The mother of all mergers?
This past Sunday, one could feel the tectonic plates atop which the legal sector is built rumble, stir and groan a little as the seismic news broke of a possible merger between Magic Circle firm Allen & Overy (A&O) and the beleaguered New York blue-blood firm Shearman & Stirling (Shearman). If the firms’ respective partners vote the merger through, the new, sui generis megafirm of A&O Shearman will be one the biggest players on the global stage, with 3,900 lawyers and 800 partners working out of 49 offices.
The shockwaves of the surprise merger announcement – the seriousness of which is underscored by the launch of a dedicated website-cum-prospectus for the proposed new firm, complete with bromance video featuring A&O and Shearman’s respective senior partners Wim Dejonghe and Adam Hakki – have continued to be felt throughout the week, igniting a wildfire of reportage, speculation and analysis in the media and online. Below, we have rounded up some highlights for you, along with our own thoughts as to why this merger represents a big opportunity for other firms.
The news has generally been welcomed by the LinkedIn commentariat, albeit with some reservations. Scott Gibson, director of legal recruitment agency Edwards Gibson, writes that it’s “probably a good thing for both firms”, noting that “the new firm will have global scale and punch with exceptional offerings in: leveraged finance, debt capital markets, structured products, project finance and, from a London vantage point at least, a truly formidable pitch in financial services regulatory”. However, Gibson also wonders whether it will in fact turn out to be a “legal chimera (in Greek mythology a monster having a lion’s head, a goat’s body, and a serpent’s tail)”, something he returns to in his concluding paragraph:
“Assuming the merger goes ahead, A&O Shearman will certainly be a force, but the devil will be in the detail; going back to the chimera analogy – an obvious question will be which part(s) of the new firm will constitute the ‘head’ and which the body’ (let alone the serpent’s tail)?”
This is a good question, and one it seems that A&O will take the lead on answering: Christopher Saul, Slaughter and May’s former senior partner, calls the proposed merger “a smart move by Allen & Overy” and highlights the fact that making the announcement ahead of working out the finer details “pre-empts the risk of an agonising endless courtship […] and suggests that A&O had the negotiating leverage to treat partner votes as something of a formality. Shearman partners surely can hardly say no when the vote comes”.
And this is a common theme throughout much of the commentary – the fact that although both firms are hailing the move as a merger, the reality is that this term is serving as a bit of a figleaf to spare Shearman’s blushes: as the Legal 500’s publishing director David Burgess points out, “the talk last week was ‘is [Shearman] going under as we can’t see it surviving’. So putting aside all the repurposed press releases of this morning, it is clearly not a merger, but a distressed sale”.
This is a reference to Shearman’s recent troubles following failed merger talks with Hogan Lovells, which ended in March, plus a string of partner defections. Indeed, even the news of a potential bright new future for the remaining Shearmans talent has not put a stop to the exodus: within days of the proposed merger with A&O being announced, an entire project team defected from Shearmans to Ashurst. And so the firm’s troubles have left it vulnerable to being muscled – which is precisely what A&O is now doing, according to The Lawyer’s Katy Dowell and Matt Byrne, who call this a “strong arm move”:
“Make no mistake, the proposed tie-up between Allen & Overy (A&O) and Shearman & Sterling has all the hallmarks of a US-style corporate takeover, albeit one led by a UK firm. Just a few short months ago Shearman and Hogan Lovells ended their talks. Now A&O is picking over the carcass of the dead deal.”
Dowell and Byrne go on to point out the sheer discrepancy in the size of the two firms, with A&O dwarfing its proposed merger partner in terms of headcount, revenue and reach. According to the sceptics, they write, A&O’s keenness in spite of the size disparity may reflect the fact that the City-based firm is “so desperate to fight back against rampaging US firms in its own backyard that it is in effect ‘stooping’ in its merger choice.”
Whether stooping or not, many can see the wisdom of the proposed merger/takeover from A&O’s perspective. Christopher Saul concludes his post mentioned above with the following thought:
“This inevitably will put pressure on the rest of the Magic Circle. They may like to characterise this as an opportunistic strike back by the empire but will be wondering how to ratchet up their US strategy in response.”
I couldn’t agree more. As I explained in the comments section of one of my own posts regarding the merger, the onus is now on the other MC firms to act, because if they choose not to do something similar, they risk their global strategies being second-tier strategies behind the new global elite. Slaughter and May proves that an alternative path is an option, but the other three MC firms have been cookie cutters of A&O. Until now.
And therein lies the great opportunity for this section of the market as a whole. I wrote about the benefits that the new firm might enjoy in the medium term if only the partners are willing to embrace the risk – becoming one of the top four transatlantic firms. I think the same applies for the Magic Circle competitors as they scramble to take in and then adapt to this potentially paradigm-shifting development: by shedding their reputation for being risk-averse and daring to dream big, the UK legal sector’s big players could usher in a new and exciting era of consolidation that will change the shape of the market as we know it today – globally, and for good.
Reading list
Here is some more coverage to dive into if you have the time and interest:
Mergers are back in fashion
Hot on the heels of the A&O Shearman announcement comes the news that UK law-firm mergers have risen by a whopping 23% over the past year, from 99 in 2021 to 122 in 2022. The figures come courtesy of accountancy firm Hazlewoods, whose associate partner Ian Johnson states that “after two sluggish years M&A activity between law firms has come back to life”. Boy, have they!
Although still not back to pre-pandemic levels – there were 174 mergers in 2018 – the rapid rise in consolidations reflects the fact that as we continue to emerge from the shadow of the pandemic, many practices in the very fractured UK legal market are becoming willing once again to seek greater safety in numbers.
In addition to Knights’ shopping spree across the regions and Stowe Family Law’s slew of acquisitions, some of the recent, newsworthy mergers that make up the past year’s bumper numbers include Holland & Knight’s merger with Waller Lansden Dortch & Davis in March, and Orrick’s fusion with Buckley in February.
I have no doubt that Sunday’s shock announcement – how did A&O and Shearman’s merger teams ever manage to keep this under wraps? – will act as an accelerant and we will be seeing lots more M&A activity as a result. But when it comes to the increasing volume of the merger mood music, it remains to be seen whether A&O Shearman will be the conductor or just another instrument in the orchestra. If the latter, both firms will be hoping it’s not a wind instrument.
Bearing gifts: why law firms fear private equity investors
We seem to be on a roll this week in terms of M&A-related stories – this next one is all about the A. Last Friday, the Law Gazette ran a very interesting article on why it can be difficult for private equity investors to convince law firms that they should embrace rather than fear them. The piece is based around an interview with investment firm Blixt’s principal, Rachel Reddy, who explains the situation with an interesting early Nineties movie analogy:
“People have said it’s like Pretty Woman, where Richard Gere rips apart companies, taking costs out and letting go of lots of people. That is not how we see it at all. We know it’s a people-based business and fundamentally the key is developing a proposition that works for people. We don’t go into a people-based business and destroy everything about it by cutting costs.’”
That’s reassuring as far as it goes, but then one has to bear in mind that Blixt itself has snapped up some regional players in the form of FJG in Essex, North-West firm Farleys and East Midlands practice Nelsons: private equity investors may not be asset strippers (after all, what fat is there to cut from a business that is all about the strength of the brand, the existing talent and the ongoing matters?), but they are hunters – and not everyone welcomes being thought of as prey, no matter how appealing the incentives.
And there are enticements aplenty: private equity investment can help cash-strapped firms manage the competing interests of younger, more junior partners who are keen to grow the business by investing in tech and BD, and senior partners whose primary concern is getting the cash out. A new, magic money spigot may well keep everyone happy.
But there is always a price of course, and that comes with the investors’ exit strategy. The Gazette article quotes Peter Haden, the chief exec of private equity firm Sun European, who is very open about the fact that his outift’s general strategy is to sell businesses on within five years. This is only palatable to the business if the people within it have been given a brighter future than they faced before the investors stepped in. But whose crystal ball can look that far ahead?
The billable hour – the enemy of diversity?
A new study has found that the legal sector’s obsession with the billable hour as the measure of all things, coupled with a lack of flexibility in terms of working practices, is preventing greater diversity within the industry.
The research published by the Legal Services Board (LSB) highlights “a culture of working long hours to achieve certain billable hours, which might exclude some groups”, a “lack of flexibility in working practices and working in outdated and inaccessible physical environments” and a need “to be perceived as the ‘right’ sort of person clients will expect to work with”.
It’s important to view the study’s findings in the context of its very small sample base of 30 respondents: the LSB page states that the research is not intended to be representative, but is instead “a qualitative study on the experiences of 30 legal professionals from underrepresented groups trying to get into, feel part of, and succeed in the legal profession”.
The sample base includes “a mix of gender identities, sexualities, ethnic backgrounds, religious beliefs, socio-economic backgrounds, presence of health conditions, neurodiversity and disabilities”. In other words, the kinds of people that law firms are (at least publicly) committed to recruiting in order to broaden the diversity of their talent pool.
Matthew Hill, LSB’s chief executive, states that “The insights provided by this study highlight enormous opportunities to make things better by changing the way the sector does business. We hope anyone serious about inclusion in the legal services sector will use the research to tackle the barriers that lawyers face every day.” Hear, hear.
Family lawyers urged to join the judiciary
Sir Andrew McFarlane, president of the Courts and Tribunals Judiciary’s Family Division, has urged hundreds of family lawyers to aspire to the bench and thereby help ease the national shortage of deputy district judges and recorders.
Speaking at the flagship conference of Resolution, a family law-firm group, last Friday, McFarlane highlighted the well-publicised dearth of judges, which is leading to long delays in bringing cases before the family courts: “We need more deputy district judges and recorders, and full-timers. If you’re interested in becoming a fee-paid judge, then talk to local judges in your local courts. We’re very keen to reach out to engage you.”
He went on to outline the application process, which he stated is “entirely blind” before adding: “People are just looked at on merit. It does not matter who you are, what you look like, what your age is – we want good people to come forward.”
The process may be blind, but according to at least one former applicant attending the same conference at which McFarlane issued his appeal, it is also “shitty”, as reported in the Law Gazette: “The process is shitty for one”, this solicitor, who has applied multiple times to become a judge, told the room during a discussion of what more can be done to attract applicants. “You cannot tell me people are not applying. They are. They are just not getting in.”
This seemed to be a common theme amongst the solicitors who had tried to apply: there were complaints about only receiving “generic feedback” on the reasons for failing the application process, which prevented candidates from knowing which areas they needed to improve on. One solicitor lamented: “People on the bench are telling you, ‘you can do it’. But you go through the process and it is an awful process”.
I hope Sir Andrew takes this feedback on board and that the judiciary takes a long hard look at the application process to make sure the left hand is not being actively undermined by the right: having to appear before the family courts is often heartbreaking enough – having to endure long delays beforehand only exacerbates the pain. And bringing greater diversity to the bench can never be a bad thing.
Raising the Bar (Council)
Speaking of greater diversity, I was really pleased to read about the appointment of Barbara Mills KC as the first Black leader of the Bar Council. This Ghana-born barrister, who escaped her home country following a military coup, has been elected to be the Bar Council’s vice-chairwoman, starting next year. Congratulations, Barbara!
GC moves
Emma Whyte, formerly of Slaughter & May, has been appointed as the new GC of ASOS
