The proposed merger of A&O and Shearman & Sterling has got the market talking about the biggest news in the legal industry for decades. LB finds commentators sanguine on the deal – but management will have much work garnering partner support this summer ahead of the vote.
‘Allen & Overy and Shearman & Sterling to create the first fully integrated global elite law firm,’ proclaims the 21 May joint statement from the two firms, stating their intent to merge to create Allen Overy Shearman Sterling. Thankfully, the branding gurus also came up with the far snappier (and not quite so ampersand-devoid) A&O Shearman, ‘for short’. The combined firm would boast 3,900 lawyers across 49 offices and roughly $3.4bn in combined revenues.
The news was a lot to take in on a Sunday evening, not least because all but a handful of partners in the inner circle had believed Shearman’s merger prospects to be thwarted when talks with Hogan Lovells fell over on 2 March. Those failed talks prompted an announcement that Shearman’s global head of litigation Adam Hakki would succeed David Beveridge as senior partner, even as partner exits continued apace.
Few in the industry suspected that another prospective merger partner waited in the wings, much less one of the size and prestige of A&O. While the dust has started to settle on news of the deal, it remains the hottest topic around watercoolers in the City. LB canvassed market reactions around the Square Mile.
Formerly known as the Magic Circle
‘[The merger announcement] was a bit surprising in terms of the name,’ says Samantha Thompson, former head of legal M&A at Anglo American. ‘A&O is quite different than Hogan Lovells as a proposition.’
Thompson’s views are in accord with many senior sources: ‘It’s reshaping Big Law. If the merger goes ahead, it will transform what is, potentially formerly, known as the Magic Circle.’
‘It’s reshaping Big Law. If the merger goes ahead, it will transform what is, potentially formerly, known as the Magic Circle.’
Samantha Thompson, formerly of Anglo American
Of course, the ramifications for Freshfields, Clifford Chance (CC) and Linklaters of such a market-defining play by one among their ranks are not lost on pundits. One former A&O partner puts it simply: ‘It throws down the gauntlet.’
Zulon Begum, partnership expert and CM Murray partner, notes: ‘I’d be very surprised if management at other Magic Circle firms aren’t keeping a close eye on this.’
Inevitably, many in the market draw parallels with the last comparable transatlantic merger, that of Rogers & Wells and CC, a takeover so disastrous it could hardly be counted as a raging success. Indeed, that paradox – the need for a US breakthrough coupled with few substantive moves towards a US tie-up – bears testament to how difficult these deals are to pull off.
As Sebastian Prichard Jones, Macfarlanes’ senior partner, notes: ‘The perception has been, possibly wrongly, that the larger London-headquartered firms have been defensive. They’ve been under attack by US firms, and they’ve retreated. However, this is a show of confidence from a member of the Magic Circle. It’s a decisive move, and it shows that A&O has a lot of confidence in its own future.’
While detractors may point to Shearman’s perceived faded glory to undermine A&O’s choice of partner, less churlish commentators concede that the Wall Street firm is still a formidable force, particularly in New York finance. Christopher Saul, former Slaughter and May senior partner and now managing director of Christopher Saul Associates, describes Shearman as ‘a charismatic brand’.
There are also obvious questions around practice areas and what, if any, transformational additions will be made.
As Prichard Jones observes: ‘It’s an interesting question as to whether they’re focused on the practice areas they already have or the ones they’re targeting. Both firms are perceived to have major strengths in a range of areas, particularly finance. But the messaging is clearly that they want to take the fight to the major US firms in areas where those firms are currently perceived to dominate. In particular, private capital.’
While A&O and Shearman’s press release refers to private capital only in passing as one of the ‘global macro trends’ the combined firm ‘will be perfectly positioned to capitalise on’, few doubt that they will make it a focus for investment, given that private equity is widely viewed to be the missing lucrative piece for both firms. Indeed, some suggest that PE stars at top US firms might be drawn by the jurisdictional and sectional breadth that A&O Shearman could provide.
For those expecting this to pave the way for a slew of transatlantic tie-ups, it is worth remembering that the partnerships of both A&O and Shearman have been primed for such a deal for some time, the Magic Circle firm from its protracted flirtation with O’Melveny & Myers that ended in 2019 and Shearman from its abortive talks with Hogan Lovells.
As one former A&O partner asserts: ‘I don’t think there’s any other firm that could have done this merger so quickly. The reason A&O could do it, and could put it to the partnership with a high degree of confidence, is because the partnership is well used to this idea.’
‘It doesn’t necessarily make any other sizeable transatlantic mergers more achievable,’ argues Saul. ‘The Shearman situation is unique, given that they had their failed combination with Hogan Lovells, and were clearly keen to find another deal.’
Do or die
However, it is painfully apparent that now is the time for peers to nail their US colours to the mast, or risk stagnating to the point of retrenching in America.
Says Prichard Jones: ‘If it goes well, it’s positive from the Magic Circle’s perspective. It shows that they can pull off a US merger, that they can insert themselves into Wall Street. Other firms might say, okay, this has happened, we need to find a way.
‘There are some US firms, and potentially Magic Circle firms, who are going to be incentivised to match the heft of this beast that’s been created. So that might produce a more amenable series of negotiations than the market might otherwise expect.’
And it does seem like too much of a coincidence that Freshfields, a firm which has had a patchy track record on the US lateral front, has heralded eight US hires hot on the heels of the A&O Shearman merger news. These include the hires in New York of financial institutions and fintech regulatory expert David Sewell from Perkins Coie and private capital specialist Damian Ridealgh from Weil.
‘I’d be very surprised if management at other Magic Circle firms aren’t keeping a close eye on this.’
Zulon Begum, CM Murray
CC too has been quick to demonstrate dynamism, announcing a ten-partner office in Houston, bolstering its US energy and infrastructure offering.
A&O and Shearman partners still need to vote in favour of the merger, with a 75% threshold meaning that management will have much work ahead to get stakeholders on board.
Several senior sources reacted with surprise that the deal was announced before the vote, however packaging this up in such a slick way – with a brand, a video and even a website – is a shrewd move and arguably the most persuasive way to get buy-in internally.
Saul points to the ‘eminent advisers’ involved – Lazard as financial adviser, Simpson Thacher as legal counsel for A&O, and Davis Polk for Shearman. ‘It speaks to the seriousness of the intent,’ he says.
Thompson agrees: ‘It seems a tactical bit of M&A. Get the news out, give a sense of where things are going and make it clear that there was significant work going on behind the scenes.’
The firms also this way retain control of the narrative. ‘Most of these deals fail if they leak too early,’ asserts one former A&O partner. ‘You lose control. People form into factions. Partners hate finding things out in the press before being told. But this one didn’t leak.’
And both Shearman and A&O have been burnt before. ‘This surely reflects a desire on A&O’s part not to have the never-ending saga that it had with O’Melveny,’ says Saul.
Thompson makes a similar point on Shearman. ‘I suspect the firm didn’t want some of the speculation there was around a potential Hogan Lovells deal. It’s great if you get positive press, but if you start getting speculation you can spook not only the market, but clients and other stakeholders as well.’
A former A&O partner agrees: ‘The Hogan Lovells merger was a classic example. It leaked, and then suddenly the whole thing was being conducted in the public domain. It’s impossible. Everyone forms their opinions very quickly. And opinions, once formed, are difficult to change.’
Professional pessimists
Now, leadership at each firm must convince what one former partner at A&O refers to as a group of ‘professional pessimists. They’re looking to find fault, as they would with anything – and rightly so.’
That the merged firm intends to use an iteration of A&O’s existing modified lockstep is also a signal to the market that some of the hardest yards of any such deal have already been done.
‘The equity ladder will be stretched a bit more’, says a partner with visibility on the situation, ‘with more at the top end.’
This will have been facilitated by alignment in certain metrics. A&O’s profit per equity partner stands at $2.7m for the 2021-22 financial year, while Shearman recorded $3m in 2022.
Assuming that Shearman’s top earners take home significantly more than A&O’s, A&O senior partner Wim Dejonghe (pictured) and Hakki will need to effectively harmonise compensation structures to appease their respective rainmakers ahead of the vote.
Other potential sticking points include difficulties around Shearman’s pension liabilities, which many suggest proved insurmountable in the talks with Hogan Lovells.
Notwithstanding the inevitable hurdles of striking such a deal, it would be churlish – and short-sighted – for partners to block the combination.
As one ex-partner at A&O asserts: ‘There could be loss of partners on both sides, but you’ve got to look at the big picture. There are going to be 800 partners in this firm. If A&O and Shearman lose 50, they’ll only be down to their last 750.’
For now, most in the market are sanguine. ‘I hope it’s successful’, says Thompson. ‘If I’m thinking about a big, strategic, multijurisdictional transaction, this merger would mean I could credibly go to one firm for top-end advice in both London and New York.’
And, as Prichard Jones concludes on a nostalgic note: ‘It’s a sign of the Magic Circle getting its mojo back. It reminds me of the 1990s, when the firms were expanding through Europe. You could feel the energy coming off them. And you can feel the energy around this now.’