SJ Berwin’s high stakes tie-up with KWM dares to bring a new equation to global law

David Stevenson and Alex Novarese assess SJ Berwin’s audacious Asia-Pacific tie-up and ask if the union can truly propel the firm into the global premier league

‘This isn’t about doing anything with our backs against the wall,’ says Jonathan Blake, the former senior partner of SJ Berwin, and one of the architects of his 165-partner firm’s impending tie-up with King & Wood Mallesons (KWM).

Despite some well publicised reverses in recent years for the mid-pack City player, Blake’s comment is undoubtedly true. But as to what the deal that goes live on 1 November does signify, well, opinion is sharply and starkly divided.The backers – including a large and enthusiastic majority of SJ Berwin’s partnership – hail the benefits of a genuinely pioneering marriage between the City player and the two top independents in China and Australia, both G20 economies and crucial hubs in the much-touted Asia-Pacific region. The deal will create a $1bn practice based in Asia, with 553 partners and over 2,700 lawyers. Just over 500 lawyers will join from the UK law firm. It will be enough to push the combined firm into the top 30 largest law firms in the world on most measures, with SJ Berwin, which earned £184.6m in 2012/13, contributing nearly 30% of income.

If a full-service, integrated Europe/Asia play can be achieved and KWM’s ranks of Australian bluechips and Chinese state-backed giants can be persuaded to use the firm on a truly global level, the union will be compellingly positioned in what many see as the key region of the 21st century.

Critics, however, are equally determined that the deal will flounder amid a welter of logistical and cultural challenges and the absence of a top-tier transactional practice in English or New York law.

What unites these differing views is the concession on both sides that the tie-up could dramatically go in either direction. Forget two plus two equalling three, four or five – King & Wood Mallesons SJ Berwin circa 2020 is as easy to imagine as a triumphant seven as it is a disastrous one or two on the merger success scale.

For SJ Berwin, the potential upside makes the rationale clear. ‘We’re teaming up with the very best people in China and Australia and that can only be good,’ says Blake.

‘There’s a real strategy, a real game plan,’ says the firm’s litigation head, Craig Pollack. ‘It’s unique. Nobody has the same kind of offering. It gives us a great story internally to our teams and externally to our clients.’

Berwin’s legacy

Understanding why a battle-weary SJ Berwin came to embrace a high stakes marriage that inevitably would cost its independence needs a little history. Launched in 1982 by the energetic Stanley Berwin, the firm from the off stood out in the staid City legal market, being built around Berwin’s notion of an entrepreneurial, client-centric practice that took inspiration from US law firms. Likewise, the firm had a pronounced Jewish cultural influence, more common to New York’s legal community than the Square Mile.

The firm was further distinguished by an individualistic strain among its partners, which helped drive its rapid growth but at times hampered co-operation. This was the ‘sharp elbows and insecurity’ that former chief David Harrel once joked constituted the firm’s culture. It was an ethos that divided peers, though the firm rapidly built a quality mid-market practice with breadth and a noted specialism in private equity funds.

SJ Berwin was also to prove the doubters wrong when it became arguably the only firm in its weight class to build a credible European network from the late 1990s onwards. At the peak of the credit boom in 2008 the firm was one of the most profitable UK law firms outside the City top ten, with profit per equity partner (PEP) of £802,000. But its practice was one of the most severely hit by the banking crisis, sending revenue plunging below £200m, while PEP nearly halved at £410,000 the following year. Though its financial performance has stabilised, it has remained a smaller, considerably less profitable firm that generates £30m less in revenues than five years ago even before accounting for inflation.

At the same time additional pressure was heaped on the firm as it tried to fund expansion into Asia and the Middle East. Still, there was surprise that the firm in early 2010 chose a moment of vulnerability to pursue what many had long seen as its endgame: a union with a US practice. Initial discussions with Orrick, Herrington & Sutcliffe led nowhere, shifting towards prolonged and unhappy talks with New York’s Proskauer Rose, which were abandoned in November 2010.

It was a divisive process that contributed to ill feeling and at one point looked set to result in the otherwise popular corporate partner Rob Day failing to win an election as managing partner in 2010 as expected. As such there was an expectation that the firm would avoid pursuing another deal until markets had well and truly settled. It didn’t work out that way.

Getting it done

With SJ Berwin partners culturally wary of dealing with another domineering US firm but convinced that the UK firm’s global goals couldn’t be achieved independently, the opening came from a long-established relationship between Blake and King & Wood on funds work. Blake had forged a close relationship with King & Wood partner Zhang Yi back in the mid-2000s. Current SJ Berwin senior partner Stephen Kon, a noted competition specialist, had also worked with King & Wood counterpart Susan Ning.

Discussions were informally initiated around the time that the much-hyped union between Mallesons Stephen Jaques and King & Wood went live in March 2012, by which point it was clear that the KWM deal was only the first part of a sustained run of expansion. Kon, Day and Blake and KWM global managing partner Stuart Fuller initially worked on the deal, with the team expanding in the six months preceding the successful vote, which concluded at the end of July. Despite persistent (and not very convincingly denied) claims that the legacy Mallesons partners took more persuading than the King & Wood partnership – the top-tier Australian practice having previously held merger talks with Linklaters and Clifford Chance – the deal was supported in a vote by the three individual partnerships.

Discussions with SJ Berwin made it clear that the prospect of joining an internationally potent partner without submitting to the cultural regime-change of a US takeover was a major selling point and helped bring forward the timetable from an expected vote in the autumn (the City firm’s management being determined to avoid the momentum-sapping re-run of previous talks).

Pollack says: ‘The beauty of this from our perspective is that we get to develop our own geographic footprint. Our mandate is to continue to develop Europe and the Middle East and do joint mandates with partners across the other partnerships and do things together in places like Africa.’

SJ Berwin – Performance in context

Year	Revenue	PEP	RPL	PPL
2007/08	£215m	£802,000	£307,000	£104,000
2008/09	£184m	£410,000	£261,000	£55,000
2009/10	£171m	£443,000	£257,000	£59,000
2010/11	£179m	£630,000	£293,000	£85,000
2011/12	£180m	£635,000	£302,000	£83,000
2012/13	£184.6m	£563,000	£300,000	£78,000
Source: Legal Business

Putting it together

Perhaps the key issue regarding the merger will be the challenge of putting together such disparate firms, all operating with separate partnerships and profit centres.

Many have noted the fact that SJ Berwin’s brand will be phased out after an interim period in Europe and the Middle East, though most partners internally are realistic and relaxed on the point. Many would argue as a mid-tier practice that has faced its share of reverses in recent years, a symbolic break with the past is sensible.

The more substantive issues are how to mesh the firms’ cultures and structure. Even as the most progressive of China’s legal elite, most neutral observers view King & Wood as well behind the slick institutionalisation, training and consistent service achieved in major US and UK firms.

This jarring contrast between the supposed barrister mentality of Chinese law firms and the sophisticated Mallesons machine has long been regarded as a major drawback of the KWM deal, a claim that has only grown more persistent in the 18 months since the union went live. This has been underlined by a wide-spread perception that the Chinese firm is calling the shots, a conclusion that has provoked disbelief among Mallesons’ many admirers in the City. While Mallesons can trace its roots back to the 1850s, King & Wood launched in 1993.

Integration has been brought further to the fore by KWM’s decision to wall off its IT systems between the Chinese and Australian partnerships, reflecting concerns over client confidentiality in China. Regulatory ambiguity about the status of international legal mergers in China has raised further questions, while rivals have pointed to the surprise departure of Australia managing partner Tony O’Malley in May amid reports of internal discord.

Fuller addresses the wider independence issue that has dogged KWM’s early progress: ‘I’ve got no issues at all on the security of our system. All the statements coming out of China about the rule of law are very strong. Our chairman believes that the rule of law will develop to support commercial [development] in China.’

Integration comes to the fore as well due to the verein-based nature of the deal, that will see SJ Berwin join the new firm as a fourth partnership complementing partnerships in Australia, China and Hong Kong, where the local operations of the legacy duo were fully combined.

Mike Ferraro, global head of corporate at Herbert Smith Freehills, says: ‘Our merger [of Herbert Smith and big six Australian practice Freehills in 2012] was dubbed “transformative” by the market, being a true merger of equals – rather than a Swiss verein such as the Berwin/KWM model, which may impact its ability to seamlessly serve clients across borders.’

The topic of multi-profit centre mergers has been much debated in recent years. Whatever the pros and cons of the model, it allows for rapid expansion and KWM’s ambitions mean deploying the structure to forge a global practice as a federation of major practices, a departure from previous deals that have been either takeovers or straight two-way mergers.

Interestingly, though SJ Berwin does not intend to immediately review its partnership pay model, partners have confirmed that the firm expects to ultimately move to much more closely integrate profits, though it is unclear if this will be achieved via a single profit pool.

Says Blake: ‘I hope it’s going to be a lot more integrated. Our aim is something that is fully integrated. The aim is to be operating as a single pool of people, irrespective of how the money moves, as quickly as possible.’

Integrating client teams across such a disparate group will also be challenging. The current expectation is that the majority of client relationships will be managed at a local level, with the international executive committee handling a select band of global clients. Based on the initial post-merger interviews at least, there is some vagueness about how the firm will move to global practice and client teams.

Strategic questions

If the challenges regarding integration stoke some doubts, the deal faces other problems not hinted at by the soaring post-merger rhetoric. For one, the economic backdrop looks less bullish than at the time the initial KWM deal was agreed, with China and Australia’s interlocking economies both slowing markedly over the last 12 months (albeit to rates well ahead of Western counterparts). An increasing body of opinion contends that the string of Anglo/Australian legal mergers have been poorly timed, coming as the Australian economy comes down from a commodity-fuelled bubble.

And while much has been made of the opportunity to secure outbound work from Chinese corporates in Europe, levels of Chinese investment into Europe, while growing, remain relatively modest. By the same token KWM faces losing out on referrals from international advisers, referrals that will be gratefully scooped up by Chinese rivals like Jun He and Fangda, who have made clear their intention to remain PRC-focused. Likewise, it has been noted in the City that Clayton Utz, arguably the top Australian firm to remain fully independent, has signalled a strong commitment to go it alone.

Many also question if the mid-tier SJ Berwin is a compatible fit, especially as its corporate and private equity practice has lost a number of key partners to US law firms since a funds team in 2007 quit for Kirkland & Ellis. This point is debatable – mid-tier or not, SJ Berwin brings substantive access to English law and the large markets of Europe. The legacy Mallesons and King & Wood are top-tier players in large and strategically potent economies but nevertheless operate in relatively small markets and specialise in national law that doesn’t travel well globally.

This latter point has received relatively little attention though it is possibly the issue that will define the success or failure of the union – whether Chinese corporates start demanding international deals and disputes be substantively handled under mainland Chinese law.

While this prediction is often made, there is little concrete evidence of such a shift – indeed, critics claim that KWM has failed to have a material impact yet even in Hong Kong. Until major international M&A, securities and contentious work starts having a sizeable PRC law component, it is hard to escape the conclusion that KWM will be at a major disadvantage against Anglo-Saxon rivals – unless it can build up a far stronger practice in English or New York law. Set against that, with $1bn of investing power and momentum to spare, the firm has considerable scope to upgrade its practice through recruitment and bolt-ons.

The US and beyond

There is little doubt that KWM intends to make rapid progress on building its global reach to capitalise on the SJ Berwin deal, being widely expected to attempt to add a major US partner within the next two years.

The question remains if the firm can persuade a US player of the right calibre to sign up. KWM is known to have also pursued deals in Singapore, having earlier this year narrowly failed to secure a deal to merge with major local independent the WongPartnership, and Canada, where it has been linked to Gowlings.

But while many factors remain in play, there is much cause for the optimism that is palpable around SJ Berwin’s offices. Certainly, the enthusiasm among SJ Berwin’s partnership goes well beyond the scripted messages that always follow such deals.

SJ Berwin private equity partner Richard Lever sums up the sentiment: ‘There is a real feeling of optimism and a belief that this is going to be “business unusual”. With this, our clients and our people are the keys to our success. We considered all our options and this combination was the best match.’

Galvanising one of the City’s most energetic partnerships with a broad practice boasting respectable coverage of litigation, arbitration, real estate and intellectual property is a considerable prize.

As Pollack observes: ‘There’s been a shake up of the global legal market since 2008, there’s a truly global elite emerging. There are firms in the top 20 you wouldn’t have seen 10-15 years ago. We have the momentum to shake up the global legal market.’

Will Lawes, senior partner at Freshfields Bruckhaus Deringer, agrees there will be more pressure for firms to stand out on the global stage. ‘In an ever more competitive legal market environment, differentiation will be the key to success. We expect firms to continue to look for ways to stand out from the crowd.’

And even if a dose of scepticism is required about the medium-term prospects for China and Asia as legal markets, the commanding long-term position KWM has in what will likely be the world’s largest economy within 20 years must make the firm a very credible contender to become one of the world’s elite law firms. Just a contender for the time being, but a serious contender nonetheless.

SJ Berwin was not a firm even its many admirers expected to be part of such an aspiring world-beater. It’s an understandable gamble.