Allen & Overy warns of headwinds due to falling profits

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Allen & Overy admitted on Thursday that the law firm’s profit margin was “under pressure” due to sharp wage inflation as it reported flat pre-tax profits despite a rise in client revenue, which for the first time exceeded an annual total of £2 billion. was over.

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

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

According to the firm, the increase in the number of partners to 590 meant that the average profit per equity partner fell by 7 per cent to £1.82 million.

Wim Dejonge, global senior partner, said the company will not limit the number of new partners to keep equity partners’ take-home profits high.

“Profit margins are under pressure as we are in an inflationary environment and we cannot pass on the cost increase directly to the customer,” he added.

Referring to the fierce competition among firms to hire and retain more junior lawyers, he said a “massive pay war” has broken out in the sector. Allen & Overy raised salaries for its newly qualified lawyers to £125,000 in May, after resisting raises for that group last year due to a “challenging business environment”.

“Wage increases have been very high and this has put pressure on profit margins,” Dejonghae said.

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

Meanwhile, upon Price’s departure, DeJong said that the managing partner – whose role DeJong assumed was that of a chief operating officer – had to make a “difficult decision” due to “personal circumstances relating to his family”.

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

Dejonge, formerly global managing partner, will take over for Price for two to three months until the company appoints a permanent replacement.

He added that Price’s departure would not affect the planned $3.4 billion merger with Shearman & Sterling – one of the largest ever in the industry. The companies are aiming to put the deal to a shareholder vote in October, which would require three-quarters of each group to vote in favor.

“We are really confident from both sides that we will get the 75 percent approval that we need,” Dejonghae said.

The planned alliance, announced in May, is the culmination of decades of Allen & Overy efforts to establish a decisive presence in the US market. Dejong indicated that there could be scope for some cost savings for the companies after completion.

“Definitely the merger is about growth and business but the cost has to be better,” he said.

He specifically pointed to the scope for office sharing in some of the larger centers such as New York and London.

DeJonge, who has been a senior partner since 2016, said some activity such as mergers and acquisitions had been “a little quieter” in the past year. But the task of facilitating the transition to clean energy was a growth area.

“The energy transition sector generates an enormous amount of work for law firms, not only those dealing in infrastructure, but also those that handle the financing side of it,” he added.