As the latest edition of Legal Business went to press in late April, Allen & Overy (A&O) and Shearman & Sterling were working to a deadline of their own – the 1 May go-live date for their mega-merger.
The headline figures are undeniable – A&O Shearman will come into existence with 4,000 lawyers in 48 offices across 29 countries, as well as $3.5bn in revenue; enough to rocket it up to fourth place in the Global 100.
However, the future success of the firm depends to a large extent on the success of the integration process, which will now be handled by a new leadership team after A&O senior partner Wim Dejonghe’s second term comes to an end. Interim global managing partner Khalid Garousha will fill Dejonghe’s role, while Paris office head Hervé Ékué will become firmwide managing partner. Shearman’s senior partner Adam Hakki will be co-chair of the global A&O Shearman board and executive committee and will lead the merged firm’s US business as its chair, while Shearman’s current global managing partner Doreen Lilienfeld will serve as co-managing partner of the US business.
Many in the market have been surprised that Dejonghe, viewed as the architect of the merger, is to step aside. But as Dejonghe told Legal Business in this issue’s Life During Law, ‘there’s a time to go. We have a constitutional limit of two terms in each role. You have to respect that’.
Notably, not a single partner in the new top team will be based in London, and this has raised some eyebrows, with one former A&O London partner suggesting a ‘charm offensive’ may now be required to communicate to London partners that they will not be sidelined.
Dejonghe argues the leadership appointments reflect positively on the firm’s ability to promote new, diverse talent. ‘I am especially proud of the diversity,’ he says. ‘That tells you a lot about my partners. It tells me that, in terms of cultural shift, we’ve achieved a lot.’
‘We’ve hired a lot of people in the US. But that doesn’t give you the brand nor the depth of bench that you need.’Wim Dejonghe, A&O
On the question of post-merger practice leadership, one former partner describes a traditional A&O structure in which firmwide management takes a broader ‘big picture’ approach, with practice and office heads given leeway and an overall strategy often ‘honoured in the breach’. Garousha and Ékué, the former partner says, are viewed as ‘very much in line’ with this approach.
Another question to be addressed is how the merged firm will handle the issue of overlap in practices and offices. Of the 48 cities that A&O and Shearman are currently active in, both firms have a presence in 18 (including associated offices), and in January, the firms announced that they would consolidate operations ‘into a single office in each jurisdiction where we operate’.
April’s announcement of partner promotions gave some hint as to the regional breakdown among the two firms. 40 partners were made up in total, with 32 from A&O and eight from Shearman. A&O made up nine UK partners, five in the US, 14 across EMEA and four in APAC. All eight of the new Shearman partners, meanwhile, were made up in the US.
You pays your money…
In addition to leadership, another key consideration is compensation. Successive rounds of lockstep reform at A&O have shifted the dial to enable it to better compete with US rivals on rates, but ahead of the tie-up, A&O still lags Shearman slightly, with profit per equity partner of $2.25m and revenue per lawyer of $1.01m, compared to Shearman’s $2.48m and $1.26m.
Talking to LB, Dejonghe points to the development of a more ‘mercenary’ market in the legal sector. ‘The money that’s being thrown around is unhealthy,’ he says. ‘I worry as an industry we’re going to lose out on some talented people. The reputation of the legal industry is already that it’s a sweatshop. We shouldn’t push that any further. Of course you need to be competitive on pay, but you also need to think about things like professional development, a positive social role, and interesting work.’
These issues aside, though, supporters of the combination argue that such a deal is the most effective way for a Magic Circle firm to grasp the nettle in America. ‘If you want to be properly global, you need to have credibility in US and English law,’ says Dejonghe. ‘That’s non-negotiable.’
A&O has made progress in recent years, with US headcount increasing by 50% from 2013 to 2023, and partner count up 71%. Americas revenue grew by almost 100% from 2018 to 2022, and this year’s accounts show a further increase, from 13% of total revenue to 14% this year (£287.5m). But as Dejonghe concedes, this is still not enough. ‘We’ve recruited a lot of people in the US,’ he says. ‘But it doesn’t give you the brand nor the depth of bench that you need.’
Dejonghe is candid about the collapse of the merger talks with O’Melveny & Myers in 2019. ‘I’m an M&A lawyer by background, and I thought I could do it on my own,’ he says. ‘But you can’t – even with all the experience I have.’ Another lesson of the experience was to keep early discussions tightly controlled. This time around, the two firms put together a small team to work on the combination behind the scenes, working out key provisions and anticipating potential objections, before taking what Dejonghe calls ‘a developed proposal’ to partners.
Pointing to the final approval rate of more than 99% of the partners who voted at each firm, Dejonghe argues that this approach gave the leaders ‘a pretty decent read of what the issues could be.’
There are undoubtedly lessons here for other firms considering a large-scale transatlantic merger. But, as many in the market note, there are few potential targets which are vulnerable to such an approach but with enough US strength and brand recognition to make a deal worthwhile. As one London managing partner at a US firm put it: ‘To do a merger you have to be either at the top of your game or in dire straits.’