Welcome back to the Big Law Business column on the changing legal marketplace written by me, Roy Strom. Today, we dig into the numbers behind Davis Polk’s impressive 2020. Sign up to receive this column in your Inbox on Thursday mornings. Programming Note: I’ll be on vacation from Big Law Business the next two weeks, returning on May 13.
As I mentioned last week, Davis Polk may have just turned in the best single-year financial performance in modern history.
That’s not an official statistic, but I hope you’ll excuse me. It’s hard to find examples of firms that have grown revenue by more than 20% and profits by more than 40% without a merger or a contingency fee victory—precisely what Davis Polk did.
There are signs through the first quarter that the results might not be a one-off blip. We’ll get to that. First, a recap of how Davis Polk pulled off the most impressive 2020 among Big Law firms.
The firm grew revenue by more than 22% to nearly $1.8 billion, The American Lawyer reported. Even more incredibly, it saw profits per equity partner spike by more than 40% to $6.35 million. Part of the outsized PPP increase is explained by the firm’s equity partner tier shrinking by 2.5% to 156 partners.
Davis Polk is now the second most profitable firm by PPP, behind only Wachtell, Lipton, Rosen & Katz. The firm increased profit per partner from 2019 to 2020 by $1.8 million—which is the total PPP for nearly half of the AmLaw 100 last year.
The firm accomplished this growth with virtually the same number of lawyers as it had in 2019—980 compared with 975. That means a Davis Polk lawyer on average generated $325,000 more in revenue in 2020 than in 2019, and $270,000 more in profits, according to AmLaw data.
Law firms were able to increase billing rates last year, but that kind of growth is only possible with a corresponding increase in hours.
Even after factoring in a 6% increase in rates (roughly the industry average last year), a partner who billed 2,000 hours at $2,000 an hour in 2019 would have had to bill 40 more hours at $2,120 to generate an additional $325,000 in 2020.
For an associate who billed 2,000 hours at $750 in 2019, it would take nearly 300 more hours of work at $795 to bill an extra $325,000. The math is generous. It assumes a 100% realization rate.
Couple Davis Polk’s results with the firm’s newfound willingness to pay lateral partners above its former lockstep rates, and there could be a serious new bidder in the market for top legal talent.
The firm declined an interview request for this column.
There were plenty of signs throughout the year that the Davis Polk machine was running in high gear.
Most telling were the firm’s decisions to hand out cash and gifts to hardworking, younger lawyers. Firms can’t give out money they don’t have, and Davis Polk granted as much as $200,000 in bonuses to its most senior associates.
So, what kind of work drove these eye-popping financial results? Not surprisingly, the firm had record-setting activity in its marquee practices, including initial public offerings and investment grade debt issuances.
Davis Polk advised on IPOs that in 2020 were worth more than $51 billion, according to data compiled by Bloomberg. That was $14 billion more than the next closest law firm, and more than twice the amount Davis Polk has advised on in any year dating back to at least 2012, Bloomberg data show.
The firm’s work for special purpose acquisition companies, or SPACs, helped drive that surge, with the firm advising on more than 100 SPAC IPOs.
Davis Polk has long been among the busiest firms in the investment grade debt practice. Between its work advising underwriters and issuers, the firm last year advised on 540 deals compared with 292 in 2019, an 85% increase. It was by far its busiest year since at least 2012.
The firm’s bankruptcy, regulatory, and litigation practices were active as well. The firm billed more than $75 million in legal fees representing bankrupt opioid manufacturer Purdue Pharma L.P. in its Chapter 11 proceeding. The firm also represented the U.S. Treasury related to Covid-19 relief loans made to passenger air carriers and other firms deemed essential to national security as part of the CARES Act.
I have written before that the surge in work in 2020 is likely to be a historical outlier. But so far this year at Davis Polk, demand isn’t slowing down.
Its IPO business was again booming in the first quarter, with the firm advising on transactions that could collectively raise nearly $28 billion, according to Bloomberg data.
By itself, that quarter would be the best year among the firm’s last decade, the data show. In that time, the firm never advised on IPOs that raised more than $22 billion combined.
Davis Polk’s mergers and acquisitions practice has stayed hot after a fourth quarter last year that saw the firm advise on 54 deals valued at more than $110 billion. In the first quarter this year, Davis Polk advised on 46 deals worth more than $85 billion.
If its M&A pace from the first quarter holds for the rest of the year, Davis Polk will advise on more deals than it has in the past decade—one of the few records the firm didn’t set in its outstanding 2020.
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That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.