By the time you read this the Herbert Smith Freehills merger will be live – a firm with revenues of over $1.3bn and more than 2,300 lawyers.
After a difficult few years for Herbert Smith, will the merger be the right medicine for the firm? Well, it’s not a cure-all but it’s a good start.
Positives first: both firms have agreed to a proper old-school merger with a single profit pool and unified remuneration system. Financial integration is moving apace: Herbert Smith will have a consultation on how to modify its lockstep this autumn, hoping to move to a hybrid performance-based system in the next couple of years. Freehills has already moved its financial year-end and management expects the firm to be fully financially integrated by the 2013/14 financial year.
The deal creates a firm that can capitalise on strong trade links between China, India and Australia. Herbert Smith gets access to one of the premier firms in Australia, potentially benefiting from the major capital outflows from Australia to Asia-Pacific. Freehills, which in comparison to its Aussie rivals has a weak international presence (just four partners in Singapore), gets access to Herbert Smith’s formidable Asian presence, as well as its impressive European and US client base.
The firm has told LB it has already won extra work from several existing clients and has won spots on panels.
Freehills’ all-equity partnership manages a profit margin that is comfortably higher than its new bedmate.
However, doubts still linger. Herbert Smith’s profitability levels have slid alarmingly compared to the Magic Circle and domestic rivals. True, the firm still has a great PEP level of £840,000, but in every other profitability metric, including profit per lawyer, the firm has taken a drubbing. For instance, the firm’s profit margin stood at just 23% this year, lower than DLA Piper (25%) and just higher than Eversheds (22%). Compare that to 2008 when the firm’s profit margin stood at 35% and was comfortably over 30% throughout the decade. Freehills’ all-equity partnership manages a profit margin and profit per lawyer that is comfortably higher than its new international bedmate, a discrepancy that could prove hard to reconcile in a few years’ time.
Management at Herbert Smith Freehills accept that profitability at both firms needs to improve, but believe this will flow as a consequence of the merger. But to improve profitability you must either cut costs or do more high-value work. Again management has expressly said that the merger is not a cost-cutting exercise. So the firm needs to up the amount of high-quality work it does, particularly in London, which is perceived as underperforming.
But at the moment plans to do that are all rather vague. When pressed on the profitability issue in a recent meeting, Herbert Smith managing partner David Willis talked broadly about the crisis in the eurozone and the difficulty of making concrete plans and predictions. Freehills chief executive Gavin Bell helped to elaborate by saying that the firm is going to do a review of its client roster and identify any key sector gaps that the firm should be focusing on.
But at this stage, you’d expect more of a concrete plan from management to lift profits. After all, what good is a merger if it doesn’t address fundamental concerns?