This comment piece has been updated to reflect an announcement late on Thursday (2 March) that merger talks between Shearman & Sterling and Hogan Lovells have been called off. In a joint statement, the firms said: ‘As has been widely reported, our firms have been in preliminary and exploratory conversations regarding a possible combination. After careful consideration, we have mutually agreed that a combination at this time is not in the best interest of either firm. We have been deeply impressed with each other’s business, practices and people and wish each other continued success.’
It’s funny how the market gets about law firm mergers. Ringing around various senior lawyers for a hot take on what they thought of a Shearman & Sterling and Hogan Lovells tie-up, most were pretty scathing.
‘A merger of losers’ and ‘a combination of mediocre and mediocre’ were just two pejorative remarks being flung around the Square Mile. Few were kind. Now that the dust has settled on the idea, and I hold my hand up to playing devil’s advocate on this one, these initial reactions strike me as a little churlish.
Isn’t it worth remembering that hubris (perhaps more so in the rarefied bubble of law firm partnerships than elsewhere) is what leads to firms looking around one day and finding they are a shadow of their former selves?
While it is certainly an oversimplification to say that this is just a matter of scale and that Shearman with its $1bn of revenue would benefit from combining with Hogan Lovells’ $2.6bn turnover, you can understand the rationale by numbers alone. Even having a top line in excess of $3bn still puts any firm with true global elite ambitions a country mile behind Latham & Watkins ($5.5bn) and Kirkland & Ellis ($6bn). But it’s a still a step in the right direction.
Hubris is what leads to firms looking around one day and finding they are a shadow of their former selves.
Shearman’s woes, especially in Europe, have been well documented. Pivoting too late to private equity from its finance and capital markets heartlands is key, along with the misguided perception that such a prestigious white-shoe institution would never need to change. Questions around partner pay, that guarantees promised to lateral hires in a big recruitment push spearheaded by senior partner David Beveridge were arguably enough to incite numerous partners to leave, even without the perceived threat of a takeover by a much larger beast by headcount (Hogan Lovells had 2,800 lawyers at the end of 2022, dwarfing Shearman’s 727 – with that latter figure diminishing by the week). Then there is the question of prestige and, dare we say, ego. As one City corporate partner at a rival (who has sifted through a fair number of Shearman CVs recently) notes: ‘This is a nightmare for Shearman partners in London; they are horrified by being merged into Hogan Lovells, which they regard as a very inferior UK M&A firm.’
Something is broken at Shearman, that much the numbers tell us. Bounce-back year-on-year financials in 2022 are notable, but this has not reversed the years of torpor that made it one of the five worst performers of our 2022 Global 100 report, with only 11% revenue growth over five years.
While few in the legal community question the memory of Shearman’s elite reputation, The Legal 500 comparator of the two firms’ rankings globally is heavily weighted in favour of Hogan Lovells, a fact that may come as a shock to some, including those malcontent Shearman partners.
But what of the rationale for Hogan Lovells? A scale play, sure, and what firm with aspirations of grandeur wouldn’t want to move in the orbit of a fêted Wall Street presence with a respected pedigree in capital markets, finance and securities litigation, where Hogan Lovells is arguably lacking?
For its part, Shearman has no choice but to make substantive changes or court further decline. If Hogan Lovells plays it right, it has little to lose and everything to gain, and to hell with the schadenfreude if it all falls down.