The long-awaited arrival of a new wave of US firms in Madrid is becoming a reality 

La tan esperada llegada de una nueva oleada de firmas americanas en Madrid ya es una realidad y lo exponemos en este artículo a fondo. Con un historial de éxitos destacable en Inglaterra, Alemania, Francia y recientemente Italia, no nos sorprende que – tras un año record de operaciones en España y la expansión de empresas españolas en le extranjero- el abrir una oficina en Madrid, se haya convertido en prioridad para muchos despachos estadounidenses. Desde hace un tiempo se habla de su entrada, empezando por Latham & Watkins, y seguido de Shearman & Sterling y White & Case, aunque hasta ahora no lo hayan conseguido debido a la dificultad de tentar al abogado adecuado que lidere el proyecto.

With their own trail of success across England, Germany, France, and most recently Italy behind them, is it any surprise that – after a year of record deals in Spain and Spanish corporate expansion abroad – a Madrid opening is moving towards the top of US agendas? 

 US firms, led by Latham & Watkins, and also believed to include both Shearman & Sterling and White & Case, have been contemplating a Spanish launch for a while but had, until now, failed to lure star lawyers away from their current practices to take up managing partner positions.

Now there is perceived to be a second wave of US law firms, led by San Francisco-based Orrick Herrington & Sutcliffe, contemplating a Madrid opening.

While the Americans can point to the undeniable success of the English law firms, notably Clifford Chance, Freshfields and Linklaters, lawyers on the ground say that Spain will be a more difficult market to crack for the new arrivals than has been the case in continental neighbours.

 Michael Willisch, who opened New York firm Davis Polk & Wardwell’s Madrid office in 2001, does not doubt that new arrivals are eyeing the Iberian market. With the increasing number of parties involved in major deals, clients quickly work down the list of large firms, he says.

But he believes that US firms have a huge hurdle to overcome. "This is the only big market I know in Europe where a group of local firms have remained the strongest." he says. "They have withstood the English competition and there is no reason why they will not withstand any US arrivals.”

First hire

 It looks likely that the first new US arrival will be top ten US giant Latham & Watkins. The highly regarded head of M&A at Cuatrecasas, José Luis Blanco Ruiz, has resigned from Cuatrecasas, leaving his way open to launch the firm in Spain.

Securing Blanco Ruiz, who has handled a number of high-profile corporate deals this year, including UK-based Yell’s €3bn acquisition of Spanish phone directory business Telefónica Publicidad y Información, is a significant coup. Until recently, recruiters spoke of the difficulties that US firms were experiencing in hiring talent to spearhead their Iberian practices.

A Madrid opening will make Latham only the third US firm to establish a permanent presence in Spain, alongside Davis Polk and Jones Day. Squire Sanders & Dempsey closed its office in 2005 when the team moved to the Anglo-American DLA Piper. With a 30-year track record in Spain, and major offices in Madrid and Barcelona, Baker & McKenzie is typically now viewed as part of the local landscape despite its US heritage.

Opportunities

 With the booming Spanish legal market seeing headline deals announced almost daily, nobody questions why the new arrivals are interested in opening. “Instead of talking about why the US firms are coming, we should be asking why they are not already here” one Madrid managing partner told Iberian Lawyer.

 Leading US firms are already seeing their share of the Iberian action, with Cravath Swaine & Moore and Wachtell Lipton Rosen & Katz the latest New York firms to be pulled into the ongoing Endesa saga where Simpson Thacher & Bartlett has been adviser to Gas Natural from the start. The debate among managing partners in Madrid is now less about the opportunities available and more about the extent to which the highly profitable US legal model sits with local reality.

 Avoiding stereotypes

Luis Riesgo, whose own firm merged with Jones Day in 2000, and last year became its managing partner, warns against viewing all US law firms in the same light. “We should not talk about a typical US approach or business model, attitudes vary,” he says. “The differences between the industrial Midwest, where Jones Day is from, New York or California, are enormous.” (See box, Who’s Who in the new wave.)

He cites Davis Polk’s 2001 opening in Madrid as the perfect model of what to expect from a New York firm. With just a handful of US-qualified lawyers working exclusively on US securities matters, it is regarded as the firm of choice for US securities work – a highly successful extension of its New York practice.

In contrast, Jones Day has built its international network advising American corporates, including half the Fortune 500, on their corporate legal needs as they expand around the world. “Our business model and our rates are not as aggressive as a New York firm,” says Riesgo. “It will be difficult for New York firms to maintain the same levels of profitability in Spain.”

“Latham & Watkins will have a few key issues,” notes Juan Picón, Madrid managing partner of DLA Piper who was formerly with Squire Sanders. “Their basic model, as is the case for most top-tier US firms, is based on a very high revenue per lawyer that is difficult to achieve in our market at this stage.” In addition, he believes that billable targets at most of the top US firms of between 1,800 and 2,000 hours a year for partners and associates alike could be a challenge as more lawyers are seeking a better work-life balance.

“The US firms do very well in the Anglo- Saxon markets, but I don’t think they have grasped the cultural differences with Spain, especially the ability to sustain high rates,” he concludes.

Merger options

In assessing the relative success of Jones Day in Spain, many consider the firm fortunate to have gained the critical mass required for M&A, picking up a quality local practice at a time when many local firms saw merger as the only means of surviving the Anglo-US hegemony.

Those days are long gone. The decision of Uría Menéndez against merger with Linklaters and the withdrawal of Garrigues from Andersen, although not of its own making, turned the tide of Spanish thinking away from merger with the globalising firms.

Just a few years on, the prime merger candidates who are regularly mentioned – such as Pérez-Llorca or Araoz & Rueda – have now achieved profitability levels and equity structures that make a merger with a US firm more challenging. “With each passing year, the growth of the mid-sized firms makes them too difficult to swallow for the Anglo- Saxon firms,” says one Madrid partner.

Niche approach

London-based recruiter Abrahams Russell went public on the proposed launch of a new American law firm with an advertisement in Iberian Lawyer, searching for a well-respected corporate/private equity or finance partner to open "a niche US practice focused on highvalue transactions".

For some this approach is logical – within private equity a small team can work on one or two significant deals a year, with the finance aspect being handled by a firm’s London or US offices. Specialists say this is particularly true if the client is making joint investments, as the lawyers’ role will be less onerous – reviewing the legal work of another firm.

 “For a top-ticket American capital markets firm, there is no reason to open in Spain except to follow a client they feel they may lose if they go outside the market,” says Luis Riesgo.

 While such a high-earning practice may offer an entry point, most see it as inevitable that in the medium term fee pressure would require any new US arrival to develop the wider resources necessary for larger follow-on transactions. Even international clients accustomed to the US rates on their first deal, will soon look at the market and see that they could perhaps pay less next time.

“Achieving the size required will be a challenge,” says Juan Picón. “They will need a team with different practice areas and the model of many of the US firms is not to be multidisciplinary. Private Equity may be an exception, although in my experience the current size and complexity of these deals will require coverage of different practice areas and a certain critical mass.”

 Pedro Pérez-Llorca is more upbeat about the work that can be achieved by a smaller team: “I doubt that a US firm would open a small office, it will go for something bigger. But you can do lots of good work with a team of 20 or 30 lawyers.”

Team building

Having launched, US arrivals would then face a second major challenge. In the current buoyant deal market, many domestic firms are themselves trying to expand. If the US firms may be experiencing difficulty in opening, growing may be just as tough.

For Stephen Fox, Madrid managing partner of UK firm Ashurst, the reluctance of Spanish lawyers to sign up with US firms mirrors the arrival of the US in London. “Partners fear losing their autonomy,” he says. “Lawyers are risk averse,” comments another UK managing partner, “and in this market money is not everything.”

 Allen & Overy’s Madrid co-managing partner, Iñigo Gómez-Jordana, believes that any US firm considering an entry will be looking for someone that can build a practice from nothing within five years. “There are not many people who fit this description, maybe ten people in the market in total.” Another complicating factor, he believes paradoxically, “is that they will not want to hire somebody who is looking to move.”

One commentator however credits the Americans, and their recruiters, as having a more strategic approach: “Anybody who moves would already have a clear team in mind. As in chess, the difficulty is to get the king, after that the other pieces are easier to find.”

The Abrahams Russell recruitment advertisement also requested a “credible portable business,” but many query whether such a portfolio exists. “Clients do not belong to anyone and cannot be taken anywhere. They go where they decide to go,” says Pedro Pérez-Llorca. “Clearly when building a new firm you can’t cover all practice areas, and by the time you achieve that it may already be too late to attract your former clients.”

The local response

 Overall, Spanish partners play down the threat from a new wave of US arrivals. They do not expect an invasion on the scale launched by the English firms at the beginning of the decade. The arrival of those firms coincided with an enormous growth in the Spanish legal market, allowing space for everyone, English and Spanish alike, to grow.

With the buoyant corporate and M&A market, and clamour for advisers on auction bids and counter bids, there is still little concern over increased competition. With increasing client conflicts at the top of the market, some even welcome a new wave of credible players. Of course, if the deal flow stops, this could change overnight.

More important, say most, is the potential blow to any of the domestic firms losing either a rainmaker, a large part of their M&A team, or at worst, both.