Consuming interest

More and more large US practices are swallowing smaller UK firms.

Lawyers on both sides of the pond benefit from such mergers.

But Philip Hoult warns of cultural and technical issues

For more than a decade, the City rumour mill has been working overtime about potential transatlantic mergers.

While talks between UK and US firms have been legion, until now only a select band has seen it through.

Although the highest profile, and first, merger saw Clifford Chance take over New York practice Rogers & Wells, the trend has been for small and mid-sized UK firms to strike a deal with a larger US practice.

They include, in the past three years, Rowe & Maw with Mayer Brown & Platt, Titmuss Sainer Dechert with Dechert Price & Rhoads, Warner Cranston with Reed Smith, Arnander Irvine & Zietman with Shook Hardy & Bacon, Rakisons with Steptoe & Johnson, and Geisler & Laws with Duane Morris & Heckscher.

However, the funereal pace at which the number of transatlantic mergers has grown could be about to change.

This year has already seen the announcement of the mergers of Gouldens with Cleveland's Jones Day and Hobson Audley with long-term Minneapolis ally Faegre & Benson.

For US firms, the attractions of merging with an established City firm are obvious.

If they are serious about building an international or even global practice and serving their clients in Europe, then they simply must have a presence in London.

By merging, US firms can immediately obtain a foothold without the risk and expense of trying to grow a presence organically.

According to David Temporal, a management consultant in the London office of Altman Weil who advises US and UK firms on potential mergers, many US firms have struggled in the past to come to terms with the segmented London market.

'The best work is concentrated in relatively few hands,' he says, referring to the consolidation of City firms along certain service lines or in certain markets.

'However the US firms are now becoming much more sophisticated and better informed about the London market.

They are now more aware that they will need to shape the practice after the merger, to position it better to support their work and their clients.'

For UK firms, the motives for joining with a US firm are many and varied.

For a start, there is the basic attraction of doing something that, for now at least, remains unusual.

For Max Audley, co-founder of Hobson Audley, the merger with Faegre & Benson was simply a much more enticing prospect than a tie-up with a larger UK firm.

'We were a successful niche practice, we enjoyed our independence and we had a way of doing business that clients really liked,' he says.

'To have merged with a UK firm would have been less fun and would have been rather grey.'

There is also the obvious opportunity to receive direct referrals, to market to a much larger client base, and to obtain greater resources.

Andrew Daws, consultant at Shook Hardy & Bacon, says the partners at litigation specialists Arnander Irvine & Zietman realised that they were too big to be a boutique practice and too small to secure and deal with a regular throughput of large cases.

Although little known in the UK, Shook Hardy is arguably the world's largest litigation practice, and its stated ambition is to become the litigation firm of choice globally for major multi-nationals.

But it only had a low-key presence in London - and so the fit with Arnander Irvine & Zietman was clear.

Thanks to the merger, the London office now has potential access to a client base that includes 60 of the Fortune 100 companies, including the likes of Microsoft, science company DuPont, and Ford.

'We now have a computer system that is unbelievably state of the art,' Mr Daws says.

'There is also a document retrieval system that is light years ahead of that used by most English firms.

The US practice also employs 300 researchers, of whom 250 have got advanced degrees.'

Another potential benefit of a successful merger is in recruitment.

Susan Laws, who merged the firm she co-founded with little-known Philadelphia firm Duane Morris & Heckscher two-and-a-half years ago, says that linking up has made it much easier to hire people.

'We have certainly been able to recruit a better quality of lawyers as a result,' she says.

'We have now got a different offering and people are attracted to that.'

Ultimately, though, according to Peter Astleford, financial services partner at Dechert, the real reason for a merger should be to get more and better work.

'It is not a question of work falling into your lap as a result of the merger,' he says, arguing that direct referrals, welcome as they may be, are not enough.

'It is a case of taking the vision of what you can achieve and painting that picture for clients.'

He estimates that of his personal billings of 5 million, half have come in this way.

'There are UK clients that I could never muscle in on in the UK alone, such as UK investment banks,' he says.

'I can now go in and offer them access to US advice as I have US-qualified members on my team in London.

As you develop that relationship, you can convert it into UK work.'

Only by merging - as opposed to simply joining an international network or alliance for referral work - will partners on both sides have a real incentive to develop their practices in this way.

Tim Foster, managing partner of the London office of Reed Smith, says this was a lesson he and his fellow Warner Cranston partners learned from an earlier unsuccessful merger discussion with another US firm.

'We realised that what we wanted was a proper merger where we would generally be valued and part of an integrated firm and not just a satellite office,' he says.

'The problem with alliances is that you do not make the most of it because you do not get a real commitment from both sides.

There is also scope for confusion in the minds of clients and the market generally.'

For the London office, the merger has so far paid off, with both turnover and headcount up by some 43% since the merger two years ago.

So, is the stage set for more transatlantic tie-ups? Mr Temporal says there is still a large number of US firms looking either to enter the market or to give their existing London office a quantum leap through linking with a City firm.

Clearly the number of failed negotiations in the past demonstrates that there are significant hurdles before any deal is sealed.

There are technical obstacles, not least because most US firms account on a cash basis while UK firms account on an accruals basis, which can lead to significant differences of opinion in the valuation of the UK business.

However, as more and more firms go through the merger process successfully, so these problems are likely to be seen as less important.

Instead, conflicting cultures or weaknesses with strategy will continue to cause deals to fall through.

This helps explain why nearly all the transatlantic mergers so far have involved US firms that are headquartered outside New York and have experience of managing a network of offices.

For many City lawyers, the culture of Wall Street firms simply does not appeal - while they might be prepared or even want to work 2,200 or more billable hours in a year, they do not want someone telling them to do that or be kicked out.

Although the culture of a firm is often intangible, it is vital according to Reed Smith's Mr Foster.

'Liking people is a part of it,' he says, 'but it is also how people are valued within the firm.

Is there a one-firm approach in reality as well as words? Is there an emphasis on teamwork? What is the service culture to clients like?'

For small and medium-sized City firms contemplating a US merger, Mr Temporal has a word of warning.

The real challenge for them in today's market, he says, is to find areas in the market in which they can compete and focus on that.

'In the light of changing market conditions they need to decide what is a sustainable market position,' he advises.

'If they realistically can say that a link with a US firm will enhance their offering, then yes, they should go with it.'

Philip Hoult is a freelance journalist