Focus on SJ Berwin merger talks: Berwin in a China shop
28 May 2013 | By Joshua Freedman
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Is SJB bulking up for a US partner with the KWM deal or is the pull of non-funds muscle enough? And what of the illustrious name?
If it happens, it could be the boldest and most ground-breaking international merger yet by a UK law firm, at least since Norton Rose’s Canada-South Africa double in June 2011. SJ Berwin is in advanced talks over a tie-up with Asia-Pacific giant King & Wood Mallesons (KWM), a $700m (£466m) firm formed out of last year’s game-changing combination of China’s King & Wood with Australian independent Mallesons Stephen Jaques. Not only would the deal put SJ Berwin in the position of a junior party in a global firm, it is also understood to be placing the established City outfit’s well-known name at risk, with sources telling The Lawyer the current plan is for KWM’s brand to win out as the post-merger banner.
SJ Berwin’s famously tetchy partnership will retain some independence at least, remaining a separate profit pool within KWM’s Swiss Verein, which also houses the Asian firm’s three partnerships in China, Hong Kong and Australia. Chinese regulations would not permit a financially integrated union.
Despite talks going on since the early summer of 2012 at the latest, the tie-up might still not come to fruition. Legacy Mallesons partners are thought to be weighing the deal up - the firm nearly merged with Clifford Chance in 2000 and again in 2008 and was a leading candidate for a tie-up right through the recent spate of UK and US interest in the Australian market. By contrast, SJ Berwin partners and KWM’s Greater China contingent are largely up for the deal, despite rumblings of discontent from a small number of senior equity partners in the City.
As one source comments rather harshly: “The fact that [Mallesons’] only option now is SJ Berwin is quite a comedown.”
The same observer puts the chances of the deal going ahead at roughly 50:50, or slightly in favour of a ‘yes’, but Mallesons’ decision is clearly no shoo-in. Last week it emerged that KWM’s Australia managing partner Tony O’Malley was surprisingly stepping down less than 18 months after taking on the role to be replaced by Sue Kench. And if Freehills’ amalgamation with Herbert Smith is anything to go by, the Australians at KWM will be pushing for a fair bit of control in the new-look firm.
Nothing has been put to partners yet for a vote but this is edging closer. A senior source close to SJ Berwin said a decision in principle would likely be made in the next month, while it is understood that as of the start of the UK firm’s financial year on 1 May, nothing had gone out in writing to partners at the City outfit in relation to the deal. Instead they have been treated to presentations.
The reception within SJ Berwin could barely contrast more with the reaction to talks with New York’s Proskauer Rose in 2010. The firm’s management, led at the time by senior partner Jonathan Blake and managing partner Ralph Cohen (who stood down during the talks), came under criticism for keeping the wider partnership out of the loop and not progressing discussions fast enough.
“I by no means reflect the opinion of everyone but the fact that it was played out in the media before the firm had done its due diligence was intolerable,” recalls a partner who was there at the time. “The way it was handled caused so many problems internally. We were never really given the full details of what the merged firm would offer.”
The talks emerged in May 2010 and were called off in November of the same year, largely because of a disparity in profit levels. SJ Berwin had just suffered a drop in average profit per equity partner (PEP) from £800,000 in 2007/08 to £410,000 in 2008/09, bouncing up to £447,000 in 2009/10, compared to Proskauer’s steady PEP of roughly $1.5m (just over £900,000 at the time).
There were then extremely brief talks with other US firms around a year ago, including Mayer Brown in spring 2012, but these were effectively preliminary meetings to assess whether a deal was realistic. It is thought that once the discussions went public in The Lawyer in May, Stephen Kon, who had replaced Blake as senior partner 21 days earlier, decided to call the idea off.
“It got to a cup of coffee and maybe a lunch,” a senior source says.
It is clear that a US merger is still on the cards for SJ Berwin, and indeed KWM has made no secret of its desire to add UK and US capability. So why the shift at SJ Berwin from a primary focus on a US deal to a major Asia play?
For one thing, the Proskauer talks were largely guided by the traditionally market-leading investment funds practice, by far its standout group going back years. The KWM deal, on the other hand, appears to have more to it than purely the funds angle, with finance and litigation - two of the firm’s biggest revenue leapers in recent years - also potentially benefiting. Of course, the leadership has shifted from funds partner Blake to former EU and competition head Kon, although Blake still retains an element of influence.
The deal would still benefit the funds division. A number of US rivals have far more substantial teams in the region, especially Hong Kong, where its two-partner funds offering is dwarfed by the elite American businesses.
A funds partner at a rival firm comments: “Having the local offering and the offering in the important jurisdictions is a good way to sell a practice. Most Berwin clients at the moment are Europe-specific. A number of the American funds in New York, DC have opened up in Asia, Hong Kong or elsewhere. They will be servicing clients like Carlyle and Blackstone. SJ Berwin doesn’t have those sorts of clients but if they complete the merger they have more of an angle to be able to attract that kind.”
A merger would also enhance its renminbi fundraising capabilities and give it access to new investor markets such as India and Indonesia, which are largely served out of Hong Kong.
The deal is widely seen as a precursor to a US merger, with the KWM venture giving both firms a better stab at a higher-ranking American suitor than they would manage alone. The sense is also that without any success in finding a US partner, the firm’s focus has shifted to tying up in Asia first.
“More of the partners are looking East rather than West. Most of the firm were interested in the Far East and the emerging markets,” says one partner. “There’s probably a sense in the partnership that a deal in the Far East was more supportive. What does the Proskauer deal do other than create a good funds practice? How would you deal with the Far East?”
“If you look at it from a negative point of view they’ve long been on a trail for a US firm,” says a rival managing partner. “The KWM thing will need a US firm. It’ll be even more attractive to a US firm with SJ Berwin.”
Shadow of doubt
Not everyone is so bought in by the idea. One rival private equity partner proclaims: “An Asian merger - what is that all about? Are they going to do referrals from China and Australia? There isn’t any work from Australia.
“Why would they not want to try to get a US firm first? Is it because they don’t think they’re strong enough to do it? We don’t rate SJ Berwin in private equity. They’ve got a decent funds practice - they’ve lost too many people because of their pussy-footing around. I think the strategic rationale is absolute kibosh. The strategic rationale stinks.”
A rival corporate head notes how smoothly KWM’s network would fit into SJ Berwin’s: “If you look at it from a purely conflicts angle, looking at a combined firm it seems like a smart move. There’s still a lot of money coming out of Hong Kong and China. If you are actually merging with a firm with much more of a reach in Europe, then that conflict issue would come up. You’re looking at very much South East Asia, an Asia and Australian firm, with very little reach here, so from that perspective it looks good.”
But is it all worth potentially giving up its brand for? The SJ Berwin name harks back to 1982, when Stanley J Berwin founded the five-partner firm (see Timeline, below). Indeed, it is almost synonymous in the UK, and perhaps across Europe too, with private equity fund formation, thanks to figures such as Blake, the father of private equity funds who raised some of the most market-defining vehicles in the 1980s by the likes of Apax Partners, as well as the more recent generation including Mark Mifsud, Michael Halford and Nigel van Zyl, of which only Halford is still at the firm. Indeed, the game-changing British Venture Capital Association memorandum of 26 May 1987, approved by the Inland Revenue, which confirmed that carried interest would be taxed as a capital gain and not income, is plastered with the SJ Berwin & Co letterhead and is thought to have been drafted by Blake himself.
According to a funds partner at a UK competitor: “In the funds world, the SJ Berwin brand is pretty strong. Jonathan Blake is still the father of the private equity funds legal world, certainly in Europe. He casts a shadow over that firm, that’s for sure.
“My gut reaction was the name is a valuable asset in the market,” says a funds partner at a US firm in London. “My other reaction is you can’t do funds without a US capability and this doesn’t do that. Why bin the name? Because that’s actually quite valuable and it doesn’t give them the US angle. I don’t know if it would make them more attractive to an elite US firm. It might give them a greater global reach, but KWM is not elite.”
A corporate head at a rival City firm claims Richards Butler did not lose out when its name was consumed by US player Reed Smith: “I used to deal with Richards Butler quite a lot - they just morphed into Reed Smith. It’s actually an opportunity to communicate. I can’t see it will damage their UK practice in any way. I suppose it can do them no harm to be more international in their reach.”
Not everyone is so measured in their reaction. One ex-partner lamented the firm’s move away from its 1980s-style City boutique model to an international outfit at risk of losing its name, telling The Lawyer: “It’s a crying shame. In its day it was the most creative, dynamic, enterprising business the world has ever seen. Everybody’s a bit sad. It’s a firm that was top of the tree - and now look at it.”
Another ex-partner is more philosophical: “It’s always a problem that people get hung up about names. There must be some emotion in the name.”
Emotion indeed. And drive. SJ Berwin was once the City’s foremost firm for ambitious client-winning, unparalleled client service and, as one ex-partner describes it, some “chutzpah” that is simply not there any more in the modernised firm. After all, it was SJ Berwin that quickly gained the reputation as the City’s cheeky chappies in 1987 when the firm challenged the Panel on Takeovers and Mergers in the landmark Datafin case which determined that a private organisation carrying out public duties could be subject to judicial reviews.
Almost as audaciously, in 1991 partner Peter Anderson defended client Macarthy, the retail chemists, against takeover bids from Grampian Holdings, Unichem and Lloyds Chemists, with his client appealing to the Panel by claiming that the convertible preference shares offered by Grampian as a partial cash alternative consideration could not legally be issued.
Datafin is still talked about in SJ Berwin circles as a defining moment in its evolution, marking it out as the nine-year-old upstart with the courage to challenge the establishment on a client’s behalf.
“One thing you can say about the firm is it was and still is very driven by client service,” says another former partner. “It has a good name in the market - maybe not the jobs market but among clients - they’re still respected for that.
“There’s a lot of urban myths around it. I found it quite an inspiring place to work. It isn’t such a sweatshop as people make out. Ever since it was founded in 1982, it has had a pre-occupation with client service. When SJB started back in 1982 that was quite a radical concept. [They said] ‘You could wait to next week, or you could do it now.’ The people who did not get on well at SJB probably found the idea of clients coming first difficult.”
And that’s not to mention the partners who won new clients by sitting next to them at weddings and supposedly handing out business cards at funerals (the latter is surely apocryphal), but it is all part of the SJ Berwin folklore.
“What it ended up with was a firm of a large number of individuals who would go out and get things in strange ways and didn’t miss an opportunity,” says the ex-partner.
With this came sharp elbows. There have long been the usual rumours about partners stealing clients from each other in their enthusiasm and a culture that did not aid cross-referrals - an area the firm has been addressing recently (see chart, below).
But what this culture does enable is the ability to adapt.
“It was always understood that SJ Berwin was a young firm. It has been agile and never wanted to lose that agility. If looking to the US didn’t work out, well, it didn’t surprise me at all that they wanted to look East,” says a former partner.
Furthermore, the Swiss Verein structure of KWM enables SJ Berwin to slot in and not integrate fully with the Asia-Pacific firm, limiting potential cultural clashes.
A precursor to a US tie-up it might be, but the proposed merger with KWM appears to be a real opportunity for SJ Berwin to become the bold team of entrepreneurs it was founded as - even if that founder’s name might have to go as a result.
The SJ Berwin culture in close-up
“A strong culture”, “a firm of individual characters”, “idiosyncratic” are just some of the euphemisms people use to describe what goes on inside SJ Berwin. Sometimes they venture for the marginally less cautious “sharp elbows”. And it is true, SJ Berwin are highly competitive and, at least in the past, saw themselves as part of silos rather than members of a one-firm team. But not everyone feels the reputation rings entirely true.
“God knows how people will position [the KWM merger],” says one partner. “Everyone has a go at Berwins. There’s an element of the ‘we’re Millwall, you hate us and we don’t care’. They said we were down and out a few years ago, but we’re not.”
One almost expected the partner to launch into a Kevin Keegan-style “I’d love it if we beat them” rant, but in truth individuals seem to be resigned to the fact that rivals - as well as job applicants - are not always so keen on them.
“I don’t think they’re any worse than anyone else. Throughout my career SJ Berwin’s been a firm people like to knock and criticise more than most. Much of it was unfounded. Recruiters understood the position,” says a former partner.
One former partner, IP specialist Chris Thornham, was even happy to go on the record expressing his admiration for SJ Berwin’s quality of lawyers. “Whoever wants to tie up with them is going to be tying up with some very good lawyers,” he says.
According to another ex-lawyer commenting on its various partner culls: “The rather blunt way at SJ Berwin is sometimes mistaken as nasty or something but the firm was pretty straightforward about it.”
The firm has done plenty to try to address its reputation, with mixed success. Corporate partner Rob Day introduced a partnership board to improve communication as part of a broader modernisation project when he became managing partner in late 2010, while last year the firm shelved plans to integrate cross-selling success into its remuneration system. And it has introduced a scheme to help staff feel more engaged, including drop-in sessions with senior partner Stephen Kon.
The firm received unwanted media attention over the death of a partner in 2009, and in a far less serious case did its reputation for working staff hard no favours when a vacation scheme student in the summer of 2011 was asked by a supervisor to work on a document until 5am.
But marrying entrepreneurialism with modernisation and expecting the firm to move forward in a large leap so quickly has not gone down well among everyone and has risked an identity crisis - not least since the firm has morphed in various stages from a City firm to a European firm to then launching in Hong Kong and Dubai in 2009. Then it rethought in Asia after regional managing partner Daniel Liew left for SNR Denton, retiring the role until further notice. In some ways, partners will welcome the merger as a clean break.
Firm founded by Stanley J Berwin with five partners and 10 staff in Weston Street, London
HQ moves to 222 Gray’s Inn Road; now 21 partners
SJ Berwin advised on R v Takeover Panel (‘Datafin’), which determined that Takeover Panel decisions were subject to judicial review
Stanley Berwin dies; Christopher Haan takes over as senior partner
Haan joins a team exodus to Coudert; David Harrel takes over as senior partner
SJ Berwin strikes a strategic alliance with Germany’s Knopf Tulloch & Partners
Paris and Munich launches; firm sparks off salary war by raising newly qualified lawyers’ pay to £45,000
Managing partner role created; goes to Ralph Cohen
Merger with Germany’s Knopf Tulloch Steininger
Milan and Turin launches
Jonathan Blake replaces Harrel as senior partner; associate salaries increased to match magic circle rates
Launches in Dubai, Hong Kong and Shanghai; Blake starts second term
Orrick ends merger talks with SJ Berwin; Proskauer Rose merger talks begin and end; Cohen stands down as managing partner mid-negotiations to be replaced by Rob Day in a toughly fought election
Blake stands down as senior partner and continues as a funds partner. He is replaced by Stephen Kon. Brief dalliance with Mayer Brown; merger talks with King & Wood Mallesons begin
Luxembourg launch; King & Wood Mallesons merger talks edge closer to conclusion
Source: SJ Berwin/The Lawyer
What’s in a name?
Everyone in private equity knows the SJ Berwin name, so managing without it will be a challenge if that eventually happens. Stanley J Berwin, who remarkably established both Berwin Leighton Paisnerin 1970 and SJ Berwin in 1982, has gone down as one of the UK legal market’s most central figures. He died while senior partner in 1988 at the age of 62.
Getting by without the brand should be fine given that many of the firm’s key private equity relationships are with individual partners. Highlights include Lion Capital (Steve Davis and Richard Lever), Lloyds Banking Group (Jonathan Pittal), Duke Street (Tim Wright), Terra Firma (Ed Harris), Universal Music (Rob Day and William Holder) and historically Apax Partners (Davis), although Apax has been dishing out much of its work recently to others including Ashurst partner Stephen Lloyd. On the venture capital side, another area associated with individual client relationships, the main player is Ylan Steiner, the key figure following the exit of Perry Yam to Reed Smith last year, while the main corporate real estate partner Michael Goldberg handles Westfield.
Funds is similar, with key partner Michael Halford managing accounts such as Patron Capital, while Cindy Valentine stands out for her work for HSH Nordbank, to name two people in a large practice that has suffered from exits but has still held onto a healthy amount of work.
The slight exception to the rule is property client British Land, which has long been such a marquee client that a broad range of people across the firm advise it, including Edward Page for retail, Bryan Pickup and Darren Rogers for office buildings and Goldberg on corporate real estate.
While rivals say they no longer see SJ Berwin on the calibre of deals it once did (for instance, Lion Capital chose Weil Gotshal & Manges partner Mike Francies for its sale of a stake in Weetabix to China’s Bright Food last year), it is still respected in some spheres.
“They obviously do have a pretty big brand in the London market and in places like Paris,” says a rival funds partner. “I don’t think they would lose that really - provided they can keep the key people around.” And that is a task and a half: of 158 partners listed as members of the LLP in the firm’s 2011/12 accounts, 20 - or 13 per cent - have since left, some voluntarily (see table).
A managing partner comments on the potential merger: “I think it’s a really exciting thing. It’s a very high-risk thing to do but it might just work. They [KWM]obviously need English law capability - it’s been a gap that was there for all to see and I can see how SJ Berwin is a very good fit. Its origin is a very high-quality firm that slightly lost its way and then found it again. They’re doing better - we see them having done deals that we would like to.”
Indeed, some see KWM as a chance for SJ Berwin to upgrade its client roster while using the pure legal capability that its lawyers already have.
“Skills from mid-market private equity would be transferable because the quality of their lawyers is very good,” says the rival firm chief.
It is not quite a magic wand, but observers feel there is quality for KWM to capitalise on.