Trouble for lawyers as deals dry up

AS LEAKED e-mails go, it sounds harmless enough. But when a senior partner at Clifford Chance, one of the world's biggest law firms, sent a memo on February 25th warning staff not to abuse its free-taxi policy, he inadvertently sent a bleak message about the outlook for the legal industry, which has thrived on the frantic dealmaking of the past few years. Free taxis are a telling indicator of prosperity at big law firms, and an essential perk for lawyers pulling all-night stints at the negotiating table. Limiting this perk signals a difficult time ahead, with fewer deals and tighter budgets.

Indeed, parts of the industry are already beginning to see the kind of layoffs last glimpsed during the slowdown that followed the dotcom crash. Cadwalader, Wickersham & Taft, an American firm, recently made 35 associates redundant; Dechert, another American law firm, laid off 13. For both firms, the seizing up of the credit markets means there is much less demand for the specialist finance practices that have become so profitable in the past two or three years. Dechert's redundancies came in its finance and property group; Cadwalader's were in structured finance. “We will we suffer the pain with our clients,” says Rodgin Cohen, the chairman of Sullivan & Cromwell, an international law firm based in New York.

But amid the gloom, many lawyers at British and American firms are quietly confident that things are unlikely to get much worse. Moving into new markets—such as Central Europe, the Middle East and East Asia—has helped to make Anglo-Saxon law firms the biggest in the world. Rising energy prices have boosted the volume and value of deals in these regions, even as things have slowed down at home. English transactional law has become the deal guideline of choice in Moscow and elsewhere, allowing firms with strong London bases and plenty of British-qualified lawyers to expand into new jurisdictions where demand outstrips supply.

Firms that are not already in these promising new markets are fast moving into them as the clouds gather in America. Several American law firms, including Latham & Watkins and Skadden, Arps, Slate, Meagher & Flom, recently exceeded $2 billion in annual revenue for the first time. They celebrated by setting up fancy new offices in the Middle East and China respectively. Another American firm, White & Case, has been diversifying in this way for many years, and last month it opened its first office in Romania. Operating in places like Moscow, Central Europe and Brazil “creates a natural hedge and keeps momentum going,” says Hugh Verrier, the firm's chairman.

Back home, restructuring and insolvency work provides another cushion against hard times. In Britain the turmoil surrounding Northern Rock, a cash-strapped bank, has paid for many an associate's late-night taxi. Freshfields Bruckhaus Deringer, a London law firm, is said to have earned some £10m ($20m) for its advice to the stricken bank; Slaughter and May, another law firm, is thought to have made about £3m advising the Treasury on Northern Rock's subsequent nationalisation. Rivals such as Clifford Chance and Linklaters have found work acting for other actors in the drama. As more companies run into trouble this year and next, as seems inevitable, there will be plenty of work for lawyers.

Nevertheless, David Ereira, a banking lawyer at Linklaters who specialises in restructuring, says demand remains reasonably robust, but that growth will slow from the double-digit rates of recent years to less than 10% in 2008-2009. International expansion and diversified practice groups will not entirely insulate global law firms from a slowdown, but will help them weather the storm. Job losses are most likely at firms that lack such protection. Junior lawyers may have to start taking the bus home from work, but partners should have little trouble making the payments on the Porsche.