Merger values

The latest transatlantic mergers have a few examples to follow. But just what have City mergers delivered for Jones Day, K&L Gates, Mayer Brown and Reed Smith?

It’s easy to forget that the transatlantic merger is not a trend confined to the last two years. The most effective way for US firms to enter the highly competitive London market has long been a matter for debate. Do you buy a greenfield site and take a long view based around organic growth or do you acquire a large, ready-made UK business? Neither is simple and both can be costly.

While Hogan Lovells, SNR Denton and Squire Sanders Hammonds focus on integration it’s worth taking a look at the major mergers between US and UK firms that precede them, to analyse just what they have delivered. We chose to focus on deals between US firms and UK firms that overwhelmingly focused on the City (which discounted DLA Piper) and firms which had been in the Legal Business 100. The deals also had to have happened in the last ten years (which counts out the trailblazing deal between Dechert and Titmuss Sainer Dechert). So we looked at Kirkpatrick & Lockhart’s (K&L) merger with Nicholson Graham & Jones (NGJ) in 2005, Rowe & Maw tying the knot with Mayer Brown in 2002, Jones Day’s 2003 acquisition of the go-getting Gouldens and Reed Smith’s deal with Richards Butler in 2007. They all shared one aim; to build a genuine global platform.

We analysed their financial progress in London, their lateral hires since doing the deal, their performance in M&A and in picking up new clients and new instructions that they couldn’t have handled pre-merger. We then spoke to management, former partners and consultants for their views on how the deals have fared. At the time of their mergers all of the UK firms faced the daunting prospect of competing in a very crowded mid-market.

K&L Gates insists that it has used its London office as a springboard for global growth, although the NGJ deal has not been a catalyst for significant revenue growth in the City. Mayer Brown’s considerable progress in terms of growing revenue and headcount was briefly blown off course thanks to the global economic crisis and a fall out at management level. Meanwhile Reed Smith’s serendipitous decision to merge with Richards Butler, a firm renowned for its litigation practice, has kept its global ambitions on course, although it’s yet to set the market alight. With Jones Day there’s a distinct sense of missed opportunity.

‘If you’re the managing partner of a firm you have to decide what your strategy is, not your tactics,’ suggests global head of legal at Hudson Martin Piers, himself a former partner at Gouldens. For some transatlantic mergers the playbook has got a little lost along the way.

First stop London

K&L’s London office, which opened via a tie up with NGJ in January 2005, was the US firm’s 11th office – it now has 37 worldwide. Chairman Peter Kalis maintains that little or none of the firm’s rapid global expansion could have happened without a City office. ‘It had an enormous repositioning effect on us,’ he says.

The London numbers though are mixed. Its six-year compound annual growth rate (CAGR) up to 2010 is 2.2%, marginally below NGJ’s 2.9% growth rate in the six years before the merger. But like everyone else in the market, growth has been hit by the global economic crisis. In the City, K&L Gates’ turnover peaked in 2007 at £33.6m before dipping to £27.9m in 2009. It has bounced back after a successful 2010, nudging past the £30m mark. Average partner numbers in the City have increased from 47 in 2005 to 55 in 2010 while total fee-earner numbers have dropped from 143 to around 128 over the same period.

‘If you’re the managing partner of a firm you have to decide what your strategy is, not your tactics.’ Martin Piers, Hudson

Revenue per lawyer (RPL) is very much in the mid-market, coming in at around £235,200 in 2010, roughly the same as Nabarro and below the firmwide average, although a marked improvement on a 2005 low of £183,900. The firm’s revenue per partner figure in London is more of a concern for management. In the first full year of merger that figure stood at £556,000, last year it came in at £542,500.

One source with knowledge of the firm comments: ‘You have to look beyond the crude financial and headcount detail with K&L Gates. They have spent quite a few years upgrading their partnership. They are in better shape than the numbers suggest but they have probably had a slower impact on the market than they would have liked.’

K&L Gates has certainly been on the lateral trail, making 28 lateral hires since the merger (losing only four of those) and promoting 15 associates to the partnership. Notable hires include antitrust partner Scott Megregian from McDermott Will & Emery, investment management specialist Martin Cornish from Katten Muchin Rosenman Cornish and construction and engineering partner Matthew Kidwell from Shearman & Sterling.

The firm now points to Halliburton and Viacom as examples of the sorts of client that it acts for globally. In London recent wins with PUMA, Betfair and Laing O’Rourke have been cross-sold across the business.

The firm’s corporate performance has gradually improved. Last year it chalked up its best performance since the tie-up in mergermarket’s European M&A tables, advising on 30 deals with a total value of E10.5bn. However, that robust performance in a tough market was still not good enough to get them into the top 50 advisers by value or volume.

London head Tony Griffiths believes that without a merger NGJ would not have achieved what it has under the K&L Gates banner. ‘We were suffering the classic signs of the mid-tier firm that was finding it difficult to compete in the market for talent,’ says Griffiths. ‘We wanted to improve our market position by internationalising our client base and undertaking more cross-border work for those international clients we already represented.’

For K&L the merger was part of a significant change in its world view. In a statement released as the deal went live in January 2005 Kalis declared: ‘A law firm that fails to meet the trending needs of its clients does so at its own peril.’ London’s progress has come against a transformational period for the firm as a whole. It has radically changed its global position, joining the $1bn turnover club in 2010 and growing to more than 1,700 lawyers globally. In growth terms at least, the firm is undoubtedly a modern day success story.

Partners talk about the culture of investment that runs through the firm. ‘We have seen very little cultural jarring, either through our merger with K&L, as it then was, or through the subsequent mergers,’ asserts Griffiths. ‘Much of our success in cross-selling clients across the firm is due to the single equity pool and a credit measurement system that positively discourages “eat what you kill” behaviours.’

Kalis likes to place particular emphasis on the importance of the firm operating as a single partnership and single business. ‘We believe in the intangibles of a unified partnership as part of our success,’ he claims. ‘Although law firm culture as a word has become so elastic as to be virtually meaningless, we do look to our merger partners to share a couple of key cultural tenets with us. First, they should have a history of resolving the tension between consumption and investment in favour of investment. Next, they should reward collaborative behaviours and discourage carnivorous behaviour. Investment and collaboration are proxies for a culturally grounded way in which to grow a law firm.’

The firm’s plans for London have not exactly dimmed. Its imminent move to new offices in One New Change will give it 120,000 sq ft, an increase on its current floor space of 37.5%. Now is the time to improve that RPL figure.

Steeled for the downturn

It’s perhaps not surprising that Peter Kalis and Reed Smith global managing partner Greg Jordan sing from the same hymn sheet. Both head firms founded in Pittsburgh and both herald from Wheeling, West Virginia, a town of almost 30,000.

Like his K&L Gates counterpart, Jordan pinpoints his firm’s UK deal as a crucial moment in Reed Smith’s international development. ‘It was the Richards Butler merger that really turned Reed Smith into an international firm,’ he claims. ‘Richards Butler at its heart had an international mindset.’ It also, at its heart, had a contentious practice, which has given the merged firm a valuable hedge in the last three years.

It has helped fuel a gradual increase in revenues during the recession, rising from £85m at the time of the merger in 2007 to £90m in 2010. The fee-earner base has been cut to 288 down from a peak of 309, helping RPL to increase from £273,000 in 2007 to £314,000 in 2010. Not a mind-blowing success but competitive in a shrinking market.

Jordan says he likes to measure the success of a merger in three ways: are people staying; is the firm attracting new talent; and what business has the firm brought in that it wouldn’t have got had it not merged? In London there have been 32 laterals since the merger, with just four of that group leaving and 14 partner promotions. While total headcount has fallen slightly the partnership has edged up from 100 to 103.

The firm also points to a number of mandates it insists only the merged business could handle; roles such as acting for Bank of New York Mellon on the Lehman Brothers administration. Work for the New York-listed World Fuel Services Corporation, BBC Audiobooks and a panel appointment for Cargill are also offered as examples to illustrate the new firm’s firepower.

To the external observer at least, the feel is of a firm very much in its comfort zone. Coming out of a recession that is no bad thing but it’s clear that both corporate and finance need bolstering. In 2010 it advised on just five European M&A deals according to mergermarket, giving a pretty clear indication of its principal weakness. The firm has been on the lookout for high-profile M&A and banking laterals and notably hired finance partner Phillip Slater from Addleshaw Goddard in 2009. Plans are underway to bring in private equity expertise in London and elsewhere. Roger Parker, Reed Smith’s European and Middle East head and former managing partner of Richards Butler, says that ultimately he wants to see its transactional practice closer to the likes of Ashurst and SJ Berwin. An ambitious aim but not totally unachievable.

Even its fiercest detractors would admit that Reed Smith’s London prospects now look significantly better than five years ago.

In 2006 Richards Butler was a shipping and litigation firm that was arguably past its prime. A Hong Kong office was highly profitable (the top paid partners took home £1m, far more than in London) but operated largely as a separate business. The firm was stagnating in London during a period where most UK firms were growing; by 2006 its revenues were £54m and it was home to 63 partners.

Like NGJ the legacy UK firm was being squeezed in the mid-market and viewed a merger as a way of giving it a little more breathing space. Parker and his management team looked at a number of UK and US deals – SJ Berwin’s recent suitor Proskauer Rose among them – before Reed Smith entered the frame.

‘It was the Richards Butler merger that turned Reed Smith into an international firm. Richards Butler had an international mindset.’
Greg Jordan, Reed Smith

Jordan put a call into Parker after reading an October 2005 article in LB which made it clear that Richards Butler was in the market for a US deal. Reed Smith had moved into the London market in 2001 through a merger with London and Coventry firm Warner Cranston, but by 2005 had failed to grow beyond 65 lawyers and a turnover of £17.5m. The benefits for Reed Smith are clear to see. It has given the firm scale from which to build.

Wherever they end up, Jordan is playing the long game. ‘This is our biggest office, it is 50% bigger than the next biggest office and it is filled with UK solicitors,’ he comments. ‘The platform allows us to attract people who have a long-term view and are looking to put down roots that allow them to feel like they are part of a robust London business. One which happens to be part of a big global business which in turn happens to have as part of it a large US business.’

Keeping up with the Jones’s

While Reed Smith talks up its London offering, Jones Day keeps its counsel. Despite repeated attempts to get official comment for this piece, the global US firm declined to talk. It’s a reticence that certainly was not evident in early 2003 when LB was given exclusive access to the Gouldens partnership and senior Jones Day management at the retreat where the merger documents were signed.

A combination of Gouldens’ and Jones Day’s London revenues pre-merger gave the newly formed office a turnover exceeding £60m, with more than 200 lawyers, including 49 partners. Since then gauging financial performance in the City has been even less clear-cut. Firmwide revenues were north of $1.5bn in 2009, the CAGR in the five years to 2009 is 7% and RPL is $608,000.

In London LB estimates that its CAGR since merging is static. Compare this to Gouldens’ eight-year CAGR of 8.2% in the run up to merging and the performance looks below par. Yes Gouldens came off a smaller, lower base, but the ambition of the legacy firm looks like it has been thwarted. Partner numbers are again roughly the same – 47 in 2010 compared to 54 in 2003.

Total fee-earner numbers for London dropped from 190 at the beginning of 2010 to 166 by the end of the year, a heavy cut but in part symptomatic of these more cost-conscious times. In late 2009 it emerged that five partners had been demoted to counsel – around 10% of the firm’s City partnership at the time.

Since the merger many of the legacy Jones Day partners have moved on. Jones Day’s former London head Robert Thomson relocated to Hong Kong soon after the tie-up. A three-partner tax team joined Fried, Frank, Harris, Shriver & Jacobson, headed up by the then chair of international tax Keith Featherstone. Some of the senior Gouldens partners have also jumped ship – corporate partner Hilary Winter moved to Orrick, Herrington & Sutcliffe’s City arm in early 2008, while legacy Gouldens co-managing partner Charters Macdonald-Brown left in 2004 to set up IP boutique Redd Solicitors. According to reports at the time he was the eighth partner to leave post merger. More recently the restructuring team saw Adam Plainer defect to Weil, Gotshal & Manges and M&A partner Peter Baldwin leave to join Ropes & Gray.

In their place, some observers point to a dearth of quality recruitment. ‘They just haven’t replaced the quality that has left with the sorts of people and businesses that they would’ve wanted,’ comments one former partner. Others suggest the City practice suffers from a lack of ambition. ‘They’re very comfortable there – it’s a bit like playing pontoon and sticking on 16 rather than pushing through to 21,’ asserts a recruiter. However, bringing in the likes of Baldwin (despite his recent exit) and competition specialist Frances Murphy (who is still with the firm) from Mayer Brown is hardly symptomatic of a firm lacking drive.

Most observers suggest that Jones Day’s Fortune 500 client base gives London a decent workflow and many of the legacy Gouldens clients, particularly in real estate, are still active. The firm’s European M&A ranking is broadly where you would expect the firm to be – in 2010 it advised on 98 deals with a total value of E49.1bn, putting it 11th by volume and 16th by value. Globally the firm continues to dominate the M&A rankings in volume terms.

Of the ten largest Jones Day European deals since the merger, London has enjoyed several high-profile roles, including advising Songbird Estates alongside a cast of thousands in its E7.75bn offer for the Canary Wharf Group in late 2003. Corporate partner John Phillips also advised Alfa Group and Access-Renova Group on the formation of TNK-BP in 2003 and also won the firm’s first instruction for German investment banking giant Dresdner Kleinwort in 2006.

‘Pre-merger we were suffering the classic signs of the mid-tier firm that was finding it difficult to compete in the market for talent.’
Tony Griffiths, K&L Gates

Not surprisingly given the market conditions, litigation, headed up by Craig Shuttleworth, has performed well in recent years, advising Sibir Energy in connection with a $500m fraud perpetrated by its former directors. The team also successfully defended Goldshield Group against prosecution by the Serious Fraud Office for conspiracy to defraud the NHS by allegedly participating in a pharmaceutical price-fixing and market-sharing cartel during the late 1990s. The real estate team counts London & Stamford and British Land as key clients.

At the time of the deal, law firm consultant Alan Hodgart, then of Hildebrandt International, now of Huron Consulting, was quoted in LB saying that the Jones Day tie-up would impact the market more than Rowe & Maw’s merger with Mayer, Brown & Platt in 2002. ‘Jones Day London in, say, three years time is going to be a significant threat to the likes of Ashurst, Simmons & Simmons, Lovells and Norton Rose,’ he said at the time. Today he stands by that claim but adds: ‘Obviously the firm has not achieved that position although there might be reasons not apparent to an outsider.’

Eight years on and it’s hard to escape a feeling of missed opportunity. In Gouldens Jones Day bagged a well-respected City brand known for its entrepreneurial attitude, albeit one that faced being outmuscled in the highly competitive mid-market.

‘The job is not done in London,’ Jones Day managing partner Stephen Brogan told LB at the time of the 2003 deal. ‘We are going to continue to invest. But it’s really for the talent we brought into the firm to handle – I’m going to turn my back on this after I leave this weekend.’ Perhaps now the City could do with a little more attention.

‘The hardest part of a merger is one of scale. Integration takes a lot of hard work and a lot of time.’
Sean Connolly, Mayer Brown

Deal terms

Of all the mergers in this piece, Rowe & Maw arguably negotiated the best deal in its 2002 merger with Chicago’s Mayer, Brown & Platt. Not only did Rowe & Maw’s negotiating team manage to crowbar the UK firm’s name into the merged entity, but the protections around the London partnership gave it a more than generous headstart. One of the terms is understood to have given London a huge amount of say on the promotions to equity from the City, with little input from the US.

On the one hand this was a canny move by Rowe & Maw’s management, led by Paul Maher. They effectively held the London business together but arguably it also hindered integration. As one London-based law firm consultant notes: ‘That merger shows the dangers of giving too many protections to London partners. There was no integration of any kind for about three years.’

That said, in the years leading up to the economic crash, Mayer Brown’s City office rose with the market. By 2008 the London office had grown revenues by over 35% to a high of £111.6m, while partner numbers had increased to 109 (up from 87 at merger time) with 355 total fee-earners. The firm’s London CAGR of 4% since the merger is almost double that of K&L Gates.

‘We believe in the intangibles of a unified partnership as part of our success. We look to our merger partners to share key cultural tenets.’
Peter Kalis, K&L Gates

High-profile laterals such as corporate specialist William Charnley from McDermott Will & Emery and litigator Clare Canning from Barlow Lyde & Gilbert strengthened the Mayer Brown bench and gently pushed it further up the market.

In total, 44 partners have been hired in London post merger – not a symptom of a firm low on ambition. The firm’s aggressive investment in its finance practice – it hired seven partners at the bottom of the market – at a time when most firms were cutting, was peculiar to some but London senior partner Sean Connolly describes it as ‘opportunistic’. The swift departures of Lee Cullinane and Jacqueline Evans after only a year to White & Case proved that play hasn’t completely paid off and will have dented London’s reputation in the eyes of Chicago. But at least the City office was given a mandate to grow in the first place. Indeed the recent hire of Stuart McAlpine as a partner from Orrick, Herrington & Sutcliffe, where he was the European managing partner until 2009, shows the finance push is by no means over.

The firm picks out the likes of Nomura, GE Capital and Lloyds Banking Group as examples of the clients that have been added to the London client base since the Rowe & Maw deal. Management in London admits it needs more visibility on the corporate side – particularly given former senior partner Paul Maher’s exit – but so far its stated aim to build up the practice has fallen flat.

Unfortunately for London, the economic downturn coincided with a significant change in Mayer Brown’s management. In 2007 long-serving chairman Tyrone Fahner – a keen proponent of the original deal and London office in general – retired. The firm, which dropped the Rowe & Maw name in the same year, re-jigged its governance structure, splitting the role three ways between chairman James Holzhauer in Chicago, and vice-chairs Kenneth Geller in Washington DC and Maher in London.

The City practice was not the most pressing issue that the new management team had to address. Improving relations between New York and the firm’s headquarters in Chicago – a relationship described as ‘dreadful’ by one former partner – and the firm’s standing in the Big Apple in general, were at the top of the agenda. In 2007 action was taken, with around 20 partners lost from the New York office and over 40 de-equitised.

But the brakes were also put on the City practice. ‘A high proportion of the Chicago partners must have hated the fact that London was the second largest office,’ insists one former partner who asked to remain anonymous. In the City, partner numbers dropped by seven between 2008 and 2009 while total fee-earner numbers fell from 355 to 337 in the same period. The recession wiped almost £18m off the London office’s turnover in one year.

In 2009, with Holzhauer stepping down after just two years in the role, the partnership approved a new governance structure that saw the vice-chair role– of which Maher was one – dropped. Herbert Krueger became the firm’s new chairman and Kenneth Geller the managing partner. Maher soon left to set up Greenberg Traurig’s London office.

Today revenues are back above the £100m mark in London with total fee-earners of 305 and 95 partners. Of course all firms were hit by the downturn but compared with Macfarlanes and Travers Smith – two firms that were in Rowe & Maw’s peer group before the deal – Mayer Brown’s growth in the City lags behind. Its CAGR for the last five years is 1.9% compared with 6% at Travers and 4% at Macfarlanes.

‘The hardest part of a merger is one of scale,’ reflects Connolly. ‘You go from being a single firm with a loyal cadre of people to becoming part of a very large global firm where you don’t know everyone. Integration takes a lot of hard work and a lot of time.’

Organic thinking

The success of a merger can be judged across a variety of different measures. If the main aim is to add resources in a relatively untapped market, then all four of these deals have at least achieved that.

They all eschewed the slower option of organic growth and critics of the merger route can point to the startling growth rates of some US rivals. White & Case’s nine-year CAGR – a good measure of a firm’s long-term performance in growing its revenues – is 13.9%. At Latham & Watkins, another firm which, after failed merger talks with Ashurst, put organic growth in London at the top of the agenda, the compound rate is just under 12.5% for the nine years up to 2010.

Comparisons like this are tricky however. Both Latham and White & Case have better profits than any of the quartet covered in this piece, which gives them considerably more firepower in the laterals market. There are also plenty of examples of firms pursuing organic growth and failing to rapidly grow their business – for example Weil, Gotshal & Manges which has grown by 0.3% over the past nine years.

Our quartet of mergers all gave the UK firms greater protection in the very crowded mid-market and offered the US firms a fundamentally different platform in London. Jones Day and Mayer Brown may have got to sufficient critical mass in London eventually but doing a deal obviously saved them a lot of time.

‘There will be more deals, but at this stage of the cycle we were expecting to see many more finished.’
Tony Williams, Jomati

None of these mergers however can claim to be the finished product. K&L Gates needs to grow its turnover and improve profitability in the City. Reed Smith is a long way behind the pack in terms of its transactional capability and needs to show it can operate outside of its comfort zone. In its merger with Gouldens, Jones Day secured a strong transactional base but it’s hard to see clear evidence that it has radically improved its market position. Mayer Brown, the earliest firm to seal a merger, has arguably enjoyed a better time of it but somewhere along the way the strategic rationale that drove the original deal was muddied.

All of them, however, can at least lay claim to early mover advantage in a market that is expected to see more consolidation in the coming years. ‘There will be more deals, but at this stage of the cycle we were expecting to see many more finished; especially at the £10m to £30m business level,’ says Tony Williams, head of law firm consultancy Jomati. ‘The problem is that some of the smaller firms are in such trouble that they are not that attractive a proposition to prospective merger partners.’

Williams insists that consolidation needs to happen in the market. ‘Even the biggest firms only have a one or two percent share of the entire market, which is astonishing.’

Market forces may be pointing towards more mergers. Whether those deals deliver any value, is another matter entirely. LB