The most enjoyable part of analysing the proposed merger of Allen & Overy (A&O) and Shearman & Sterling has been hearing the reactions of leaders at peer firms to the video featuring senior partners Wim Dejonghe and Adam Hakki.
Hot-takes from around the City have been often amusing. Says one US firm leader: ‘It’s clearly not a merger, is it? It’s a takeover of Shearman by A&O, isn’t it?’ And it certainly does feel like A&O’s Dejonghe is in the driving seat of what is undeniably a slick pitch, even if it does, at times, look like Hakki is in a hostage situation.
That the announcement is conveyed in the language of dealmaking is not lost on most, as another US leader remarks: ‘This has been presented to appeal to the partners of both firms because it looks like a proper M&A deal. It’s the same language, and with a financial adviser and independent legal advisers. That has to be part of the strategy to win the voters over.’
One commentator also cynically points to the staggering amount of times Dejonghe and Hakki insist this transaction is all about the clients, but let us look at the real rationale.
The numbers are compelling enough to convince even the most hard-bitten sceptic. The tie-up would see 3,900 lawyers operating across 49 offices and generate around $3.4bn in combined revenues, putting A&O Shearman fourth in the current Global 100 table, between DLA Piper and Baker McKenzie.
Dejonghe is in the driving seat of what is undeniably a slick pitch, even if it does, at times, look like Hakki is in a hostage situation.
However, revenue per lawyer would be $872,000 – less than the RPL at A&O and Shearman separately ($1.1m and $1.4m respectively) and significantly less than many ‘global elite firms’.
But profits are aligned, with PEP at A&O $2.7m, while the average partner at Shearman is taking home around $3m. This means that full financial integration, the thorn in the side of many a law firm merger, will be much easier to pull off, especially as the firms have agreed on a compensation model that moves A&O further away from a pure lockstep.
Many point to the strong pedigrees both firms have in their home markets, and this is evident in the data. In the US, A&O Shearman has the potential to enjoy top-tier rankings in The Legal 500 for securities litigation and project finance, and second tier rankings in key areas such as antitrust, disputes, capital markets and tax. However, for M&A (large deals) the firm would only be ranked in tier three, tier five for restructuring, and would not be ranked at all for private equity.
The UK rankings would be much stronger. Tier one rankings would abound in numerous areas within finance, as well as restructuring, TMT and energy, while tier two rankings would apply to commercial litigation, big-ticket M&A and tax. Crucially, A&O Shearman would also be in the chasing pack for private equity.
You have to hand it to Dejonghe for not allowing his US merger priority to be thwarted by the whimpering end to the merger talks with O’Melveny & Myers in 2019. If anything, that experience has meant that a lot of the hard yards have already been done to prime the partnership for what, don’t forget, would be only the second-ever US merger for a Magic Circle firm (if Clifford Chance’s takeover of Rogers & Wells 20 years ago really counts).
While one London managing partner damns the combination with faint praise: ‘It would be wrong to write this off as a hopeless or desperate merger’, they have a point. These two firms have come of age and grown stronger with the battle scars, not least those born by Shearman after its failed merger talks with Hogan Lovells, which prompted a string of high-profile exits in recent months.
As we pointed out when the O’Melveny talks collapsed, the only transatlantic deal that the Magic Circle globalists were ever going to strike was with a firm in decline. Shearman is certainly that, which is the reason it has swallowed its pride to countenance this deal at all.
While there is clearly much to be done in terms of financial due diligence and the ironing out of issues relating to Shearman’s pension liabilities, time will be of the essence. A long courtship never works, so Dejonghe and Hakki would be well advised to work quickly on getting buy-in from rainmakers, while not dragging their feet on the vote. Once the stars are aligned, the rest will inevitably fall into place.
nathalie.tidman@legalease.co.uk
For more on the proposed A&O and Shearman merger, see ‘Getting its mojo back: How A&O Shearman could redefine the Magic Circle‘