Law firm management: planned A&O and Shearman deal among largest sector has seen
In late May, UK Magic Circle firm Allen & Overy (A&O) and New York-based firm Shearman & Sterling announced plans to merge. The move would create Allen Overy Shearman Sterling – A&O Shearman for short – a global law firm with approximately 3,900 lawyers and 800 partners working across 49 offices in 29 countries, with combined revenues of approximately $3.4bn. The firms say the merged entity would be ‘the only global firm with US law, English law and local law capabilities in equal measure’.
The proposed merger – which remains subject to a partner vote, expected in the coming months – is significant because of its scale and the access it would give A&O to the US corporate market. It would be the largest merger the legal sector has seen for a long time, if ever, and the first merger between a UK Magic Circle firm and a US competitor since Clifford Chance merged with New York-based Rogers & Wells in 2000. ‘On any analysis, it’s significant’, says one senior partner at a law firm, who asked to remain anonymous.
When contacted by Global Insight, Allen & Overy and Shearman & Sterling did not wish to provide additional comment.
Expansion into the US corporate market is important for a firm that wants to be truly global. Without a US corporate client base a firm won’t, perhaps, be as successful internationally as they might otherwise be. The UK Magic Circle firms are taking differing approaches to achieving this goal. A&O and Clifford Chance have opted for the merger route, while Freshfields is pursing more organic growth through strategic lateral hires in New York. One London-based senior lawyer, also speaking anonymously, says it’ll be interesting to see how Linklaters – the fifth of the Magic Circle grouping – responds.
However, it’s unlikely this merger will prompt a surge of further UK–US law firm tie-ups. It’s challenging to find a natural partnership between firms from these two countries, and previous attempts have had mixed success. For some of the larger US firms, having a presence in the UK may not be a priority, particularly if they’re achieving success through their own London-based offices. Equally, not all UK firms, particularly those outside the Magic Circle, view expansion into the US market as a critical strategic goal. Some firms in both regions may prefer to focus on being in the top segment of their own jurisdiction and place less emphasis on achieving international coverage.
Post-Covid, firms are looking at where they are [and] what their plan is
Member, IBA Law Firm Management Committee Advisory Board
In this context, A&O and Shearman’s proposed union stands out as a rare opportunity for a UK and a US firm to merge. This could explain the timing of the deal. Both firms have been contemplating a merger for some time and this deal is an upgrade on those either party had been discussing before. ‘Their brand names are sufficiently compatible to be mergeable’, says the senior partner, who argues the firms are well suited in terms of profitability and mutual respect.
The current down market could also be a factor in the timing of the deal: firms are more likely to consider a merger in a difficult economic climate when profitability is under pressure. In more prosperous times firms have less appetite for a deal because they feel more positive about their own performance.
In addition, the fallout from the Covid-19 pandemic could have prompted the deal, although it’s perhaps less significant for the A&O–Shearman merger than for others. Many firms will be reassessing their priorities following the upheaval of the pandemic and the impact it had on working practices. For Hanim Hamzah, Member of the IBA Law Firm Management Committee Advisory Board and Asia Pacific Leader at KPMG Law in Singapore, this is a natural time for law firms to consider their next steps. ‘Firms are looking at where they are [and] what their plan is’, she says, adding that the Covid-19 pandemic highlighted the importance of being agile and thinking strategically.
Hamzah believes we’ll continue to see law firm mergers as clients’ needs and expectations evolve. There will be pressure on firms to remain competitive not just with other law firms but with other providers, such as technology and professional services companies, and mergers will offer an opportunity to adapt to the current market.
Scale and access to a better client base are also major drivers for law firm mergers. A large firm with a global presence can invest in new practice areas and technology such as artificial intelligence. Some clients are attracted to a firm that can offer a one-stop shop across multiple jurisdictions. In some cases, mergers can help drive cultural change within a firm when it adopts some or all of the cultural norms of its partner firm.
Law firm mergers can be prompted by what Stephen Revell, Co-Chair of the IBA Law Firm Management Committee, describes as ‘founder-to-firm’ transitions. When the firm’s original founder is looking to step down, a merger can help it move to its next iteration. Revell also observes that, ‘in some cases [a merger] is a sign of problems and weakness’, where the firm has run out of options and hopes a merger might be the solution.
The biggest risk associated with law firm mergers is that the merged entity is less successful than expected. ‘You can incur a lot of cost and have a lot of stress and a lot of internal focus. You can lose partners who no longer feel it’s their home. And what comes out of it is less than the sum of its parts’, says the senior partner.
In terms of the overall M&A market, A&O and Shearman’s planned merger goes a little against broader trends. The M&A market has been quieter since Russia began its war in Ukraine but is beginning to pick up again. Hamzah says activity is currently very industry- specific, with some sectors seeing more deals than others.
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