A changed competitive landscape?
While last week's merger of the law firms of Brown & Wood and Sidley & Austin may have produced a league table powerhouse for structured finance practices, market observers do not necessarily think that high rankings always equate with profits, and many say that the legal competitive landscape will not change that drastically.
The merged firm, Sidley Austin Brown & Wood, will undoubtedly reap the benefits of having a large No.1-ranked ABS and RMBS player, Brown & Wood, joined with a No. 1 CMBS firm, Sidley & Austin. Moreover, the firms are enthusiastically touting an increased global presence, with emphasis on its growing London and Tokyo-based offices.
But does this merger make life worse for the new firm's closest competitors? Sources at other law firms say that while high league-table rankings are important for marketing purposes, sometimes the highest ranked firms are doing lower-margin businesses, and are not as profitable.
"It seems to me that Brown & Wood has a big term securitization practice, Sidley has a smaller but still respected practice, and obviously it's bigger if that's combined. Perhaps that has its advantages," said one market observer at a competing law firm. "But I'm not sure if that will change the landscape for us, and I don't think we will lose any business because of it."
"Some of the work that Brown & Wood did was lower cost, and they are trying to do higher margin stuff," added another source. "But league tables only look at deals, and they are often skewed toward public deals, and don't always reflect what is generating fees. Sometimes a firm that is ranked a little lower is actually a more profitable firm."
For the year 2000, Brown & Wood was ranked No. 1 for ABS manager lawyers, with $73.6 billion in profits, and No. 3 for ABS issuer lawyer rankings, with $22.9 billion in proceeds. Sidley was ranked No. 15, with $2.2 billion, according to Thomson Financial Securities Data. For both CMBS manager lawyer rankings and issuer lawyer rankings, however, Sidley ranked No. 1, with $8.9 billion in proceeds for all of 2000 (issuer rankings) and $7.3 billion in proceeds for manager rankings. Brown & Wood ranked No. 1 in the RMBS issuer lawyer rankings, with $41.1 billion in proceeds, and ranked No. 1 for RMBS manager lawyer rankings, with $29 billion in proceeds.
Each firm also has a large presence for 144A and true private securitizations, as well as a traditional private placement team under the corporate debt group that is particularly strong at Brown & Wood.
"When you look at the health of a practice, you look at whether it is busy with stuff that is interesting and legal-intensive, and how profitable that is," said a source from a competing law firm. "That does not always correspond to league-table rankings."
The source said that the merger of Clifford Chance Rogers & Wells was a more interesting one, since "Rogers & Wells did not have a strong securitization business, and Clifford Chance had strong European ties. This led to Rogers & Wells being pulled into some deals."
Still, the combined firm of Sidley Austin Brown & Wood will be a force to be reckoned with. Not only will it be continually adding lawyers to its roster, but at the top of its priority list is the expansion of its London office and other global offices.
In the London-based office, "the whole is greater than the sum of its parts," according to Cathy Kaplan, a Brown & Wood partner that is co-head of the combined firm's New York securitization practice, and there will be an ongoing endeavor to develop business in the Euro markets. According to Kaplan, Sidley Austin Brown & Wood will become a formidable competitor to English firms.
"We will have more U.K. lawyers than U.S. lawyers over there," Kaplan said. "We are doing major deals there as it is, and this merger is going to catapult us into a different category."
Similarly, the merger will add a boost to the firm's work in the Asian markets, particularly in Tokyo, Kaplan said. While both firms represented investment banks in Japan, Sidley represented insurers as well. Kaplan said that Brown & Wood has a huge presence in Japan already, and she has personally closed at least 40 deals there over the last few years.
"Asia is such an economically sensitive market, it can go awhile with no deals closing," Kaplan added. "The exception to that is Tokyo."
As for the Latin American securitization market, "it depends on the week," Kaplan said, noting that "Brown & Wood is probably more prominent in that market." Overall, however, deal flow from Latin America is sporadic, at best.
With plans to combine each firm's New York offices into a single office (Brown & Wood's office) and efforts to expand the London office, the newly formed firm will add depth and expertise by adding new lawyers and continuing to grow the global structured finance business.
"What excites us from the structured finance side is that we now offer in the U.S. a full panoply of services, including working on CP conduits, 144A's, Reg-S deals, private placements and public offerings," said Thomas Albrecht, a Sidley partner that is now the global co-head of securitization for the combined firm. "Each of the two firms had its own strengths, but combined, we offer the kind of expertise that is not matched now in the marketplace."
"We are leveraging the combined experience of both firms now," added Kaplan. "On a global basis now, this helps with business development, and we are more of a force. In the U.K., for example, our combined strength is now close to 100 lawyers, and more than half are doing various types of structured work, including repackagings, structured bank loans, collateralized loan obligations, etc."
Under the global securitization umbrella there will be different teams and sub groups, Albrecht said, all of which will be coordinated through the global co-heads, Albrecht and Brown & Wood's Ren Martin.
A primary focus for both firms will be the CDO group, Albrecht said, and there will be an attempt to strengthen the use of warehousing financing using CP conduits.
As to whether the economic slowdown has hindered business, Kaplan said, "It has not affected our business at all. There has never been a year that we haven't increased the deals we do. On the mortgage side now, there are refinancing increases. The market is countercyclical, so people need regulatory capital."