The planned mega-merger between Allen & Overy and Shearman & Sterling has sent shockwaves across the legal world, and ignited a tidal wave of interest in merging in an industry thriving on loyal client relations and expansive institutional networks. ALB delves into the matching dance between law firms, including the strategic considerations beforehand and factors that can make or break the union.
The recent engagement between Magic Circle firm Allen & Overy and Wall Street brand Shearman & Sterling has been dominating headlines. The UK-U.S. union is poised to become a globally dominant legal force, forming a practice of nearly 4,000 lawyers with combined revenues of about $3.4 billion in one of the biggest transatlantic tie-ups in history.
The deal, announced in May, is set to fulfil A&O’s decades-long dream of gaining a substantial slice of the lucrative U.S. market, while enabling a withering Shearman to tap into A&O’s sprawling global network.
The planned tie-up, which is awaiting approval from partners at both firms, is not only dominating conversations in the industry, but also giving law firm leaders, especially those toying with the idea of a merger, plenty of food for thought.
A&O Shearman is not the only merger happening, though; in particular, the middle tier of the American legal market appears to be a particularly active space. At least five law firm mergers have taken place in the U.S. this year, as fears of industry giants dominating market share push consolidation into high gear, according to Bloomberg. Analysts believed there’s been an increasing appetite on the part of larger firms to swallow up smaller boutiques.
William Brennan, principal at U.S.-based management consulting services firm Altman Weil, believes this trend is set to continue for the next decade.
“Many law firms are now trying to accelerate their expansion plans to make up for the two-year hiatus caused by COVID. This has resulted in a lot of law firms ‘dating’ while they explore the viability of a merger. Mergers can be strategically advantageous for law firms of all sizes, assuming there is a sound business reason for the firms to combine,” says Brennan.
BIGGER THE BETTER, OR NOT
Brennan, who has specialised in law firm M&A and profitability for over a decade, cautions that the emerging ethos of “bigger is better,” which has been making waves and accelerating merger talks in the Western legal industry, does not paint the whole picture.
“The strategy of getting better by getting bigger is too simplistic. A successful strategy needs to be built upon a strategically sound business case for the combination, which necessarily should be based upon client needs,” notes Brennan.
But for Chandler MHM – one of the top-tier players in the Thai legal market - the strategy seemed to have paid off. Originally Chandler & Thong-ek, the Thai practice was acquired by Mori Hamada & Matsumoto in 2016 in a landmark deal, riding on the Big Four Japanese firm’s ambition to make deeper inroads across Southeast Asia.
The merger doubled the number of lawyers for the Thai firm, giving it an enhanced position with an expanded breadth of service offerings for not only domestic, but also overseas clients.
By the same token, “the integration would allow MHM to achieve its goal of significantly expanding its capability in the Thai market by investing in the integrated firm, Chandler MHM,” says Jessada Sawatdipong, co-managing partner at Chandler MHM.
“A merger should allow the newly created firm from the integration to attract new talent. This can be particularly important if there is a need to develop new areas of practice or the next generation of lawyers to ensure smooth succession planning,” he adds.
It could have been a merger that Brennan would endorse, as the consultant lays out the trademarks of a successful legal tie-up.
“Fundamental to a successful merger is a sound business case supporting the combination based upon client needs, plus synergy from a geographic expansion and/or practice areas. The addition of capabilities from one firm to an area that is already a strength of the other law firm is a major plus,” notes Brennan.
MAKING AND BREAKING
For managing partners either toying with the idea or actively plotting a combination, the list of factors to consider goes beyond mere size and scale. After all, reasons including difficult integration and cultural incompatibility have doomed once-promising mergers or precipitated the downfall of integrated entities.
If any merger is a four-dimensional legal chess game that managing partners need to master in order to soundly execute a deal that could guarantee optimal returns, alignment on strategic objectives and visions between two firms will be the preface of the playbook.
“If the integration did not align with the long-term goals of the integrating parties and enhance their competitive position and market opportunities, it would not be worthwhile,” says Jessada. Also, “There needs to be some alignment of corporate values. If the values of the merging firms are too divergent the merger will likely fail.”
-- Jessada Sawaditpong, Chandler MHM
“This is critical. If the integration did not align with the long-term goals of the integrating parties and enhance their competitive position and market opportunities, it would not be worthwhile,” says Jessada. Also, “There needs to be some alignment of corporate values. If the values of the merging firms are too divergent the merger will likely fail,” he adds.
Talent and client arrangement also top the strategic considerations when mapping out the path of convergence to ensure the merged firm’s financial viability without tearing apart established relationships.
“The integration needs to be of value to the best talent in the firm so as not to risk losing them after the integration. This also applies to the firm’s key clients. It must be clear that the integration is of real value to them so that the relationships remain strong,” says Jessada.
As far as financial viability is concerned, Brennan believes firms with certain characteristics are prone to make a less attractive suitor than others.
For example, “Any law firm with an unfunded partner retirement plan is a major concern. It should not automatically eliminate them from consideration as a merger partner, but it deserves careful analysis of the future financial implications to the combined law firm as part of the due diligence process,” notes Brennan.
“Other areas of concern would be large long-term debt, large lease commitments in excess of the firm’s needs, and partner demographics,” he adds.
And then there are the negotiations, which could be drawn out, dogged with conflict of interests, and potentially fatal. A&O’s merger talks with California-based O’Melveny & Myers, which lasted 18 months before eventually collapsing in 2019, make for a textbook case.
“Entering into merger discussions is fraught with risks and makes those law firms more vulnerable. If competitors become aware of a firm’s interest in merging, they may target the firm’s clients, lawyers and/or staff,” explains Brennan.
“Interested law firms should strive to mitigate that risk by using a trusted intermediary to screen out all but seriously interested merger partners from confidential merger discussions. A non-disclosure agreement (NDA) should be signed at the outset of discussions which contains a non-raid provision protecting the smaller law firm,” he suggests.
It’s not yet plain sailing even after a deal is sealed as challenges during integration between two practices are set to present the ultimate test to the union.
“The integrated firm will be different and distinct from the firms before the integration therefore it is important to foster a sense of unity and shared values,” says Jessada.
“It can take time to understand the details of the working practices and systems of the integrating firms and either integrate or develop new systems. There are likely to be practical issues to address such as Integration of IT systems or the development of new IT systems,” he notes, adding that it’s pivotal for leaders to continuously listen, adapt, and invest in a steely commitment to see through the integration process.
But at the end of the day, the secret ingredient of all recipes to success is flexibility. “Despite the best plans there will be challenges therefore these need to be addressed when they arise. The success of the integration will take time,” says Jessada.
