Is Linklaters ready for a China alliance?
23 June 2014 | By Kate Beioley
23 June 2014
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Is Linklaters on the hunt for an alliance in China? Sources suggest the magic circle firm has been touting the market for a deal, but it's by no means done. Reporter Kate Beioley discusses the opportunities that lie ahead
What is the future of Linklaters in China? Happily ever after alone or is time to buddy up with a new best friend?
The firm is understood to have made overtures to at least two Chinese firms in the wake of liberalised Shanghai trade laws and the game-changing merger between King & Wood Mallesons and SJ Berwin (31 October 2013).
Both Global Law Office and Commerce & Finance are believed to have been tapped on the shoulder by the magic circle firm for preliminary discussions. Talks with Global Law office are said to have ground to an early halt when the firm decided to remain independent. However sources said Linklaters had also spoken to elite capital markets firm Commerce & Finance, which is undergoing a radical attitude shift towards alliances.
A source close to Linklaters said: “Nothing has been formalised as yet but we’ll all be interested to see what happens.”
Insiders at Commerce & Finance said the firm was regularly in informal talks with a number of international firms, most of which were US-based. Sources suggested that Linklaters was among the UK firms joining the queue for chat. A senior level partner indicated that the firm was in the midst of a seismic attitude shift towards associations.
Following a management transition this year, Commerce & Finance is increasingly open to the prospect of tying up with foreign firms.
A senior-level partner said: “Previously the firm was very resentful about the idea of having a formal or closer relationship with a particular international firm in the fear of losing out on opportunities working with many other foreign firms.
“But there has been a shift in our strategy and thinking. Now we have a more open mind about international alliances and associations. We’d be happy to see a deal done with a leading global firm, but so far there’s nothing formal on our agenda.”
Traditionally Chinese scepticism over tie-ups has prevented deals from getting off the ground. But the launch of the Pilot Shanghai Free Trade Zone (SFTZ) at the end of last year and the SJ Berwin and King & Wood Mallesons deal has altered the way East and West view integration.
The SFTZ has opened up service sectors to foreign invesmtent and for the first time openly allows formal associations between local and foreign law firms (13 March 2014). It means a Linklaters’ China alliance would allow it to offer combined international and PRC advice to clients for the first time. But both sides are mired in debate as to how to go about greater state-sanctioned cooperation.
For Linklaters, the opportunity for a Chinese alliance offers the potential to build up its niche practice. It would also allow it to steal a competitive march on its domestic rivals. That said, it would also come with a raft of cultural and practical pitfalls.
A source close to the firm said: “There are opportunities there but also challenges in terms of pricing and other things. But the market is undoubtedly moving towards liberalisation and SFTZ means that having foreign devils in the legal market is clearly not the sacred cow that it once was.”
Would the benefits outweigh the drawbacks?
An alliance would allow Linklaters to build out from its current niche role in China. It has a strong reputation in M&A, project finance and capital markets work in the region. but the prospect of building out a debt and equity capital markets practice would be attractive.
A source said: “They’re not the most well known firm for banking capital markets work in Asia. It’s the equity capital market side, maybe the debt capital markets and derivatives work that’s in big demand.”
However partners are thought to be divided over whether or not the firm needs to alter its offering with some preferring to take a more conservative wait-and-see approach. “It’s a huge decision to build out into those areas,” said one source.
Linklaters currently has 11 partners spread across Shanghai and Beijing, the majority of which have moved up through the ranks as trainees. The team is now led by Asia head Marc Harvey, who stepped into now projects head Stuart Salt’s shoes at the end of last year (2 December 2013).
Partners are aware that when it comes to China, they have a range of options. One plan could see the firm maintaining its home-grown capability and hoping for more favourable regulatory changes which could add flexibility. However that could be a risky game-plan. Alternatively, a merger in the vein of the King & Wood Mallesons deal could be the way forward.
However with such different firm structures and divergent remuneration and partnership structures, Chinese mergers appear to some too tricky a deal to knit together. The opacity of Chinese firm financial structures and the Chinese reluctance to buddy up with foreign firms are also understood be thought of as barriers to tie ups within the firm.
With that in mind, an alliance could make more sense, potentially similar to McDermott Will & Emery’s strategic alliance with Shanghai-based MWE China (30 January 2007). Partners in Chinese firms see it a rational move for the magic circle firm.
“It would make sense for Linklaters. The firm’s China practice has been very focused and niche. It doesn’t have a wide range of practice areas or a big portfolio of Chinese clients as other magic circle firms. The potential move to tie up with a Chinese firm signals the firm’s intention to take a radical change in its China strategy and boost its China offerings,” says a partner in a leading Chinese firm.
“Foreign firms have increasingly recognized the increasing cost of handling Chinese legal matters themselves and the limitation of advising on inbound investment. It’s a good approach to keep their clients while preserve profitability by giving out China-related work to a trusted ally,” said another Chinese partner.
However the concept is greeted with a healthy dose of caution according to sources. One said: "What you wouldn’t want to do is give up your own highly skilled practitioners and that flow of work if the alliance isn’t going to work and disappears.”
Linklaters’ failed Singapore joint venture with Allen & Gledhill has provide a valuable lesson to the firm’s partners (26 March 2014). Shortly after the breakup, the firm decided to apply for a Qualifying Foreign Legal Practice licence to handle limited scope of Singaprean law by itself (19 February 2013).
Then there is the issue of how keen Chinese firms really are to give up independence. With Global Law Office already understood to have discarded the idea, it is not known how many PRC firms are ready to embrace change.
A source said: “It may be that things could change if in fact the in-bound work into China is not as great as used to be but Chinese firms appear hugely excited about being at the vanguard of what is still a new profession in China.
“I think they value their independence and get an awful lot of referrals from other firms so there is a question of why you would compromise that.”
Tricky decisions for Linklaters in the East but it seems the magic circle firm does have potential partners in mind.
Additional reporting by Yun Kriegler