Hats off to my old shop, Legal Week for a quality scoop on Allen & Overy (A&O) and O’Melveny & Myers doing the come-hither shuffle. As usual, various outfits have lifted it without credit or attempted to imply that they forecast it. I didn’t forecast it and haven’t given it more than a cursory kick-of-the-tyres because – deadlines – so I am just riffing off anorak industry knowledge rather than proper research. But it’s still enough to make a few observations about what it says about the global market and London elite in general and A&O specifically.
For A&O, a tie-up with O’Melveny would clearly be highly significant – only the second US merger for a Magic Circle firm and just about the largest of its kind nearly 20 years on from Clifford Chance’s disaster-strewn takeover of Rogers & Wells.
That A&O would pursue a firm born outside Wall Street and one whose brand has been so badly on the slide for a decade speaks volumes of the changed realities and loss of status facing the London elite. O’Melveny was the 19th largest law firm in revenue terms in 2007 – in 2017 it was down to 59th. The US firm was also the second worst-performing practice for revenue growth in our Global 100 table over the previous five years, with revenues shrinking from $779m in 2012 to $725.4m in 2017.
The practice mix with this Los Angeles-bred legal royalty is also rough. O’Melveny has historically majored on private equity, litigation, West Coast corporates and the entertainment industry – hardly the neatest fit for A&O but just about acceptable and who wouldn’t want more disputes and sponsors? You can at least trust A&O to have enough sense to not try a half-baked attempt at putting a tech/Bay Area spin on this if a deal proceeds.
Profits line up OK – the compensation models won’t however, and dealing with that could be the chance for A&O to usher in the kind of partnership reform it needs (a chance that will most likely be squandered).
At this point, I don’t have a feel for how likely a deal is to proceed, beyond the bleeding obvious that these things are hard, hard yards. A&O has been scouting around for a US marriage in DC, Houston and California for five years now, having long ago conceded that the odds of a credible New York pairing were slim-to-non-existent.
Even with a decent US institution past its best – the only kind of deal on the table for the London elite – these mergers are a nightmare to pull off due to compensation and accounting issues but even more cultural clashes. London firms have avoided Americanising their businesses to the degree that would have smoothed the path to transatlantic mergers and even faded US brands have a nasty habit of believing they should be the top dog in any union, even a tie-up with the top-performing member of London’s Big Four.
That said, this deal or a comparable one – and personally, I’ve always liked the notion of A&O/Akin Gump – would still carry heft in the global market. A&O is the only one of its City peers that hasn’t spent the last decade looking like a prisoner of its own history. It has kept on advancing and generally shown flair and decent execution.
It has a chance in the next five years of becoming London’s top law firm, and perhaps something more – an extraordinary achievement for an outfit being written off by some in the mid-2000s as a mid-market player.
Yes, a deal like this would only be a fixer-upper but a fixer-upper is the only option that the London elite are going to get before the rapidly closing window on their global ambitions shuts for good (three years at best barring some dramatically favourable changes in the global economy). And if CC had built on its own fixer-upper it could be generating $1bn out of the US now, instead of going backwards. London-based lawyers with an over-developed sense of status may want to remember that even with a tough five years behind it, O’Melveny still generates revenue-per-lawyer levels ranging between 20%-30% ahead of London’s big four Magic Circle firms. And pulling off the deal still would leave A&O trailing the top line of Kirkland & Ellis and Latham.
In short, you cannot imagine a materially better tie-up that the London elite can realistically get for all their pining for Wall Street acceptance. If A&O can grasp that truth and push past it, it has a shot at securing genuine market-leading status. That’s a risky path, and one strewn with immediate dangers but the status quo also promises some treacherous but better-hidden terrain for the Magic Circle. In essence, those two paths are the only options.