‘Opportunistic and strategic’ – Allen & Overy’s bold move to crack the lucrative US market
For the first time in decades the four international UK Magic Circle firms will no longer be marching in strategic tandem, reports John Malpas
“This looks like one of those rare deals that is both opportunistic and strategic.”
So reflects consultant Tony Williams on Magic Circle UK firm Allen & Overy’s (A&O’s) and Shearman & Sterling’s plan to merge to create the third-largest integrated international law firm by revenue.
And it is hard to dispute the logic of this assessment, given the pedigree of the respective merger partners and their previously trailed desire to seek tie-ups – Shearman thanks to the recently abandoned talks with Hogan Lovells and A&O due to protracted but ultimately fruitless negotiations with O’Melveny & Myers.
The numbers are impressive, a fact that was hammered home in a slick presentation by the two parties on unveiling the proposed deal yesterday (21 May), which even featured a video of A&O’s Wim Dejonghe and Shearman’s Adam Hakki, the two firms’ respective senior partners, extolling the virtues of the deal.
If approved by a vote of the respective firms’ partners, Allen & Overy Shearman will have revenue of around $3.4bn and house 3,900 lawyers across 49 offices in 29 countries. Crucially, given A&O’s long-held desire to grow in the US, A&O Shearman will have 210 US partners and $1bn in US revenue.
Financial integration will inevitably be tricky, but the two firms at least start from the basis of average profit per partner (PEP) figures that are in the same ballpark. Shearman’s PEP for 2022 was down 17.5% to $2.48m while A&O’s stood at $2.66m for its 2021/2 financial year.
The merger partners make much of the uniqueness of their proposition in that the merged firm's local law capability will be in equal proportion to its US- and UK-law offering.
That sits squarely with the long-held strategy of A&O’s international Magic Circle rivals, namely Clifford Chance, Linklaters and Freshfields Bruckhaus Deringer. Except that its US law capability would now be vastly superior to that of its rivals.
It also puts the firm ahead of the small band of US and transatlantic firms seeking the same formula. They include Hogan Lovells and New York-headquartered White & Case, which would most closely resemble A&O Shearman in terms of size, reach, capability and profitability.
“There are always risks,” concedes Williams, principal of Jomati, “but the omens are good on this because both sides will see the benefits of a merger. It is quite an exciting proposition if they get it right – there will be a lot of work to do to make it work but there is a big prize in that this really would be a top tier global firm.”
Scott Gibson, director of recruitment firm Edwards Gibson, notes in a LinkedIn post: ‘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.’
Gibson goes on to highlight the two firms’ ‘relative weakness in transactional private equity’, an issue the two sides will be hoping they will be better be able to rectify by joining forces to leverage ‘scale and brand’ despite the challenges associated with attracting private equity talent.
But, of course, if Shearman had successfully ridden the private equity wave like so many of its US peers, it wouldn’t be in the market for a merger in the first place.
New York-based consultant Robert Bata, principal of WarwickPlace Legal, believes A&O will benefit from the perception it “has finally cracked the US market, which no ‘Magic Circle’ firm has been able to do in a meaningful way so far” while Shearman has “managed to pull it together with a proper peer firm” after “what was widely perceived as an improbable fit with Hogan Lovells”.
He also predicts, during the lengthy process of finalising the deal which may not close until the second quarter of 2024, “a slow seepage of talent from possibly both firms, where some practices will no longer fit well or will be conflicted or will seem overlapping in various jurisdictions”.
As for the deal's wider impact, he anticipates “more interest by UK firms in becoming successful in the US, an indispensable market and still the world’s largest economy”.
Whether that interest will translate into further top tier deals, however, is another matter. As Williams observes: “Classically, this deal would spark consolidation, but you need two to tango and most suitable US firms for the other UK Magic Circle firms are considerably more profitable having ridden on the private equity wave for 10 years. They have been successfully recruiting from the Magic Circle in London, so why would they want to merge?”
Looking at the deal in these terms, it seems likely that CC, Freshfields and Linklaters are destined to continue with their strategy of growing their US practices through lateral and team hires, however painstaking this will be.
Meanwhile, the opportunistic A&O has at least on paper jumped ahead of its rivals in the US, assuming its seemingly confident leadership team win the support of their respective partnerships and navigate the complexities associated with bedding the deal down. And for the first time in decades one of the international Magic Circle quartet will have a distinctly different profile, the four having stuck together like glue for so long: interesting times.
|The UK Magic Circle 2021/2 Performance||Rev (£m)||% Change||PEP (£k)||% Change|
|Allen & Overy||1,940||10%||1,950k||3%|
|Freshfields Bruckhaus Deringer||1,701||7%||2,070k||8%|
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