Transatlantic mergers are a hot topic once more after two big deals and Clifford Chance’s global managing partner’s relocation to New York. Neil Rose asks whether more will follow
Could it be that the long-awaited rush of UK/US mergers is finally about to happen?
This month, City firms DLA and Nicholson Graham & Jones both formally began their new lives with Piper Rudnick Gray Cary and Kirkpatrick & Lockhart respectively, while the transatlantic pacesetter among the big firms, Clifford Chance, made front-page news in the Financial Times by relocating its global managing partner, Peter Cornell, from London to New York.
The world’s largest law firm says Mr Cornell’s main role will be to share his knowledge of the firm’s global network and clients as part of a bid to grow the US practice.
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The critics – and Clifford Chance, perhaps simply because of its size, attracts more than most – prefer to think that Mr Cornell’s main role will be to knock some heads together after five years of difficulties since the firm merged with Rogers & Wells.
Back in the mid to late 1990s, the prospects of transatlantic mergers were being constantly talked up. Since that time, there have been several deals of varying magnitude, as well as plenty of failed talks (such as Ashurst and Fried Frank), but until DLA, none of the mergers was of equals in size terms.
In fact, most have been large US firms swallowing up far smaller City practices, such as Steptoe & Johnson taking over Rakisons, and Reed Smith absorbing Warner Cranston. The biggest by some distance was Jones Day last year merging with mid-tier Gouldens, creating the sixth largest firm in the world. Only Clifford Chance and Withers in its 2001 private client merger with New York’s Bergman Horowitz & Reynolds have reversed this trend.
DLA’s merger creates the third largest firm in the world based on number of lawyers (more than 2,700 in 18 countries) and second on revenue (projected at around £800 million for 2005). Clifford Chance has around 3,300 lawyers in 19 countries, while its revenues are likely to top £1 billion this year.
Another feature of the DLA deal is that these are not firms operating at the top end of the corporate and finance world. Both practices have strong regional elements domestically – Piper Rudnick Gray Cary is in 20 US cities, ranging from the big metropolises to the likes of Easton, Maryland; DLA is in nine UK cities – and focuses instead on middle and upper-mid market clients.
Announcing the merger last month, DLA chief executive Nigel Knowles said: ‘We will differentiate ourselves by being one of the few global firms that is not predom-inantly capital markets-driven.’
Nicholson Graham & Jones’s merger is also not at the top tier of the market. The combined firm has 950 lawyers in ten US offices plus London. The firm characterises its client base as ‘entrepreneurs, growth and middle-market companies, as well as leading global corporations in every major industry group’.
London senior partner Michael Johns says that since starting merger discussions, the two firms have worked together on ‘dozens of client engagements’, for example acting on international transactions for Kellogg Brown & Root, the engineering and construction arm of US energy company Halliburton, UK litigation for World Wrestling Entertainment, and London-based insurance coverage claims approaching $1 billion for various clients.
UK and US firms dominate the international legal market. Around 100 US firms have offices in London, and despite a hiring spree by some in the last year, few have the capability a merger with a City firm can offer. Far fewer UK firms have set up in the US and have also generally made far less progress.
The conventional wisdom is that mergers are inevitable, whether to handle the relatively limited amount of truly multi-jurisdictional work, or to service that far larger number of organisations that regularly have matters arising in several jurisdictions, related or otherwise. The DLA merger is arguably mainly aimed at the latter market.
In his new book, Law Firm Mergers, Giles Rubens, a senior consultant at professional services consultancy firm Hildebrandt International, explains that to compete for certain types of work – and in particular international mergers and acquisitions, capital markets and litigation work – there is no realistic chance of being a leading player without a significant geographic capability.
He says that while for a small number of firms it may be possible to provide such capability through a network or alliance of firms – working on the so-called ‘best friends’ basis, of which Slaughter and May is the most high-profile proponent – for the majority such an approach is not likely to meet the expectations of the sophisticated purchasers of such services.
He writes: ‘Hence there is an imperative in some firms to build an international or at least multi-jurisdictional capability to service the top end of the market and indeed other parts of the market that are international in nature.
‘For some firms, setting up local practices and then building them through organic growth has been seen as the appropriate approach. Increasingly, however, this has become recognised as an inadequate approach because of the time taken to build overseas capabilities in this way and in it not providing the required capabilities (eg, breadth and depth of expertise) for a considerable period of time to service international clients and instructions competitively.
‘And so for some firms and in particular, but by no means exclusively, those wishing to compete at the very top end of the market, developing an international capability in a relatively short timeframe is a further driver for merger.’
Between them, the big UK and US firms cover pretty much every market of note in the world. According to Stuart Popham, Clifford Chance’s senior partner, his firm’s business model is to serve the same client in multiple jurisdictions. While originally there was ‘little commonality of client base’ between the City giant and Rogers & Wells, now more than half of clients in the US use offices from elsewhere in the network too.
Clifford Chance’s problems in the US have been well documented, from departing partners and questions over profitability levels, to offices closing last year in San Francisco and Los Angeles, and the now infamous 2002 memo from junior associates to management in the New York office, which warned that the stress of billable hours could encourage associates to ‘pad’ their timesheets.
Mr Popham acknowledges that there have been difficulties in the past, but he says that having gone through that, the firm is ‘now trying to build from a strong core’.
The plight of associates is perhaps an example of the progress made. The memo was produced at the behest of US partners after the firm came bottom of the American Lawyer magazine’s annual associate satisfaction survey. In the 2004 survey, Clifford Chance was placed 105th out of 148 firms. Nothing to shout about, but a sign that things are moving in the right direction.
On the positive side, the survey found that associates nominated high-level international work and cutting-edge technology as what sets their firm apart from others. On the other hand, it said they would like to tell the managing partner to be more communicative about issues affecting the firm, and show more appreciation to valued lawyers so they will not leave.
Of course, the New York associates will now have the chance to do this face to face. Mr Popham was surprised that news of Mr Cornell’s move made the waves it did – ‘it wasn’t meant to be such a watershed,’ he says. However, it is the first time the head of such a firm has been based away from headquarters.
According to one of Mr Cornell’s predecessors, Tony Williams – who left Clifford Chance in 1999 shortly before the Rogers & Wells merger – this is a key aspect of the move. ‘There’s an important message about avoiding a head office/satellite office culture,’ he says.
Clifford Chance describes itself as ‘a truly integrated global law firm’. Genuine integration is the Holy Grail for any merger, and Mr Cornell’s move indicates that the firm wants its tag-line to be more than a slogan. Can Clifford Chance’s swanky Canary Wharf tower block in London truly be called the headquarters if the global managing partner is located several thousand miles away?
Speaking to the Gazette, Mr Rubens says ‘the biggest challenge for law firms, which corporations started addressing 20 years ago, is the mindset that they are fundamentally a US/UK/German firm with overseas offices’. He says that to be successful, they need to move to a mindset of being truly international in outlook and culture.
He adds that one problem lawyers have is that in their day-to-day work, their involvement ends when the deal is signed. ‘What they have to realise [with a merger] is that the work starts when the deal is signed.’
One senior lawyer with experience of international mergers, who prefers not to be named, says the first priority post-merger should be helping clients understand why you have done it. Then you need to help the staff understand what is required of them. Finally, you need to look at running the business in a more economical fashion, standardising – and, if possible, centralising – certain functions.
Mr Rubens says integration should mean ‘culturally what is going to work in both firms’. Being flippant, he says there is a tendency for merging firms to trade systems – firm A will accept firm B’s remuneration structure if firm B will adopt firm A’s governance model.
For Mr Popham, integration means ‘common standards, common values, a common approach, shared clients and teams that work together’. However, that does not mean stamping a common culture across all 29 offices. ‘We’re not all going to be clones of one another. A services business is always going to be like this.’ He adds that it is important to realise that processes that work in a smaller firm do not always work in an enlarged practice.
Mr Knowles explains that UK and US firms have different business models. In the US, property costs as a percentage of turnover are lower than in the UK, starting salaries for lawyers are higher, billing targets are higher, their leverage – the number of associates per partner – is lower, and their hourly rates are a little lower too.
‘The most ridiculous thing anyone can do is to try and harmonise that,’ he says. Rather, you have to embrace cultural differences. He suggests that it has helped that DLA, through its international network, has been operating in a multicultural environment for some years.
Historically, the large Wall Street firms, sated by a massive domestic market, have been slow to globalise; by contrast, City firms have needed to look internationally to grow their business. What has driven US firms to look beyond their own borders is the increasingly global demands of their huge investment bank clients. Joining forces with a City firm already firmly established in all the key markets of Europe, the Middle East and Asia offers a short-cut to meeting them. Getting in with those clients is a big appeal for the UK lawyers.
Neither Mr Williams nor Mr Rubens thinks that the experience of Clifford Chance has deterred others, but Mr Williams identifies key obstacles that have to be overcome. US firms are generally more profitable, despite the weak dollar, and are more driven in producing revenues, while also running ‘a tighter ship on overheads’. This means the sheer size of City firms makes them nervous. As Mr Rubens notes: ‘Going international has implications for profits per partner.’
That leads to the always-crucial element of partners’ pay: US partners are generally remunerated on the basis of their individual performance, while many UK firms remain devoted to the lockstep system of rewarding seniority.
Mr Knowles brushes this aside as an issue, at least at DLA Piper Rudnick Gray Cary. ‘Everyone’s on what they were before,’ he says.
Mr Popham cautions that if firms cannot agree on a basic pay structure – ignoring certain local disparities – they should not merge.
Such a disagreement would also be a red flag to Mr Knowles, who has done more than his fair share of mergers since becoming managing partner in 1996. He says there are full-service firms looking to merge with practices that are not so broad, lockstep firms trying to do deals with merit-based partnerships, and firms with different visions talking to each other. He explains: ‘So many people spend so much time trying to convince others that their way is right. It’s better to move on.’
Mr Popham says he expected others to follow his firm’s lead in 2000 and is unsure why they have not. Lawyers are a cautious breed, but Clifford Chance has always enjoyed being an innovator. ‘One of the values of Clifford Chance is ambition,’ he says. ‘We are more prepared to take risks.’
Mr Williams points out that despite all the negative headlines since 2000, the US arm of his old firm is now in the top ten of advisers on US mergers and acquisitions and ‘still way, way ahead of its magic circle competitors’ with similar ambitions. Not quite the failure some have painted it, he insists.
More generally, he adds: ‘There is a greater sense of realism in UK firms that they cannot continue as they are. They will be more serious about talks [with US firms].’
It is widely believed that all the top-tier City firms want a US merger – the problem is finding the right one. As a result, both Mr Popham and Mr Rubens predict that there will first be more transatlantic deals done at the next level or two down.
There will then be the question of what happens to those firms, especially in the City, that are left out – presumably there will remain a place for the quality full-service, mid-sized practice, but will the market accommodate as many as there are currently?
With the seemingly inexorable rise of globalisation, the pressure is on lawyers and seems only likely to grow. The stakes are becoming increasingly clear. As Mr Williams puts it: ‘One shouldn’t underestimate the appeal of an international offering to clients.’
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