How is Milbank faring in these difficult economic times?
Immergut: We had an exceptionally strong year last year - our net income was up, our profits per partner were up and we generally had a positive year. For the last seven years we've been building a firm that is counter-cyclical and inured to the ups and downs of the equity market. We had a very difficult time in the late 1980s and early 1990s and we learnt from that. And touch wood, for the first fourteen months of this recession it's working.
Right now we are representing the Enron creditors' committee and the PG&E creditors' committee, so we have the creditors' committees of the two largest bankruptcies in the history of the US going on at once. So our true counter cyclical practices were strong last year. Our non counter-cyclical practices were OK. The combination of the two, along with some expense cutting, led to a very strong year for us.
Root: In Asia the story's the same. Revenues in 2001 were up over 2000, which had been our best year in Asia. What's unusual about us compared to many of our US peers is that we are more diversified both in practice lines and geographically. We had a strong year here in Asia across our six product lines - M&A/private equity, capital markets, acquisition finance, structured finance, project finance and restructuring - in both north and south Asia. We operate our three Asian offices as a unit and expect our lawyers to be capable of working in several practice areas. This enhances our ability to keep utilization levels high, particularly in choppy markets like last year's.
You have a very wide practice area. Where do you really add value?
Immergut: Our focus is very much on high-end complex transactions. We have stressed quality forever at Milbank. Throughout our history we have been a place that has stressed high quality substantive legal work. We shy away from commodity transactions to focus on the complex deals.
Root: Unlike many UK and US firms in Asia, we have intentionally kept ourselves small and focused. We target a thin, top-end type of work and we don't try to engage in general commercial and local law work.
Asia is a very interesting legal market as many of the relationships are not yet mature between clients and law firms. How do you see the legal market evolving in Asia?
Immergut: We intend to continue how we started in Asia 25 years ago. We were the first US firm to open in Tokyo and one of the first two firms to open in Hong Kong and Singapore. When we came here it was to follow the same high-end strategy that we had followed elsewhere. We will stay with our same three offices that we have here and develop them in diverse practices. We are considering opening up in China in the near term and, when possible, Korea in the longer term.
How is your practice split here in Asia between investment banking clients and corporate clients?
Root: We have worked on 70 capital markets deals since 1998 and it is roughly a 50-50 underwriter/issuer split. We want to work with investment banks as they give us access to the deals and introduce us to the best corporate clients. But we also want to develop the corporate side as it gives us a diversified stream of business beyond the cyclical underwriting business, much of which we can direct back to our offices in the US and Europe, such as dispute resolution and IP. The same goes with project finance where we want to work on the finance side and the sponsor side. Given the ongoing consolidation of investment banks, you are serving a shrinking pie.
How does this affect your business? Are you now getting more work from fewer clients?
Immergut: It really depends where and what sector you are talking about. Firm wide, the consolidation has by and large been positive for us. We have been through four mergers with our heritage Chase client; several mergers with our original Citibank client; several mergers with our original CSFB and DLJ clients. By and large it has worked in our favour.
Did you work on the mergers themselves?
Immergut: We did the Beacon merger, which has been crucial for Chase as that's where they acquired Geoff Boisi who had such a key role in the JP Morgan acquisition. JP Morgan Chase continues as our largest client and Citigroup is our second largest client.
Root: The market goes through cycles. Consolidation of the investment banks does not mean that demand for legal services is shrinking. On the contrary, Wall Street law firms as a whole experienced much stronger demand at the end of the 1990s than they did at the outset of the decade, even though there are fewer major investment banks now. We are seeing a temporary down turn but overall the market is getting bigger. Consolidation throws up many opportunities as no single law firm can now serve any one of the five global U.S. banks on their own, as their needs are so enormous. So we get more work from existing clients and more opportunities with new clients.
How do you see the trend towards consolidation within the legal market, especially between US and UK firms?
Immergut: I foresee that in the future there will be two types of law firm in the areas of practice we cover. The first type will be the mega firm with 2000 lawyers and offices in 40 different locations. There will be less than 10 top quality organizations like that. I think there will also be probably about the same number of firms with 500-800 lawyers. Both will have advantages. We see ourselves developing into a firm with 600-800 lawyers, located in the world's financial capitals. Our geographic spread and the scope of our services will be more limited than the major UK firms and some of the US firms. Our goal is to maintain a culture where every partner at Milbank knows all the other partners. We only make four or five lateral partner hires a year and only promote six or seven internal partners a year.
So are you hiring any UK lawyers at the moment?
Immergut: In London and selectively in Asia yes we are certainly hiring UK lawyers. We jump at the opportunity to hire them when good ones become available.
What practice areas do you expect to be strong in Asia this year?
Root: There are two types of cycles in Asia - the product cycle and the country cycle. Country windows open and close. More broadly, we are seeing a significant shift both in the number and the size of deals from south Asia to north Asia. This reflects the opening up of the northern economies - Korea, China and Taiwan - and their ability to snap back from the Asia crisis in the late 1990s much faster than other Asian countries.
On the product side, we expect the equity capital markets to be reasonably active. We work closely with private equity firms and they see significant opportunities in 2002 - again primarily in Greater China, Korea and Japan. We see more acceptance of US style LBO acquisition and financing techniques we have been pioneering out here. But if you were to identify a single area that is going to grow fastest for us in 2002 it will be structured finance and NPL resolution. We did 14 bids last year in Korea alone. There are nearly $300 billion worth of NPLs in China, which by some estimates is greater than Japan. Taiwan is beginning to deal with its bad loans as well.