Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we look at how law firms with broader practices may be less acutely impacted by the economic fallout from coronavirus. Sign up to receive this column in your Inbox every Thursday morning.
Followers of the Big Law market are well aware that the biggest, richest firms have been outperforming their smaller, poorer peers for most of the post-recession era.
That trend was driven home in the latest AmLaw 100 results released this week. A group of 30 firms, dubbed the “Super Rich,” last year accounted for virtually all of the growth in profits per equity partner among the 100 largest firms, AmLaw reported. The 30 firms grew revenue by nearly 6% in 2019, while the remaining 70 firms grew at one-third that rate.
The Big Law market already favors the strong, and that may only become more pronounced as a result of the coronavirus. Firms with more diversified practices, usually the big, rich ones, may have a natural hedge against some of the acute pain the pandemic is leveling upon certain industries.
I wrote about this concept earlier this week in a story that looked at how national firms that have entered the Houston market may be in a position to profit by taking on more bankruptcy work as the U.S. oil and gas industry convulses.
Having strong cyclical and countercyclical practices—like M&A and bankruptcy—is one type of diversification. But there are plenty of others. Firms that have strong practices across various industries will be better positioned to handle a severe downturn in any one business line.
There, again, Texas-based M&A practices provide a good example. Some firms’ fortunes are more strongly tied to the fate of the U.S. oil industry, which could be facing a long period of decline.
One oil industry analyst predicts the number of wells coming online in the U.S. will fall 87% by the end of the year, Bloomberg News reported. U.S. oil output could decline from 12.8 million barrels a day to start the year to 8.5 million in 2021 to 2022.
The market for oil and gas deals in Texas was historically dominated by a group of regional firms that have provided the base of expertise for national firms to get their foot in the door in the oil and gas industry. A number of national firms have entered that business line in recent years, including Kirkland & Ellis, Latham & Watkins, and Sidley Austin. But those firms have broader M&A practices that encompass a wider array of industries and geographies.
For instance, Vinson & Elkins advised on more than 200 deals involving a Texas-based energy company from 2016 through 2019, according to Bloomberg data. That was more than 45% of the firm’s total deal work in that time. For Kirkland & Ellis, which handled the second-most deals involving a Texas-based energy firm, its work in that market represented around 5% of the firm’s total deal work. Baker Botts, Akin Gump, and Bracewell also had more than 30% of their total deal work in that time involve a Texas-based energy company, Bloomberg data show.
The Texas energy market has been a consistent, robust source of deals for Big Law. But it is showing signs of slowing, and that could have a more severe impact on firms that are more reliant upon that particular market.
Dating back to 2010, there have been an average of 36 deals a month involving a Texas-based energy company, according to Bloomberg data. Through Tuesday, there had only been seven such deals in April. And first quarter deals this year hit lows not seen since at least 2009.
The broader M&A market has slowed, but not to the same extent as Texas energy M&A. Through mid-April, the total number of announced deals was down about 9.5% from the same period in 2019, settling in at a level last seen in 2016.
I’ve written before that a basic way to describe the impact of the virus is that it has drastically shifted priorities. It has done so in ways that you couldn’t prepare for as a law firm leader. And the best that some managing partners can hope for now is that these unexpected changes don’t last long enough to inflict enduring damage on their business.
Worth Your Time
On Pay Gaps: Men who lead legal departments at the biggest U.S. companies earn 49% more than women in those same roles, according to a new Major Lindsey & Africa report. Brian Baxter writes that the report also revealed an advantage for top U.S. in-house counsel, who make more on average than those in other countries.
On Lateral Hires: Sidley Austin hired Joshua Thompson away from Shearman & Sterling, where he led its global leveraged finance group, Meghan Tribe reports.
On Priority Changes: The number of patent filings could fall from 2% to 4% as a result of companies prioritizing cash savings over IP protections, reports Matthew Bultman.
On Priority Changes II: Utah on Tuesday became the first state to adopt “emergency diploma” privileges for recent law school graduates. California may also grant limited law licenses to new grads as the fate of the state’s bar exam remains uncertain due to the virus, reports Sam Skolnik.
On Virus-Borne Innovation: Bryan Cave Leighton Paisner teamed up with Neota Logic to build a free Covid-19 estate planning tool. It comes as people have rushed to draft wills and trusts in wake of the virus.
That’s it for this week. Thanks for reading and please send me your thoughts, critiques, and tips.