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‘We want to use this combination to forge a new global elite,’ Herbert Smith Freehills (HSF) CEO Justin D’Agostino tells Legal Business as he discusses the firm’s ambitious merger plans with New York’s Kramer Levin.

Heralding the planned union as ‘the first real transatlantic and transpacific merger’, D’Agostino stresses that the deal offers ‘a winning trifecta: global disputes and global transactions on day one, a high-quality US law firm, and alignment over ambitions for growth.’

Herbert Smith Freehills (HSF) has made no secret of its ambition to grow in the US, and has long been touted as a potential merger partner for Stateside firms. Even so,  Monday’s news (11 November) that it is intending to combine with New York’s Kramer Levin came as a surprise to some partners within the firm – let alone the wider market.

Should the partner vote go through early next year, the pair will unite in May as Herbert Smith Freehills Kramer; a $2bn, 2,700-lawyer firm that will operate as HSF Kramer in the US.

With US expansion still a strategic priority for many UK firms,  Legal Business spoke to senior figures in the market to gauge opinions on the merits of the deal and predictions on how the latest transatlantic tie-up will play out.

Why Kramer Levin?

HSF has had a disputes-focused base in New York since 2012,  launched on the back of a series of hires from legacy Chadbourne & Parke, before that firm’s merger with Norton Rose. The office now has around 50 lawyers, including 17 partners, the majority of which focus on disputes.

The Kramer Levin deal will substantially broaden HSF’s US presence, adding new offices in Washington DC and Silicon Valley, as well as some 300 lawyers in New York.

As a result, the noises from within HSF are largely positive so far, with one partner telling Legal Business: ‘The US is one of the most important legal markets in the world today, and we’ve been exploring ways to achieve greater scale there for some time. It has been a key priority for us.’

‘This merger will enable us to offer broader global coverage and move us closer to our goal of becoming a truly global, top-tier firm. This is exactly what our clients want – having a strong US presence is crucial.’

‘The partner buzz is really positive,’ another HSF partner remarks, framing the merger as a logical next step in the firm’s US strategy. ‘We’ve been so open that we wanted to do something in the States, and we’ve been fussy about getting a good fit. Kramer are well known in New York market and our New York office has a good relationship with them.’

Peer perspectives

Snap reaction to the deal among partners at peer firms has been mixed.

‘This is a very smart move,’ says one management figure at a leading global firm, of HSF’s solution to plugging the gap in its US presence. ‘If you look at the narrative over the past three or four years, there’s been a lot of talk about US firms dominating the market and taking over others.  Recent deals, however, show a new dynamic: international firms are now able to persuade US firms to fully merge. It’s a very promising shift.’

Others, however, point out that given HSF’s size, they would have expected a tie-up with a larger firm, despite the inevitable challenges such a deal would have brought.

‘I had suspected HSF would have ended up with a bigger firm in the US, but availability likely played a big role in this,’ said one London managing partner. ‘Many US firms are powering ahead, so there’s only a certain type of firm open to this kind of arrangement.’

Another law firm leader echoed this view: ‘If they had approached a much more profitable firm, there would have been little incentive for the US firm to engage. They had no choice but to merge with a firm that wants to globalise, rather than just focusing on profitability.’

Putting the doubts more bluntly, one sourced joked: ‘One partner at HSF said they would update me once they had Googled the firm’.  (For the full lowdown on the US firm, see: Getting to know Kramer Levin – a guide to HSF’s merger partner)

The profits puzzle

While in previous years, many transatlantic deals adopted the verein model, allowing them to dodge the challenges of combining profits, HSF and Kramer intend to have a single global profit pool from day one, following in the footsteps of other recent transatlantic tie-ups such as A&O Shearman and Bryan Cave Leighton Paisner.

Past reluctance to financially integrate was often down to the higher partner profits at US firms, and indeed Kramer Levin is more profitable than HSF, with 2023 PEP of $2.41m (£1.87m), compared to HSF’s equivalent figure of £1.315m.

‘It’s well known that generating profits in the US is generally easier than in Europe or regions like Australia,’ notes one source. ‘In past mergers, firms often aimed for similar profitability levels to simplify integration. It means that, when a US firm merges with a UK firm of equal profitability, the US firm is often perceived as the ‘inferior’ partner outside the US.’

The decision to push ahead with financial integration despite a difference in PEP marks a turning point in how UK and US firms are willing to approach mergers, according to partners .

‘This shift proves that some US firms are willing to look beyond short-term profitability and adopt a more global, entrepreneurial mindset, which has traditionally been difficult in the US market,’ one partner observes.

One key question is the extent to which HSF’s existing US referral relationships will be affected by the deal. One former HSF partner suggested that the Kramer merger could minimise disruption to existing relationships with larger US firms.

‘By merging with a smaller firm, they could be trying to avoid stepping on the toes of the bigger firms they rely on for referrals,’ the partner explained.

However, others doubt this hypothesis, with one law firm leader describing an impact on US referrals as ‘unavoidable’. ‘This will inevitably have an impact. That said, it now has a US base from which it can expand, positioning itself as one of the most integrated, truly global businesses. This move serves as a wake-up call to US partners who may be resisting integration for the sake of profits. It highlights the urgency of pursuing more innovative strategies.’

Combining cultures

As with any major merger, the success of the deal will depend on how effectively both firms integrate cultures and align strategies. ‘They have a lot of work ahead of them—particularly around attracting clients and creating a solid business rationale for why clients should engage with them,’ says one London managing partner.

One managing partner with experience in past transatlantic mergers notes that this will take ‘time and effort’. ‘They’ll need to ensure both firms align culturally, that their strategies mesh, and that the integration process works smoothly.’

Sceptics of the deal point to the contrast between the two firms as a potential problem. ‘They are like oil and water – they are so different,’ one source bluntly remarks. ‘HSF is global, while Kramer Levin has a strong focus on high-end private equity clients. Can they really leverage the synergies they believe are there?’

However, that disparity is also cited as a potential positive by another recruiter. They noted that HSF being ‘the senior partner’ in the merger, as the bigger firm and with its leaders set to retain their positions in the merged firm,  means it could avoid ‘the painful integration issues we’ve seen with other transatlantic mergers.’

What next?

With the deal following hot on the heels of the A&O Shearman merger, attention will inevitably focus on whether other similar tie-ups will follow – and whether HSF’s decisiveness has handed it a head start on competitors.

According to one recruiter, the deal gives HSF ‘a distinct advantage’. ‘People will now be looking at firms like Simmons & Simmons and Ashurst, who haven’t yet made similar moves,’ he explains.

The deal could also have a knock-on effect of encouraging other comparable US-UK tie-ups involving firms of differing scales. ‘This could actually make it easier for other international firms to negotiate full mergers with mid-sized US firms, something that would have been much harder even five years ago,’ according to one law firm leader. ‘Larger US firms might start looking for merger candidates as well, realising that waiting may not be in their best interest.’

Another partner at top 20 global firm notes that the merger has implications beyond just HSF. ‘For firms that are global but not fully integrated, this creates a challenge. An integrated firm is generally more efficient, and now, with HSF’s example, these semi-integrated firms aren’t just lagging behind in efficiency – they’re no longer unique in their global presence either.’

anna.huntley@legalease.co.uk

With additional reporting from Tom Cox and Elisha Juttla