‘You’ve now got one more 64,000lb gorilla,’ said one former UK firm leader, in response to the news that the merger of Allen & Overy (A&O) and Shearman & Sterling will proceed.
On 13 October, the firms announced the end of partnership voting on the combination, with more than 99% of votes cast at each firm in favour. The firms are due to combine as A&O Shearman from May 2024 at the latest, creating ‘the first fully integrated global elite law firm’, with nearly 4,000 lawyers across 48 offices in 29 countries.
With combined revenue of roughly $3.5bn, the merged firm will sit comfortably within the top five of the Legal Business Global 100 – behind only Kirkland & Ellis, Latham & Watkins, and DLA Piper, and well ahead of its nearest Magic Circle competitor, Clifford Chance (CC), in ninth place in last year’s Global 100, with $2.71bn in revenue.
The firms announced they were in merger discussions in May this year and the deal had been widely expected to go ahead, with management at both firms embarking on a series of roadshows around the world over the summer to shore up support.
The combination marks the first transatlantic merger involving a Magic Circle firm since CC’s ill-fated union with Rogers & Wells in 2000, and comes after A&O held unsuccessful talks with O’Melveny & Myers in 2019.
Shearman, meanwhile, was engaged in talks with Hogan Lovells as recently as this year, with the pair announcing the end of discussions in March. The firm has struggled to keep pace with US rivals in recent years.
With its traditional banking client-base, it has not made the same push into private equity as its rivals, something management at the combined firm is keen to rectify.
‘We haven’t actually heard anything about how they’re structuring this. We haven’t heard much of anything about partner remuneration, for instance.’ Zulon Begum, CM Murray
Shearman increased its revenue by 35% 2012-22, with profit per equity partner (PEP) up 93% in the same period – an increase partially explained by a decline in equity partner headcount of 63. A comparison to its competitors, however, shows the firm’s relative decline. Latham & Watkins grew its revenue by 155% in the ten years to 2022, while Kirkland & Ellis managed a staggering 245%. The two firms grew their PEP by 152% and 142%, respectively.
Shearman, meanwhile, has continued to fall further behind. In its most recent set of financial results, announced in March this year, it reported a 10% drop in revenue, falling below $1bn to $906.9m. Its performance in PEP was even weaker: a 17.5% drop took it to $2.48m.
Shearman has also been hit by partner exits around the world, including finance partners Philip Stopford and Korey Fevzi, who left in March this year to launch the English law offering of Cravath, Swaine & Moore in London. The firm named respected litigator Adam Hakki as the senior partner successor to David Beveridge the same month.
Market reaction to the deal has been largely positive. Jomati founder Tony Williams, who was previously managing partner at CC before its US merger, said: ‘A&O was lucky. The previous discussions with O’Melveny made partners understand how difficult getting a US deal is. The partners were more amenable to compromise on issues that, if not for that experience, might have been sticking points.’
Another commentator noted: ‘It’s been handled extremely well. Both firms have had failed merger attempts recently. Both sides understood the importance of managing communications – even simple things like who gets informed in what order. Communications strategy is crucial and has been really well handled. The whole thing was presented as a proper corporate deal.’
The deal will heap pressure on the remaining Magic Circle firms to come up with credible offerings of their own in the US. There has not been a significant UK/US merger since 2018, when BCLP was created. This deal came after Eversheds Sutherland was formed in 2017, while Norton Rose Fulbright was established in 2013 and Hogan Lovells in 2010.
As Williams commented: ‘It’s transformative in one key respect: it is a fundamental shift in what the top UK firms have been able to achieve in the United States.’
The overwhelming partner support for the merger and the speed with which it was completed might make it look easy. But the hard work starts now. ‘We haven’t actually heard anything about how they’re structuring this’, said Zulon Begum, partnership specialist at CM Murray. ‘We haven’t heard much of anything about partner remuneration, for instance.’
Both A&O insiders and market commentators stress that the merger is not an endpoint. Rather, it is one aspect of a strategy by which the firm aims to establish a truly global presence. To this end, A&O intends to do far more than bolt Shearman’s US brand recognition and strength in New York finance onto its existing offering. Looking ahead, for Maurice Allen, founder of legal consultancy LTN & Partners: ‘One of the big challenges will be finding the money and the willingness to invest in key areas. Private capital is the obvious growth area right now if you want to counter the US threat.’
A&O has already signalled its intent in that respect. Before the partnership vote, it established a new private capital group, co-chaired by banking co-head Philip Bowden and private equity co-head Stephen Lloyd. The firm has also identified life sciences and technology as key sectors, as well as energy and infrastructure, where it has made US hires as recently as August, with energy tax specialist Scott Cockerham and new head of US energy private equity Kfir Abutbul joining from Orrick and Paul Hastings, respectively.
‘It’s not the merger itself that’s a threat. It’s the fact that a Magic Circle firm of some quite significant financial muscle has decided it’s going to compete actively in both markets.’
Maurice Allen, LTN & Partners
A&O’s Magic Circle rivals have similarly sought to grow in the US. CC and Linklaters are open about their willingness to pursue a merger with the right partner. But there are few if any candidates that combine Shearman’s name recognition and New York capabilities with the financial struggles that made the firm willing to consider a combination with a larger UK outfit. ‘Those kind of sweet spots open up very rarely,’ said Begum.
‘We don’t comment on other firms, as it’s invidious,’ said Freshfields UK managing partner Mark Sansom. ‘But what this does show is the need in this market to be really agile, and for firms to think about their direction of travel over the next decade.’ Freshfields remains confident in its strategy of growth through lateral hires.
Still, the US laterals market is, in Williams’ words, ‘febrile: many people move on in three to five years. It’s a tough market to hire in, and mistakes are expensive’. And, due to the gulf in profitability between UK and US firms, ‘US firms can afford to make more mistakes.’
‘There’s a fair amount of scepticism among US firms as to whether this is really threatening,’ noted Allen. ‘But it’s not the merger itself that’s a threat. It’s the fact that a Magic Circle firm of some quite significant financial muscle has decided it’s going to compete actively in both markets. It’s going to present itself to clients, including clients of market leaders like Kirkland, Latham, and Simpson Thacher, as a firm that should be considered as a real alternative and a firm that has skills and geographic coverage that the US firms cannot always match.’
For one former UK law firm head, US scepticism may play in A&O Shearman’s favour: ‘The longer they carry on saying that, the better. It’s always better to be underestimated by your opposition.’ LB