the top of the lockstep not pulling their weight. One former partner says: ‘We got a lot of professional advice saying that we needed to shed some partners. The trouble is the partnership deed is so antiquated that it was hard to get rid of them.’ Morrison, who with Bunch was a key negotiator in the Pinsents talks, disagrees. ‘I haven’t seen any dominance of the old guard,’ he says. Bunch also stresses the harmony in the Masons partnership. He points to the fact that, ten years ago, the
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the need to grow revenue and fee-earners. Being the number one construction lawyers to the construction industry was fine; but the prospect of being the number one lawyers to the construction industry was far more appealing. By January 2003 a fivepartner committee was in place, charged with finding a tie-up. Bunch and Morrison quickly took the lead and were joined on the committee by IT partner Iain Monaghan; Chris Dering, head of international and energy; and employment supremo Michael Ryley. Possible suitors were slow to materialise. Almost a year after the committee was formed, Masons partners received a memo from the firm’s management stating that they were in merger talks with an unnamed firm. The cynics among the partnership claimed that it was a ruse by the management to show they were doing something. But Morrison and Bunch – who had approached Pinsents through recruiter and consultant Dominique Graham – were
selling the Masons vision to Tonks, and the Pinsent Masons fit began to take shape.
The fit Here’s how the Pinsent Masons fit works, in theory. Pinsents gains market-leading positions in three of its original chosen markets – infrastructure and construction, government and technology – and can start to cross-sell into Masons’ major contractors and IT clients, such as AMEC, Amey, Bovis Lend Lease and Fujitsu. Legacy Masons partners, meanwhile, have the opportunity to tell their contractor and IT clients that they now have fullservice teams from Pinsents that can handle all their ongoing commercial and corporate finance work. A large majority of Masons’ client contacts are institutionalised and therefore not threatened if the contact partner walks out when Tonks and his team take the reins. And take the reins they will: while Tonks and Pinsents’ managing partner David Ryan take the top roles, Masons’ senior partner Martin Harman and managing partner Andrew Hibbert become partnership chairman and UK head of construction and engineering respectively in the merged firm. ‘Masons is the favoured firm for a lot of these contracting companies. They’re just not on the corporate or finance side,’ Tonks stresses. ‘What Masons partners are telling their clients is, “Pinsents is a firm which has a similar approach to us in terms of trying to understand the sector you operate in, so give them the opportunity to handle more work”,’ he adds. Opportunity is a wonderful thing, but you can’t base a law firm merger on it. Pinsents therefore sought more solid reassurance from Masons’ top clients that they would stick with the firm after the merger. Tonks paid a visit to several to gauge whether they would instruct Pinsent Masons, including Fujitsu, AMEC and Amey. Of these, Fujitsu is Masons’ largest client. Last year it is thought that the firm billed the company over £5m following a particularly lucrative dispute, although typically it contributes around 5% to Masons’ top line. Fortunately, the feedback was positive. ‘We were satisfied that, while we weren’t guaranteed work, the clients
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recognised that there was something in it for them and that we would get a fair hearing,’ Tonks says of his client roadshow. It’s a fair hearing that Pinsents is betting will result in a greater spread of work from Masons’ clients and ultimately more fees. Cross-selling, the holy grail of modern law firm marketing, is the Pinsent Masons mantra. But not all observers in the market are convinced. ‘I think they’ll find it very hard to cross-sell into Masons’ clients,’ says a former Masons partner. ‘The trouble is that Masons contacts are very specific either on the construction or IT side, and most of these companies tend to be very sophisticated users of legal services. I can’t see why they’ll suddenly start using Pinsent Masons for corporate or finance work.’ If this deal is going to work, Pinsent Masons needs some corporate dealmaking to happen in the City.
London deals Before the Biddle deal, Pinsents was in a rut in London. The firm’s City presence amounted to a £13m business, while the likes of DLA, Eversheds and Hammonds were starting to beef up in the capital. From that top line, £3m came from work for the Solicitors’ Indemnity Fund; work that Pinsents has since lost.
Ryan: aiming to hike PEP to £345,000 by 2007
The 2001 deal with Biddle added just under £14m turnover, 70 fee-earners and 18 equity partners to Pinsents’ modest offering. It also brought niche expertise in pensions and private equity, plus a small private client team and, in David Hooper, one of the leading defamation lawyers in the market. Suddenly Pinsents’ London turnover was a respectable £27m. But, internally, some felt
the firm had missed a chance in not sealing a deal with Paisner & Co or, ironically, Nicholson Graham & Jones, both of which were seen as the prime City deals at the time. ‘Biddle wasn’t even on the radar for most of the time,’ reveals one insider. Others saw the opportunity in Biddle, but only as a platform for greater growth in corporate and finance. Growth didn’t come; at the end of the last financial year Pinsents’ London turnover was £28m – £1m more than after the Biddle deal – and the firm had lost Alan Greenough, its one true corporate heavyweight, to White & Case. Pinsents’ management bristles at the accusation that under-achievement in London has led them into another City deal, this time with Masons. ‘Biddle was a small deal, but from our perspective it was a successful deal. It gave us a strong pensions practice,’ Tonks insists. ‘And it gave us a strong corporate practice,’ Pinsents managing partner David Ryan adds. But within its peer group – Addleshaw Goddard, DLA, Eversheds and Hammonds – Pinsents was underweight in the City. It’s a point that Tonks concedes. ‘It’s been a stated ambition of the firm that we want to grow London,’ he says. ‘The fact that we’re doing this deal is a recognition of that.’ A combined Pinsent Masons London office is approaching
A BUSLOAD OF BRUMMIES: THE LOWDOWN ON BIRMINGHAM’S SIX MAJOR FIRMS Firm DLA
Turnover
Birmingham turnover
PEP*
£275m
£24m
£475,000
£296.2m
£42m
£330,000
£136m
£25m
£272,000
£18.6m
£17m
£170,000
Eversheds
Hammonds
Martineau Johnson
Pinsent Masons** £153.6m
£31m
£258,500
£75m
£208,000
Wragge & Co £79.3m
The local outlook DLA got off to a slow start after the 1993 takeover of Needham & James but it recruited wisely and is now one of the most vibrant of Birmingham’s big six. Birmingham firm Evershed & Tomkinson was the original Eversheds practice. It’s still one of the best performers in the network. Hammonds is slowly returning to form after a painful post-merger integration following its takeover of Edge Ellison. Downturn hit profits hard, but Martineaus is still one of the finest private client practices outside London. In taking competition specialist Guy Lougher from Wragges, Pinsents made one of the most astute laterals the Birmingham market has seen in years. Wragges has lost some of its sheen of late, but it is still a class act in the Midlands.
* Average profits per equity partner ** Pinsent Masons’ turnover figure is the two firms’ combined total from this year’s LB100; the profits figure is an average for the two firms. Source: Legal Business
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> £70m in turnover, second only to DLA among its national peers. The Biddle deal was also not helped by timing, Tonks and Ryan maintain. ‘Just after we did the deal the London corporate market nose-dived,’ says Tonks. ‘That’s part of the reason we haven’t been out there recruiting corporate finance teams; nobody has.’ Instead it has now recruited in construction and IT – hardly two of the areas other firms are looking to bolster. Whether you have a market-leading position or not, construction work is notoriously low-margin and IT is only slowly recovering.
Spin city Not surprisingly, Tonks likes to put his own spin on the merger. He insists that it’s a matter of interpretation. You can either look at a merger in terms of legal capability or from the client perspective. So for example, while Addleshaw Booth & Co liked the look of Theodore Goddard’s corporate finance brand, Pinsents liked the look of Masons’ client base. Either you have the City brand and get the clients, or you have the clients and go after the brand. Watching this one play out could be interesting. And while Tonks and Addleshaws’ managing partner
Morrison: adamant about pre-merger profitability
Mark Jones are busy ON THE BUSES: THE CONDUCTORS integrating their merged firms, OF PINSENT MASONS they know partner profits will go a long way to bringing the partnerships together. This is where Pinsent Masons’ managing partner David Ryan steps in – no more Mr Nice Guy, you might say. The aim is to increase PEP to £345,000 by 2007, Ryan explains. Currently, a point on Pinsents’ lockstep is worth £8,000. To hit the firm’s growth target this needs to rise to £10,000 a point. Anthony Bunch Julian Tonks The question is how. ‘A lot of Head of international Senior partner it relates to client opportuniMasons down to the foundations, Love him or loathe him, few senior ties,’ Ryan says. ‘We think we’re Bunch joined the firm in 1976 and partners have such a grip on their going to deliver a service that went on to specialise in contentious firm – only Nigel Knowles puts him clients appreciate, which should construction. He served as in the shade. Elected senior partner lead to greater fee income, and international managing partner in 1994, Tonks has given the firm its we have to make sure that a for five years until 2002, before national status. An unabashed good amount of that extra becoming chairman of the firm’s Brummie, he has been slow to settle revenue drops through to the partnership board. down south, although this may be bottom line.’ Again, it’s hardly about to change. As he sets about brain surgery, but putting it Alastair Morrison integrating Pinsent Masons, Tonks into practice is where manageHead of chosen markets has recently bought a Norman ment earns its corn and Opinion is divided on Morrison. ‘All Foster-designed flat in Battersea. partnerships stick firm. mouth and no trousers,’ say some; Tonks and Ryan may ‘popular, easy-going and a good David Ryan complain of a poor corporate ideas man,’ say others. His rapid Managing partner market hitting all and sundry, rise to the top at Masons would Tonks’ affable right-hand man and, but Pinsents’ average equity suggest that the latter is a more like the Pinsent Masons senior partner profits of £270,000 look accurate description. Morrison partner, a former tax specialist. sluggish compared with a earned his stripes in the Glasgow After qualifying at Freshfields, he resurgent Eversheds – with a office of Dundas & Wilson before made partner at Pinsent & Co in PEP of £330,000; it’s also leaving in 1998 to set up Masons’ Birmingham in 1992 and became dwarfed by DLA, where partners Scottish operation. If he can managing partner in 1999. He’s average £475,000. impress the legacy Pinsents very much in the passenger seat – In the meantime, Masons’ 45 partners, he’s a potential Pinsent Pinsents has always been the equity partners have been given Masons managing partner. Tonks show. 1,350 points to share among themselves. At £8,000 a point, respective management positions in the that’s a pot of £10.8m to divvy up. ‘It’s done business, have extended their terms to 2007 on a merger basis,’ Ryan says. ‘There’s no – they were both up for re-election in premium involved.’ It works out as an November 2005. Bunch, Morrison and average of £240,000 per partner. Five Masons Pinsents’ financial director Steve Hancock partners will join the 20 Pinsents partners at complete the management board. the top of the lockstep. Pinsents plans to For Tonks, his increased term will take phase out salaried partner status and follow him just shy of 55 and close to possible retireMasons’ fixed-share policy. Fixed-share ment. His legacy in transforming a bluepartners will invest £10,000 of partner capital blooded Birmingham stalwart into a £150m into the business and receive two points in national business would be considerable. It’s the Pinsent Masons lockstep in return. just a question of whether he can regain Management have given themselves an some of that old Pinsent & Co lustre. LB integration period of two-and-a-half years. richard.lloyd@legalease.co.uk As a result, Tonks and Ryan, who keep their
84 Legal Business November 2004