ANALYSIS
Shearman & Sterling's Long Road From Wall Street Darling to Merger Partner
Once an Am Law 10 law firm, Shearman & Sterling is now playing catch-up as it pursues scale and a transformative merger.
January 27, 2023 at 05:00 AM
Shearman's growth, in revenue, head count and profits, has lagged behind New York peers in the past two decades.
The dot-com bust, the financial crisis and the rise of private equity business all played a part in Shearman's trajectory.
The law firm is taking steps to catch up, including finding a merger to build scale and finding more private equity talent.
This article is part one of a multi-part series examining the trajectory of Shearman & Sterling and what propelled the firm to seek a merger.
Shortly after the dot-com bubble burst in the early 2000s, Shearman & Sterling was still a marquis name in the legal community. The firm, then ranked No. 5 in the Am Law 100, was high-priced, effective and had a market reputation as a firm that you called. They didn’t need to call you.
But the legal industry changed significantly over the past 20 years. Some law firms became as large as Fortune 500 companies, growing profits from private equity firm business, not only investment banks, and partners were forced to do business development, instead of relying on institutional business. Law firms found a new pecking order, with firms founded in Chicago and the West Coast suddenly leaping ahead. Some New York law firms adapted, while others are playing catchup.
Shearman’s trajectory—a one-time Wall Street darling to now actively courting merger options to gain scale and thrive—contrasts with that of several of its New York peers that did adapt. Other New York firms advanced their profit and platform in the last two decades, gaining considerable scale and staying in the Am Law 20, according to an analysis by Law.com.
“The market changed, and [Shearman] did not,” said Tim Corcoran, a long-time legal industry consultant. “It seems to me they’ve been resting on their laurels.”
A Shearman representative declined to comment for this article beyond the firm’s statement from December: “We continuously consider the various levers of growth that are accessible to us as part of our strategic planning process. These include both internal and external opportunities that would benefit our firm and our clients.”
Law.com has reported that Shearman is pursuing merger talks with Hogan Lovells, with the law firms leaders meeting on each side of the Atlantic in the last two months. Shearman has also pursued talks in the past with Baker Botts.
A source familiar with Shearman’s operations said the firm’s strategy isn’t solely dependent on a large merger, but its vision “would be seriously propelled forward if achieved.” A merger, the source added, would let Shearman choose its path and control its destiny.
Few could have predicted, decades ago, Shearman’s pursuit today of a transformative merger.
In the mid-1990s, Shearman was ranked No. 9 in the Am Law 100, generating $283.5 million in revenue with 546 lawyers. The law firm maintained long-standing ties and business with investment banks.
The firm was far larger, by revenue and head count, than several of its New York peers, including Paul, Weiss, Rifkind, Wharton & Garrison (generating $180 million in 1995, with 328 lawyers); Milbank ($173 million, with 327 lawyers); and Simpson Thacher & Bartlett ($254 million, with 398 lawyers).
Fast forward about 25 years, and Shearman’s financial performance hasn’t had the same trajectory as its peers. Shearman posted around $1.01 billion in revenue in 2021, with about 730 lawyers.
Meanwhile, many of Shearman’s peer firms have more than 1,000 lawyers and more than $1.3 billion in revenue. In terms of percentages, Paul Weiss grew its attorney count by 207% between 1996 and 2021. Weil, Gotshal & Manges grew its head count by 105%. Milbank and Simpson Thacher grew their head count by 150% and 192%, respectively.
In comparison, Shearman grew its head count by 33%.
And despite their larger size, Shearman’s New York peers are also more profitable than the firm, even though Shearman had comparable profits with its peers in the late 1990s. Paul Weiss, Milbank and Simpson Thacher all had profits per lawyer of more than $1 million in 2021, compared with Shearman’s at $468,000, according to American Lawyer data.
According to interviews with former Shearman partners, law firm leaders, recruiters and industry observers, several factors converged that led to Shearman falling behind not only its New York peers but also rising giants in the legal industry, such as Kirkland & Ellis and Latham & Watkins.
A long-time legal recruiter believes that the trouble for Shearman started just after the dot-com bubble burst at the turn of the century.
The recruiter said the law firm laid off corporate department members around that time. “That was the beginning of their downfall,” the recruiter said, about the dot-com bust and the fallout. “Their profitability never really went up after that.”
While Shearman maintained a top 10 Am Law ranking through the early aughts, the firm had slipped to No. 17 in the rankings for 2006. Its head count, which had peaked at just over a thousand attorneys in 2001, was down to 833.
The financial crisis of 2008 was particularly tough on Shearman.
“For decades, Shearman had several marquee bank clients,” said one Am Law 100 leader said, who spoke on condition of anonymity. “During the financial crisis, there were many bank mergers and there were winners and losers among law firms that had represented those banks. If, post-merger, a few of Shearman’s large bank clients sent a greater share of their work to other law firms, moving Shearman down the food chain, that would have adversely affected their business.”
Others echoed that sentiment. After the financial crisis, Shearman’s bank business didn’t rebound to the same heights as before, “so they had no big-ticket items,” noted a recruiter. “After the financial crisis, while others were recovering, Shearman was still sluggish.”
The numbers back up Shearman’s sluggish business growth. The firm generated $921 million in revenue in 2007, ranking No. 19 in the Am Law 100. By the time the economy and businesses were recovering from the financial crisis in 2012, Shearman had dropped to No. 35 in the Am Law rankings, with its revenue falling to $752 million.
The source familiar with the internal operations of Shearman said the firm recognized that its reliance on traditional financial institutions made the financial crisis more impactful for Shearman than some of its competitors.
“What happens to a law firm is very much correlated to what happens to its clients,” the source added.
Private Equity Boom
Up until the late 1980s, private equity was considered a second-tier practice at major law firms. Elite Wall Street firms were mostly gaining profits from corporations and investment banks.
But after several events—such as KKR buying the recently formed RJR Nabisco for $24.88 billion in 1988, beating out many traditional banks—things changed. While New York law firms such as Paul Weiss, Simpson Thacher and Weil have grown lucrative private equity practices, competing for business with Kirkland and Latham, Shearman didn’t take on the same level of investments.
“My view is that Shearman as a banking firm and as a capital markets firm has not realized the shift from public markets to private capital,” one former partner said, speaking on condition of anonymity. “It has not invested in private equity and private debt. If you look at where a firm like Kirkland was 15 years ago, compared to Shearman and where Kirkland is today, it’s a very good example of what Kirkland did right and what Shearman did wrong.”
The source familiar with Shearman’s operations agreed, saying the firm was “a little slower than they would have liked” in recognizing the revenue potential of private equity. The firm has been attempting to make more private equity-focused hires in recent years, but it is playing catch-up, the source said.
“All firms would like to move into that [private equity] and you’re seeing that now,” the source added. “There are other firms that have varying stages of building private equity practices, but nobody is as developed as Latham and Kirkland.”
Meanwhile, more aggressive firms after the financial crisisg became focused on advanced marketing and business development for each partner, instead of relying on a firm’s institutional business and market reputation.
“There’s been no innovation over there,” said Corcoran, the legal industry consultant, about Shearman. “And now two generations of advanced marketing has overtaken them. They don’t have any differentiators.”
An Am Law 100 leader had a similar assessment about Shearman.
“As the market became more competitive after the financial crisis, it doesn’t appear that they developed a lot of up-and-coming entrepreneurial types who regularly hunted for revenue,” he said. “Other white-shoe firms adjusted better to the changing market.”
The source with knowledge of Shearman’s operations agreed that the firm had relied too much on its market reputation to generate business. Shearman has made a point of trying to recruit talented attorneys in the last few years who are also “hunters,” the source said, something the firm hadn’t really done in the previous two decades.
“The market environment for law firms has changed significantly and this change made business origination very, very important,” the source said. “The firm has done well in originating business but again, this goes to scale. Not everybody’s gonna be a business originator. But the more people you have, by definition, you’ll have more business originators.”
Law.com has previously reported that Shearman was interested in seeking a path to arrive at $3 billion in revenue.
The $3 billion revenue mark has become something of a demarcation point for law firms lately, according to legal industry sources, and it’s a point that other Am Law 200 firms may be pursuing in the coming years. At that mark and above, firms have the scale and resources to attract and pay for top talent without jeopardizing their commitments to current lawyers.
Whatever Shearman does to catch up, whether through a merger, more lateral partners or modernizing its business development efforts, legal industry sources say the law firm must act to preserve its future. But potential merger partners might view Shearman differently than they did decades ago.
“Shearman is not what it once was on Wall Street,” said a former partner. “If you want a Wall Street firm, you want a strong core of Wall Street business.”
Paul Hodkinson, Rose Walker, Anne Bagamery, Jessica Seah and Jack Womack contributed to this report.
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