Allen & Overy warns of headwinds as profits drop

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Allen & Overy on Thursday admitted the law firm’s profit margins were “under pressure” from sharp pay inflation as it reported flat pre-tax profits despite a rise in client revenue that took the annual total over £2bn for the first time.

The firm was the first of the “magic circle” of large London-based law firms to announce results for the year to April 30. It said pre-tax profits fell marginally to £892mn, from £900mn the previous year, while client revenue grew 7 per cent to £2.1bn.

The firm also announced that global managing partner Gareth Price, whose term was due to run until at least April next year, was leaving “for personal reasons”, ahead of its planned merger with US rival Shearman & Sterling.

An increase in the number of partners to 590 meant that average profit per equity partner fell 7 per cent to £1.82mn, according to the firm.

Wim Dejonghe, global senior partner, said the firm would not limit the number of new partners in order to keep equity partners’ take-home profits high.

“The profit margin has been under pressure because we’re in an inflationary environment and we can’t charge on the cost increases directly to the client,” he added.

There had been a “massive salary war” in the sector, he said, referring to the fierce competition among firms to hire and retain more junior lawyers. Allen & Overy increased pay for its newly qualified lawyers to £125,000 in May, after opting against a raise for that cohort last year due to the “challenging business environment”.

“The salary increases have been very substantial and have put pressure on the profit margin,” Dejonghe said.

However, he insisted that partners had been “fully involved” in decisions about pay and had wanted to ensure Allen & Overy maintained its competitiveness.

On Price’s departure, meanwhile, Dejonghe said the managing partner — whose role Dejonghe likened to that of a chief operating officer — had had to make a “difficult decision” because of “personal circumstances related to his family”.

“It was not an easy decision for him but I think he made the right call,” he said.

Dejonghe, previously global managing partner, will fill in for Price for two to three months until the firm appoints a permanent replacement.

He added that Price’s departure would have no effect on the planned $3.4bn merger with Shearman & Sterling — one of the biggest the industry has ever seen. The firms are aiming to put the deal to a partner vote in October, requiring three-quarters of each group to vote in favour.

“We are on both sides really confident we will get the 75 per cent approval that we need,” Dejonghe said.

The planned tie-up, announced in May, is the culmination of decades of efforts by Allen & Overy to establish a decisive presence in the US market. Dejonghe indicated there might be scope for the firms to make some cost savings after completion.

“The merger is of course about growth and growing the business but the costs should get better,” he said.

He particularly pointed to the scope to share offices in some big centres, such as New York and London.

Dejonghe, who has been senior partner since 2016, said that in the past year some activities, such as mergers and acquisitions, had been “a bit quieter”. But work to facilitate the transition to cleaner energy was a growth area.

“The energy transition space generates very substantial amounts of work for law firms, both with the people that are operating in the infrastructure space but also those that control the financing side of that,” he said.