It wasn?t so long ago that mergers and acquisitions were the axes around which London?s legal universe evolved. Indeed, elite UK law firms spent 2006 and the first half of 2007 basking in the radiance of record-breaking M&A activity. According to Thomson Financial, deals in 2007 tallied $4.5 trillion, up 24 per cent from 2006, itself a record year.

By midsummer 2007, however, the picture had changed dramatically. As the US credit crunch sent predictable reverberations throughout the international legal market, big corporate tie-ups became scarcer, and deal volume dropped. By January 2008, it was clear that markets were battling rough weather. Transactional activity fell, and deal value for worldwide acquisitions value plunged 24 per cent in the first quarter of 2008, compared to its standing a year earlier. Deal volume plunged as well, with M&A stalwarts like Clifford Chance even reporting a drop (from 98 transactions in the first quarter of 2007 to just 60 a year later). Naturally, certain firms felt the pain more than others, and those leveraged in structured finance were particularly hard hit. But even as the credit crunch took its toll on banks, the legal industry still managed to achieve growth and Magic Circle firms garnered the double-digit revenue growth seen before the crisis hit.

Nevertheless, many firms took the lesson, changing direction and strategy. As big-ticket deals, leveraged buyouts and private equity mandates withered in the wake of the subprime crisis, law?s bigger players forayed into the still active middle-market. Other outfits found work rescuing suffering investment banks, as sovereign wealth funds came galloping to their rescue, couriering emergency cash. London litigation giant Herbert Smith, SJ Berwin and US-based Bingham McCutchen even geared up for bank-on-bank court fights. The Bear Stearns buyout, government orchestrated to prevent the investment bank?s total collapse, also generated work for a number of US-based law firms. Many firms turned their profit aspirations to emerging markets, in the hopes that growth in these regions would mitigate slack business on the home front.

Credit-crunching the numbers

In the face of upheaval, UK firms managed to keep their trajectory, with the top firms scoring double-digit growth in both turnover and profits per equity partner. Despite its exposure to a floundering structured finance market, Clifford Chance posted 11 per cent growth in turnover and saw PEP increase by 13 per cent for the year 2007-2008. Other Magic Circle firms fared even better. Freshfields Bruckhaus Deringer?s PEP surged by 39 per cent, crossing well over the ?1 million threshold?and that wasn?t just the result of tighter equity rolls, slashed in a 2006 restructuring. After all, the firm?s turnover also jumped 19.5 per cent, shattering the ?1 billion benchmark. Hovering just outside the Magic Circle, Herbert Smith recorded a PEP rise of 25 per cent, which catapulted the firm into a clique of seven UK firms that have surpassed the ?1 million PEP milestone (among them, Ashurst, Linklaters, Freshfields, Clifford Chance, Allen & Overy and Macfarlanes). Other firms posting significant revenue growth for 2007-2008 include Bird & Bird, CMS Cameron McKenna, Dundas & Wilson, Field Fisher Waterhouse, HBJ Gateley Wareing, Norton Rose, Stephenson Harwood and Veale Wasbrough. Meanwhile, as US firms published their 2007 results, it was clear the M&A boom had elevated the legal market there to new heights. Among top US firms with sizeable London contingents, Sullivan & Cromwell tallied an enviable $3.1 million in partner profits, with Simpson Thatcher & Bartlett coming in at $2.9 million. In terms of revenue, Skadden, Arps, Slate, Meagher & Flom led the field with $2.2 billion, while Latham & Watkins followed closely behind with a revenue figure of $2.01 billion.

Profitability aside, it is, of course, uncertain just how much the legal industry has cause to worry. US firms are more vulnerable to a potential economic downturn and, as UK firms continue to thrive post-crunch, industry observers suggest that City firms? broader exposure to emerging markets provides some protection, come balance sheet time. That said, USbased firms have traditionally performed better through slumps, because of their wider spectrum of practice areas and access to the huge American market, a money pot that can more than make up for these firms? rather myopic geographical reach. In the end, law firms? revenue figures are not prompt reflections of current economic conditions, and it is simply too soon to gauge what effect roiling markets will have on the legal world.

Penny-pinching

The ships may be weathering the storm, but what about the crew? Challenging times have seen law firms cull their ranks, especially in the areas of real estate finance and structured finance. US firms wielded the biggest axes. The first high profile cuts occurred at New York?s Cadwalader, Wickersham & Taft, which laid off 35 associates in January 2008 and six months later culled 96 more lawyers, including several in the London office. Other US firms that made cutbacks include Dechert and Wall Street?s Thacher Proffitt & Wood. The UK market has not escaped unscathed. In November 2007, City firm Olswang nixed 10 from its real estate department, including five associates, and Clifford Chance laid off six associates in its structured finance division. Dickinson Dees cut 17 from its re-mortgage team, although the layoffs did not hit lawyers. Redundancy consultations have also reportedly been underway at firms including Bevan Brittan, Howard Kennedy, McGrigors, Halliwells and TLT. Although layoffs have not been as widespread in the UK, the spate of job cuts in America has led to fear that more are in store for this side of the Atlantic.

UK firms have not been immune to pay pressures, either. In 2008, the salary increases of recent years were tempered, and in some cases, nonexistent. Herbert Smith cited the shaky business climate for its decision to forego pay bumps for newly qualifieds and other junior lawyers. Olswang announced that it would not hike salaries for NQs, but backtracked a month later (the increase was 2.4 per cent, below inflation). Allen & Overy surprised the market with a pay freeze for associates, while Magic Circle rivals Freshfields and Linklaters offered below-inflation hikes, a marked contrast to the sizeable increases they touted a year earlier. But other firms are taking advantage of the shift toward moderate pay rises and making up ground. Bird & Bird, for example, rolled out a 19 per cent pay boost in 2008 for first-year trainees, and increased salaries for newly qualified lawyers by 9 per cent.