At the start of this year Denton Wilde Sapte established a base in the secretive Central Asian dictatorship of Turkmenistan. The former Soviet state is best known for the surreal personality cult surrounding its late president. Only two local law firms exist in the country – and one now has an exclusive association with Dentons.
The City firm has a long list of offices in offbeat destinations. It has branches in Kazakhstan and Uzbekistan, and a large African network that includes, among others, Rwanda and Uganda. It’s a strategy that mystifies some City observers. “I don’t understand how you can make money in these places,” says a leading legal consultant.
The bewilderment is amplified by the fact that, while Dentons has eight offices in the Middle East and partners on the ground in Central Asian cities like Almaty and Tashkent, it’s bereft of offices in the USA or continental Europe (except Paris).
It’s similarly absent in Asia. Five years ago Dentons shut its offices in China, Japan and Singapore, to further general bewilderment. “To pull out of the fastest-growing economy in the world makes no sense,” says an ex-Dentons partner. In March, it reopened in Singapore, the timing provoking further dismay. “It’s hard to understand the firm’s logic,” adds another consultant.
Dentons’ practice mix is equally confusing. It lacks heft in banking and corporate and relies on niches like energy, telecoms and insolvency. Moreover, its ardent focus on the Middle East – where it has eight offices and 150 lawyers – has left many observers scratching their heads.
“It’s hard to know what Dentons stands for,” adds another critic. “What’s going on there?”
Howard Morris, Dentons’ chief executive, inherited a firm in crisis. He took over in 2004 with profits and revenues in freefall. PEP had tumbled to £279,000 – a good third less than other mid-tier firms like Norton Rose.
One fifth of the firm’s 150-strong partnership had quit in the previous year. Profit margins stood at 19%. Despite boasting some big-name clients Dentons simply wasn’t doing enough high-margin work for them. And the firm had pulled out of Asia and allowed its eight-country European network to dissolve.
Its global ambitions were more or less over. Morris was elected on a platform of change. To arrest the decline, he focused on emerging markets. The firm had a historical presence in the Middle East and a toehold in Africa and the CIS.
Under Morris these markets became central to Dentons’ business model. Howard Morris inherited a difficult task and his solutions have baffled the City. How successful has his unorthodox strategy been?
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Denton Wilde Sapte was the result of a merger between Wilde Sapte and Denton Hall in the autumn of 2000. Back in the 1990s,Wilde Sapte was one of the City’s top banking firms – while Denton Hall was renowned for its energy and media expertise and a broad network of foreign offices and allies.
The plan was to marry Wilde Sapte’s blue-chip reputation with Denton Hall’s global reach to create a dynamic 900-lawyer business that would challenge for top-tier work. The plan failed.
Both sides had entered the union from a position of weakness. In 1998,Wilde Sapte had come within a whisker of merging with accounting giant Andersen Legal and the move had divided its partnership. Denton Hall was still reeling from a failed attempt to complete an ambitious tripartite merger with Richards Butler and Theodore Goddard in the same year.
“Jilted brides finally find their match,” ran a headline after the merger was announced. The two firms had different objectives. Wilde Sapte needed to merge its way out of trouble; Denton Hall, swept up in the spirit of globalisation, was hungry for merger partners. Neither party did enough due diligence, according to former partners.
“The result was a group of practices that accidentally found themselves in the same place,” says former Denton Wilde Sapte partner Mark Gay. Wilde Sapte’s much-vaunted finance department was depleted from the start. A host of banking partners opted to move on rather than join the new firm. A quick glance at where they ended up – Nick Syson at Linklaters for example or James Johnson at Clifford Chance – indicates the group’s lost potential.
The engine driving the new firm should have been a top-rank global finance practice – but it never got going. The bulk of Wilde Sapte’s revenues came from its long-standing relationship with NatWest Bank. But over-reliance on one client can be risky. In 2000, the same year as the Denton Wilde Sapte merger, the Royal Bank of Scotland acquired NatWest. RBS introduced vigorous panel processes that drove rates down and – particularly after the loss of its European network – Dentons’ finance department struggled.
The investment-banking boom passed Dentons by; it did not build a meaningful securitisation or private equity practice; it struggled to hire and hold onto top-grade partners. By 2005, Dentons was, in one former partner’s words, “bruised and disillusioned.”
Howard Morris’ priority once he took over was to push the firm up the value chain. Dentons has always boasted an array of big-name clients – they include Royal Dutch Shell, Total and Vodafone – and Morris had to find a way of attracting bigger mandates from them. Dentons had recently introduced a sector strategy to take advantage of its disparate collection of practice areas.
The idea was that four sectors – energy, transport and infrastructure; financial institutions; real estate and retail; and technology, media and telecoms – would employ lawyers from all departments of the firm. Morris focused his strategy on providing sector-specific expertise to clients in those areas in a bid to play to the firm’s strengths.
At the same time, the firm would focus its global ambitions on jurisdictions where it had a competitive advantage – the Middle East, the CIS and Africa. In the last two years, Dentons has opened offices or formed alliances in Amman, Doha, Riyadh, Kuwait, St Petersburg and, most recently, Ashgabat, capital of Turkmenistan.
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“I have to be honest, I thought Ashgabat was from a Harry Potter book,” quips Howard Morris as Client Report sits down with him to discuss the firm’s strategy.
“All the majors are piling into Turkmenistan since its crazy president died a couple of years ago. It has huge natural gas reserves.”
The 52-year-old insolvency specialist is renowned for being one of the City’s more sanguine managing partners. He sees plenty of opportunity in difficult destinations. The firm has even been considering Iraq. Much of his time is now spent darting between London and the Middle East.
The week we meet, Dentons has been appointed as advisers to the Qatari government for its World Cup bid in 2022. “I did wonder how they could possibly expect footballers to play a summer competition in a place where the temperature hits 50 Celsius,” Morris says, with a smile.
“But the government’s solution is to build 15 underground stadia next door to each other. That’s the fantastic thing about these Arab countries. They dream something and they do it.”
Morris is bullish in his defence of the firm’s emerging markets focus. More than 80 lawyers have been posted to the Middle East during Morris’ time in charge, including then-chairman James Dallas to Dubai.
“The Middle East sits perfectly with our strategy,” Morris continues. “It’s the same clients, the same industries and the same sectors.” The Riyadh office, opened in 2007, is “doing better and better every month.”
Recent mandates, including a Saudi investment group’s $1.6 billion bid to privatise Saudi Arabian Airlines’ cargo business, explain his optimism. “The only problem is finding good people willing to go out there.”
Dentons left Asia before Morris took over. But he maintains it was the right course. “It was a hard decision,” he admits. “But we were losing money there.
Find me a firm that is making money in Beijing? There aren’t many. So we closed Asia against the commitment that we would apply our investment in the Middle East.” Dentons’ Middle East practice saw a 59% increase in revenues in 2007. Whether that growth can continue, however, is far from clear. Arab countries, too, are getting squeezed by the global downturn.
All the Gulf ’s largest economies are set to contract this year, according to the IMF. But Dentons has continued to invest in the region. This year, two of Dentons’ six partner promotions have been in Dubai, despite the perilous state of the emirate’s economy.
Dubai’s population could shrink by one-tenth and house prices could fall 70% in the next two years, according to a recent UBS report. “Dubai’s bubble has gone down, it hasn’t burst,” Morris argues.
“It remains a natural hub. It’s got the infrastructure and it is sufficiently established. Some people will lose a fortune in the downturn, but it will be back.” Morris is equally bullish about the firm’s investment in Africa.
Dentons’ network of associate firms includes Algeria, Botswana, Ghana, Kenya, Mauritius, Rwanda, Tanzania, Uganda, South Africa and Zambia. “It always makes for an interesting talking point at cocktail parties,” Morris says.
“People ask what a City firm is doing in Africa. It’s very simple, we’re making money. The continent is rich in sector work.” But Africa’s contribution to the firm’s overall coffers remains small.
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To cling onto its best partners, Dentons had to raise its financial performance. Morris has pushed the firms’ PEP up 68% to last year’s £470,000: an encouraging increase, but one that still leaves the firm lagging well behind peers such as Norton Rose. In part, the increase has been achieved by a healthy rise in profit margins, from 19% in 2005 to 25% in 2008 (Norton Rose and Lovells posted profit margins of 33% last year). But a purging of the equity partnership – and extensive use of salaried partnerships – has helped.
Between 2005 and 2008 the firm’s equity partnership shrank from 104 to 92. When it comes to growing the business, Morris’ performance is less impressive. The firm’s turnover increased by 7% between 2005 and 2008.
Revenue per lawyer increased just 4%. By way of comparison, Cameron McKenna’s turnover increased 44% during the same period and Norton Rose’s grew 41%. Norton Rose’s revenue per lawyer, meanwhile, leapt 18% and Simmons & Simmons increased by 17%.
Howard Morris steadied the ship after a disastrous period. His decision to steer it in an alternative direction may yet reap dividends. But, during a boom that has brought massive rewards to Dentons’ competitors, he has struggled to expand the business. And now it faces the global recession.
As Client Report was going to press Dentons announced its 2008-9 financial results: its revenues are up 3% but its PEP down to an alarming £300,000.
Dentons’ banking department has been its perennial underachiever. Last year, finance revenue reportedly dropped 3.2% to £41.1 million. The group has relied on mid-market asset and trade finance work at a time when peers turned in record profits from leveraged finance and securitisation. The firm’s comparatively low PEP and lack of a European network has meant it has struggled to hire and hold onto ambitious partners.
In the last couple of years, for example, Dentons lost Islamic finance specialist Rahail Ali to Lovells and capital markets expert Farmida Bi to Norton Rose.
Ever the optimist, Morris argues that the firm’s failings could yet prove an advantage. “Our banking practice is agricultural. It doesn’t do securitisation. It doesn’t do a lot of debt capital markets. As a result it’s had a good year. I’m pleased that we don’t have stuff like private equity because a lot of those lawyers would be playing sudoku at the moment.”
Morris also points out that the firm is rebuilding its Islamic finance practice. Despite its problems, Dentons has maintained a reputation in restructuring and insolvency and that should prove advantageous in the current climate. It recently advised the Financial Services Compensation Scheme on the nationalisation and transfer of the deposit business of Bradford & Bingley to Abbey National.
Next year, says Morris, finance is projected to have its best year ever. “And we are very cautious saying stuff like that. The balloon has burst for others and it has only deflated a bit for us,” he asserts. Morris is the first to admit that Dentons has underachieved since the merger and that there is room for improvement. But he remains adamant that its investment in emerging markets will pay off. PEP, he assures, will be competitive with firms like Norton Rose and Simmons & Simmons within five years. (Both firms boasted PEP north of £600,000 in 2008.)
“The sector strategy was here before, but now we have an imperative,” he continues. “We have built a critical mass in a number of key emerging markets. The ability to understand a client’s issues in a geography that matters to them is a compelling proposition.”
In today’s uncertain economic climate Dentons face an uphill task to achieve parity with their rivals and a new strategy needs time to gather momentum. Many of the firm’s new offices opened in the last two years. A scan of the deals Dentons has worked on recently – such as advising an Indian infrastructure client on its tender bid for the $1 billion redevelopment of Russia’s Pulkovo Airport – suggests the firm is making headway. A lot depends on whether the firm’s investment in emerging markets – including some less obvious jurisdictions – can genuinely make it a compelling proposition to some of its long-standing clients.
Dentons has advised Royal Dutch Shell on a number of projects over the years. But, historically, the oil giant has not called on its services for large cross-border mandates. “We tend to use the main Wall Street firms for big-ticket transactions,” says Shell’s legal chief Beat Hess. “But in the Middle East we would consider Denton Wilde Sapte for M&A. In that region it has the scale and expertise and that could meet our needs.” Howard Morris can only cross his fingers and wait.