Focus: Making a bundle

Allen & Overy can easily afford such swanky premises. As one of Britain's elite "magic circle" law firms, its profits have surged on the back of the boom in mergers and acquisitions, and advising companies on complex regulation and the minefield of competition law.

This week Allen & Overy is expected to announce a 27% rise in profits to about £330m, netting its full partners an average of about £1m. Other firms are enjoying the profits bonanza (see below). Linklaters, the world's second-largest law practice, last week unveiled a 20% rise in annual revenues to £1.1 billion and a 29% jump in profits to £490m. The average partner will pocket more than £1m.

For the legal elite, business has never been so good. Last year the top 100 UK firms billed £10.8 billion in fees; this year they should easily breach £12 billion. Collective profits should jump from £3.5 billion to well over £4 billion. Fees are rising, with a select group of top-flight lawyers charging £1,000 an hour against the benchmark rate for a partner of £600 to £800, according to a survey by Legal Week, an industry journal.

However, the giants of the legal industry face huge challenges. Cutthroat competition has led to a price war for talent. American law firms stung by the international expansion of the magic-circle Britons are plotting how to fight back. Meanwhile, staff are being stretched to the limit, leaving the firms open to possible mistakes and litigation if deals go sour.

"They are working flat out. You wonder how long it can continue. Something has got to give," said a former senior partner.

Tony Williams, a former managing partner at Clifford Chance, the world's biggest law firm, who now runs the legal management consultancy Jomati, said: "It is a great time to be a lawyer. They understand that the rewards are high and in some cases the sums are eye-popping. But it comes at a high price." A FEW months ago a senior partner at a leading City firm was telephoned to be told that his wife had stormed into the office, dumped six binliners containing his personal belongings onto the floor and flounced out of the building.

The gruelling culture of long hours and relentless pressure endured by many legal eagles appeared to have broken yet another relationship. No wonder there is a joke among the high-flyers that it is only after the second divorce that a partner can claim to be truly committed to the firm.

In legal circles, tales abound of wives destroying the Blackberry mobile devices of their partners in fits of frustration. At Charles Russell, according to industry newspaper The Lawyer, how your Blackberry meets its end has become a status symbol. On the lowest rung is the partner whose gad-get was flushed down the toilet. Higher up the pecking order are those whose partners have tossed the e-mail devices into swimming pools during supposedly romantic weekend breaks. Top of the tree is the partner who had his shattered under the red stiletto heel of his mistress.

It has always been tough at the top, but the pressure has never been more intense. And the desire to win has become obsessive. An American lawyer based in London was recently heard complaining that on his daughter's wedding day he was able to bill clients for only six hours of work.

"The profession has changed," said one lawyer. "Whatever it is, every client wants the work done by tomorrow. Everything is urgent. If you can't do it, someone else will."

That pressure has led to a fierce battle for talent. Salaries for newly qualified lawyers have jumped by about 15% this year to between £65,000 and £75,000. Associates with three years of experience are being lured away with 20% rises as top American firms pay close to £115,000.

"They are paying silly money, full stop," said James Baxter, editor of Legal Business. "The problem is that there is just too much work and too few lawyers."

But there is trouble in legal land. A quarter of all lawyers want to get out of the business because of the stress and long hours, according to a survey by The Lawyer. The figure rises to one third for associates, with many no longer set on becoming a partner. Even managing partners are dissatisfied - one fifth want to quit.

Some dismiss the survey as alarmist. "More than three-quarters of them are happy, despite putting in 20-hour days and living on black coffee and Mars bars. I think that's pretty fantastic," said Matthew Rhodes, a former lawyer who runs Rollon-friday.com, an online legal community.

That may be true, but sometimes the pressure can have tragic consequences. In February, Matthew Courtney, 27, a Freshfields lawyer who had recently become concerned about his heavy workload, plunged to his death down a stairwell at Tate Modern. Freshfields said Courtney was an extremely promising, talented and committed lawyer, but denied he had been routinely required to work 16-hour days.

Although an inquest recorded a verdict of accidental death, the tragedy has ignited a fierce debate about the punishing hours endured in this high-pressure business.

There are other problems. "If you look at any firm, it probably loses a partner every other year to drink. Office relationships show no sign of diminishing. The number of security videos with compromising pictures is not falling," said Williams.

City firms are taking these matters seriously. Over the past year, several have introduced "counsel" or "director" roles that offer genuine responsibility, good career prospects and high six-figure salaries without the burden of being a partner. Other innovations include providing "sleep rooms" and concierge services to help run the lives of hard-pressed staff.

"When markets are very hot there are always challenges balancing the demands of clients and the work-life balance of staff. We are working very hard at it, but we have not got it quite right yet," said Tony Angel, managing partner of Linklaters. THE wider issue is the continuing battle for supremacy between British and American firms. Clifford Chance, Linklaters, Freshfields and Allen & Overy have in recent years taken big gambles by expanding internationally. There have been difficulties. Clifford Chance's double merger in 2000 with Rogers & Wells in America and Punders in Germany prompted pay disputes and an exodus of partners.

Angel has worked wonders at Linklaters, taking radical steps, such as axing underperforming partners, cracking down on costs and expanding aggressively overseas. About two-thirds of the firm's income is now from overseas, up from 10% a decade ago.

THE CITY'S BEST PAID LAWYERS

MORE than 400 lawyers at City legal practices will earn in excess of £1m this year, with partners at Slaughter and May top of the pile on an average of £1.5m.

But many who have made a lucrative career advising private-equity firms, will get more. They are likely to include Raymond McKeeve and Graham White, two private-equity specialists poached from Linklaters by the American firm Kirkland & Ellis last year. They are said to be on guaranteed three-year deals of about £3m a year. Their colleague Jim Learner, who advises Bain Capital, could earn even higher sums.

Mike Francies at Weil Gotshal & Manges is also one of the highest-paid lawyers in the City. Other big earners include Bruce Buck, the partner in charge of Skadden Arps's European operations and an adviser to Roman Abramovich, the Russian billionaire owner of Chelsea football club. Buck, who is also chairman of Chelsea, is thought to earn more than £3m a year.

American firms have tended to pay more because of their broad use of an "eat what you kill" system where pay is linked to the business a lawyer bills. British firms mainly use a "lock-step" system that rewards partners based on their seniority. But booming profits here will narrow the pay gap. At Linklaters, Tony Angel and David Cheyne, a high-profile mergers and acquisitions expert, will earn about £1.5m each. Clifford Chance's Matthew Layton, an adviser to Permira, and managing partner David Childs will pick up a similar sum, as will Freshfield's senior partners Guy Morton and Konstantin Mettenheimer. Tim Clark, Slaughter and May's managing partner, and Nigel Boardman, a legendary mergers lawyer, will pocket about £2m.

The elite UK firms have been smarter at riding the globalisation wave, giving them an edge in complex cross-border transactions. "If your competitive advantage is to build across the globe, you better bloody well invest. This is a huge UK success story," said Angel.

Many American rivals, which had for years concentrated on their hugely profitable home market, are scrambling to catch up. And while big American firms have tried to invade London, the firms of the magic circle still have a formidable grip.

Top British firms, helped by London's emergence as the world's leading international financial centre, and a weak dollar, are now as profitable as leading Man-hattan firms - a feat that was considered impossible a few years ago.

The big prize will be if any of the big firms decide to list on the stock market. New laws expected to be passed within the next 18 months will allow legal practices to take on external investors for the first time. So far, this has been seen as more of an issue for mid-tier firms seeking to transform their businesses by a big injection of capital. But Alex Novarese, editor of Legal Week, says that if floats are successful "it would start a domino effect, and everyone knows it". That would revolutionise the market and could force a big firm to look at going public.

Valuing the big firms is tricky, but the landmark flotation of Slater & Gordon in Aus-tralia this year at 15 times earnings provides a rough guide. Using this measure, Clifford Chance would be worth £5.2 billion, Linklaters and Freshfields each more than £7 billion, Allen & Overy £4.9 billion and Slaughter and May £2.6 billion.

But the boom has spawned concerns. Leading lawyers admit privately that law firms are being asked by voracious private-equity houses to carry out due diligence on deals in as little as five days - work that would normally take a month.

"There are concerns over what liabilities we could face if things go wrong. There are accidents waiting to happen," said a senior private-equity lawyer.

Some firms are already gearing up for a downturn in the economy by recruiting experts in restructuring troubled companies.

There will be stiff challenges ahead but, for now, the top legal firms are enjoying their time in the sun.