Can London’s legal ‘magic circle’ fend off the threat from America?

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WHEN I studied law at university many moons ago there was a “Magic Circle” of City law firms. Interestingly, in the time that has passed, there are still.

The only difference between now and then is that there are six practices in this elite group: Slaughter and May, Linklaters, Freshfields, Allen & Overy, Clifford-Turner and Coward Chance. These last two were combined, so now there are the original four with the addition of Clifford Chance.

If that’s not a case for monopoly inquiry — we’re talking about a charismatic group that sits at the top of the profession and has dominated the City’s legal business for decades, back when I was an articled clerk and ever since — no i know what It’s similar to accountancy, of course, where the “Big Four” rule.

However, how safe are lawyers, their prestige under threat? What prompted the question was a paper, “The Magic Circle – where next?” from Christopher Saul, himself a former senior partner at Slaughter and May.

In it, Saul suggests that companies are at an inflexion point. “How can they avoid becoming a training service for top US companies, gradually giving up ‘brand charisma’ in the process?”

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Four of the five, Allen & Overy, Freshfields, Linklaters and Clifford Chance, took a similar path of becoming global one-stop shops, merging with foreign companies and opening offices abroad. His own Slaughter and May chose a different route of loose associations with independent foreign outfits.

As a result, the four have developed global networks — Allen & Overy is in 43 cities around the world, Clifford Chance in 30. But they have not been able to conquer the US, home of enormous dollars and the world’s largest legal market. A US corporation involved in a major domestic deal tends to turn to a US company for advice.

At the same time, while the Brits didn’t make a splash there, the Americans were making waves here. Kirkland and Latham each have more than 300 lawyers in London, and the likes of Skadden, Weil and White & Case are also at the fore. Some of their recruits came from the Magic Circle itself.

Where Magic Circle was once the most profitable, it is no longer so. As Saul points out, Allen & Overy has gone from a profit per equity partner or PEP, of £1.2 million in 2015-16 to £1.95 million in 2021-22. But during the same period, Latham’s PEP climbed from $3.75 million to $5.7 million and Davis Polk saw its PEP jump from $3.75 million to an eye-watering $7 million. While top Londoners are scrambling to hang on to their best men, sterling’s weakness against the dollar isn’t helping either.

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What is happening bears the hallmarks of the investment banking experience when Bank of America, Citi, Goldman Sachs, Morgan Stanley, JP Morgan shook up the industry in London in the late 1990s and early 2000s.

So, how can the Magic Circle respond? Given the mismatch in profitability and the low rating of the pound, a mega-merger with a US company seems unlikely. They are fueling US expansion, but the benefits are limited.

They may emphasize their specialist expertise, especially in complex cross-border transactions, but that doesn’t exactly turn off the lights. They can rotate and demerge their less profitable parts, so the most profitable ones look exciting and attractive, but in general they become smaller and not bigger.

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Listing their shares is a possibility, but although it would be a boost for the profile and make them look modern, it is a fraught, difficult process and leaves the company exposed to market disturbances ( just ask Mischon de Reya where it put its own list on hold).

They could expand the range of services offered, to include the illegal, but it’s hard to see how that would cause Americans to shudder in fear.

Saul said that Magic Circle “needs to find another yard of speed in the competition with the leading companies in the US, which is dominated in terms of competitive edge and fighting by Kirkland and Latham”. They should go up — the Magic Circle should do some magic. Or else, their high status may no longer exist.

Chris Blackhurst is the author of Too Big To Jail: Inside HSBC, the Mexican drug cartels and the greatest banking scandal of the century (Macmillan)

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