It is impossible to miss the daily, even hourly, barrage of bad financial market news these days. No ride in an elevator, no walk down the street, no pause in front of a storefront is without a reminder that we are facing global economic uncertainty.
This financial slowdown is different from most that we have experienced in recent decades. At the same time that transactional work is significantly curtailed, distress buys, restructurings, insolvencies, and liquidations are not yet in full swing.
As we’ve seen, law firms are not immune to this slowdown. Chicago-based firms Sonnenschein Nath & Rosenthal and Katten Muchin Rosenman, as well as international giant Clifford Chance, have laid off significant numbers. Some, such as Thelen and Heller Ehrman of San Francisco, have reached the point of collapse. In the wake of these recent layoffs, should Canadian firms follow suit and start to downsize?
The answer is no. Downsizing is premature and fails to recognize that Canada is different in several ways from the US. We have not staffed our associate ranks to the same leverage model of either the US or the UK. Accordingly, we have little room for downsizing, particularly when there are many signs that we have hit the bottom of the market and are about to turn.
While most economists say recovery won’t occur until late 2009 or later, more optimistic predictions are emerging. Jeff Rubin, chief economist of the Canadian Imperial Bank of Commerce World Markets, came out in mid-November to say that the worst is behind us and progress has started on recovery. That same day, Paul G. Parker, head of global mergers and acquisitions for Barclays Capital, predicted that M&A activity will revert to 2004-2005 levels during 2009, down from the high levels of 2006-2007 — a transitional era that will lead to stabilization. Furthermore, my discussions with senior personnel representing investors and funders are now consistently indicating a return to activity in early 2009. Of course, there are those who add a year or two to that, but increasingly the shorter time frame is being reflected as the most likely start to the recovery period.
Regardless of the timeline, the business of law firms does not rely on the recovery of stock market values and does not require complete stabilization. Though the current “bad times” have not yet led to the expected significant increase in distress-based transactions or insolvencies, I believe the dam will soon break. Insolvencies peak after the start of the financial recovery because financial institutions have no option but to wait if there is no take-out funding and no one to buy the assets. There is no purpose in forcing debtors into bankruptcy or other insolvency protection right now: no one is buying. However, buyers will emerge as soon as the market hits bottom. If we’re not there yet, we will be shortly.
As a result, it is likely that Canadian law firms will experience a recommencement of transactional work and a ramping up of insolvency and restructuring-based work at essentially the same time. In other words, Canada’s business lawyers are about to get very busy.
Now is the time to regroup and train, not to downsize. There is lots to do to prepare for the approaching surge of business. Use the lull to build skills, develop relationships, and raise your profile. Firms, hang on and encourage this investment — the payback should be good.