New south sales
15 April 2013 | By Yun Kriegler
24 April 2014
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Recent law firm mergers with Australians are producing the hoped-for results in terms of cross-referrals. Where are these top level deals coming from?
Early indications are that recent law firm mergers with Australians are producing the hoped-for results in terms of cross-referrals
When Australian’s Middletons was tracking down the best international firm to merge with, it paid great attention to one particular area: how much cross-referral of clients there was between the suitor’s offices.
The results of its due diligence process on K&L Gates were the most satisfying, leading to the firms’ full merger on 1 January this year.
According to K&L Gates, its top 100 clients use 10.3 or more of its offices and 467 of its largest 500 clients utilise two or more offices, while its top 20 clients use 15.3. On average, 27 per cent of its gross revenue comes from work originating in one office but undertaken in others.
Nick Nichola, Australia managing partner at K&L Gates and former head of Middletons, says this puts the antipodean arm of the firm in a rare position.
“We’re confident there will be more opportunities as part of a global network that actually refers work and clients from one office to another,” he says. “The cross-referral rate is high at K&L Gates, and it’s as if the firm is our largest client.”
Into its fourth month as a merged firm, the Australian arm of K&L Gates has started collaborating with the firm’s offices in Asia and the US. The Australian offices have, for example, leveraged K&L Gates’ US relationship to win an advisory role on a $100m (£65m) commercial contract for a US mining equipment company that previously used Clayton Utz for this type of work in Australia.
On the outbound side, the Australian offices are working with the Singapore team to help a client of legacy Middletons – an Australian pharmaceutical company with an annual turnover of $500m – move its headquarters to Singapore.
For heftier Australian firms such as Freehills, which has combined with Herbert Smith, the opportunities are greater still (see box, overleaf).
One of the key concerns with international mergers is the possibility of cannibalising referrals from other foreign law firms. The newly merged top-tier Australian firms will inevitably lose some referrals, but the impact for many has been negligible so far. They have, in fact, put much more focus on servicing the international legal needs of their existing clients and globalising Australian companies.
According to Ashurst Australia, since it rebranded from Blake Dawson in March 2012 more than 300 joint matters have been opened. Two thirds of these originated on the Australian side.
“There’s an increasing need for us to have a strong international network because our clients require growing input from lawyers outside Australia,” says Helen McKenzie, Ashurst Australia’s deputy managing partner who is in charge of the operational integration of the firms in advance of the full merger.
“Domestic work is still a major part of our business but the tie-up helps us offer clients more services where they are needed.”
One such client is Qantas, which used legacy Blakes for many years in a variety of areas and transactions. Shortly after the rebranding last March, a team from Ashurst’s Hong Kong office, led by Hong Kong managing partner Robert Ogilvy Watson, advised the Australian airline on its joint venture with China Eastern Airlines to set up a Hong Kong-based low-cost carrier, Jetstar Hong Kong.
In addition, it is understood that Ashurst has recently been engaged by Qantas to advise on employment-related issues in Europe following its new alliance with Emirates Airlines.
New panel appointments are another indication of the global tendencies of Australian companies and also the importance for firms of having global reach.
This February, Australian financial services company AMP established an inaugural international legal panel as part of a strategy for growth in overseas markets. Ashurst has been appointed to the panel along with Allen & Overy, Baker & McKenzie, Clifford Chance and Norton Rose following a thorough selection process led by AMP general counsel Brian Salter in Sydney.
“It’s impossible and irrelevant to compare the possible referrals we’ve lost against new work gained following the rebranding,” says McKenzie. “It’s a very different market today compared with a few years ago. Difficult markets in Europe and the US mean the inbound work into Australia has changed significantly. I don’t have a sense of having lost referrals.”
Norton Rose’s Australian arm has also introduced several existing clients into the group’s international network. Chinese steel maker Anshan Iron & Steel Group Corporation (Ansteel) is a good example. Legacy Deacons Australia began working with Ansteel in 2006, when the Chinese company acquired Australian listed iron ore group Gindalbie Metals. Last year Norton Rose’s Beijing, London and Melbourne offices jointly advised Ansteel on the restructuring of assets valued at A$1.8bn (£1.2bn), addressing complex issues under Australian, Chinese and English law.
Australia-based gold producer
Allied Gold Mining is another key client of the group. Following Norton Rose’s involvement in the company’s major restructure and listing on the main market of the London, Australian and Toronto stock exchanges in 2011, the firm was instructed again by the client to advise on its merger with gold producer St Barbara in 2012. In both transactions a team of lawyers from the firm’s London, Canada and Australia offices serviced the client, with London corporate partner Raj Karia, Toronto partner Pierre Dagenais and Perth partner Liz Allnutt among the lead partners.
“There’s no doubt that, had it not been for the merger, we would not be acting on many of the deals or for many of the clients we are today, both in the cross-border work we do and our domestic work,” says Wayne Spanner, Norton Rose’s Australia managing partner. “Obviously, we considered the [potential reduction in referrals from other foreign firms] carefully before we combined. The benefits far outweighed anything else.”
According to Spanner, Australian turnover for the 2011/12 financial year has increased by some 20 per cent compared with when the merger went live.
Herbert Smith Freehills(HSF) global managing partner for clients and industries Mark Rigotti echoes this. He notes that revenue from other foreign firms’ referrals was never a big part of legacy Freehills’ income, standing at no more than 5 per cent.
“Top-tier Australian firms are well-established and have already developed strong relationships with key clients from overseas. On the Australia side there are certainly not a lot of lost referrals and the loss is easily overcome by the work gained,” he says.
Take British healthcare giant Bupa, which had been working with legacy Freehills directly on its major Australian investments and expansions for almost a decade. Most recently, Sydney-based corporate partner Brad Russell, the key relationship partner, advised Bupa on its A$374m acquisition of Australia and New Zealand’s largest dental group, Dental Corporation, and the purchase of Australian aged care operations from Innovative Care.
For HSF, however, its growth ambitions lie way beyond the Asia Pacific region.
“In addition to a clear Asia Pacific dimension in the synergy and collaborations there’s also a natural link between the Perth and Brisbane offices, and the Paris office, on doing work in Africa,” says Rigotti.
“A lot of Australian companies have mining and related infrastructure projects in Africa. We’re looking at ways to open up for new work in Africa. Previously, Paris didn’t have as many Australian clients and Australia didn’t have the coverage.”
Given that these law firm mergers are still pretty new, collaborations may be largely driven by a burst of enthusiasm - and lawyers thinking more laterally and creatively in a world of tougher markets. Whether a merger, in the long term, will produce a consistently high level of synergy around clients and legal work depends entirely on the internal management and compensation systems firms have in place.
But that’s a whole new can of worms.
Anglo-Australian firms’ M&A deal count, 1 Jan 2011 to 31 Dec 2012
Source: Thomson Reuters. Based on the 100 largest M&A deals with Australian involvement. *include deals advised on by legacy firms prior to combination
How Herbies and Freehills have fared
For big top-tier Australian firms that have recently tied up with UK firms, the scope for collaboration is wide and joint work has come in apace.
For example, Herbert Smith Freehills (HSF), formed on 1 October 2012, has already carried out around 250 joint advisory and cross-referral matters since the merger. One highlight has been its role advising China National Offshore Oil Corporation (CNOOC) on its $1.9bn acquisition of major interests in the Queensland Curtis LNG project in Australia. A team of Chinese and Australian lawyers was jointly led by Hong Kong corporate partner Hilary Lau and Perth projects partner Stuart Barrymore.
Also in the energy and resources sector, the firm recently advised another major Chinese state-owned oil and gas giant, PetroChina, on its acquisition of an interest in two Western Australia exploration assets from ConocoPhillips. Lau again led a team from the firm’s China and Perth offices.
According to Mark Rigotti, HSF global managing partner for clients and industries, both legacy firms have previously worked for CNOOC, but it is the first time the Australian partners have done work for PetroChina, a longstanding client of Herbert Smith.
“Creating new opportunities to work for existing clients and developing new clients is one of the reasons we did the merger - there’s synergy around clients for us,” says Rigotti, who held a similar position at Freehills and relocated to London to take on the global role in the merged firm. “We’ve identified 66 key clients where there will be new opportunities for the merged firm. We’re ahead of our expectations by a long way, in terms of both the work followed through and the fees generated.”
His main responsibility is to cut across practice groups and connect people with opportunities in various jurisdictions, ensuring partners are not doing things in silos, driving client synergy and co-ordinating cross-selling.
There are obvious benefits to working with other partners and offices of the same firm rather than with separate firms. On the cost front, Rigotti emphasises, it is now much easier for the firm to move around resources internally and blend teams from cheaper jurisdictions to offer clients better rates.
The rates in Perth, for example, are roughly 75 per cent of those in Hong Kong. Therefore, for Australia-related work originated in Hong Kong, by pulling more resources from the Perth office the firm can offer lower rates and better value.