Anatomy of a merger
8 May 2011 | Updated: 9 May 2011 9:15 am | By Caroline Butcher
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Hogan Lovells’ honeymoon period has seen the firm attempting to integrate cultures and expand its client base. But has it lost something in the process?
Shortly after Hogan Lovells’ much-anticipated merger was signed and sealed last May, its London partners were incensed to find that their free car parking at Atlantic House had been whipped away and replaced with hefty fees.
The miserly move ruffled feathers throughout the office. Many muttered at the water cooler that it was a sign of the times, an example of what was in store for them in the new post-merger era.
The high-profile union of legacy US-based Hogan & Hartson and the UK’s Lovells has since unleashed a wave of change for the firms’ offices across the globe. Remuneration, an increasingly centralised governance structure and a cultural shift have all emerged as the burning topics of debate.
While the firm’s UK-based co-chief executive David Harris and his US counterpart Warren Gorrell are hailing the merger as a resounding success of compatible equals, sources close to the firm talk of equity partners’ anxiety about being hit where it hurts most - their pockets.
The nervousness centres around the merged firm’s new merit-based remuneration system. This represents a change towards more of a performance-focused regime for legacy Lovells partners, who previously worked under a managed lockstep system.
Under the new system, equity partner compensation comprises a number of units, which accounts for 85 per cent of the firm’s profit, as well as a new bonus pool, which accounts for the remaining 15 per cent.
The number of units each partner is allocated is determined every two years based on both financial contribution (including factors such as individual and team billing, collections and profitability) and non-financial contribution (including client development, development of team members, involvement in the management of the firm and pro bono activity).
The firm is also wielding a generic measure known as ’firm mindedness’. This assesses an individual’s overall approach to being a partner at the firm. Bonuses for salaried partners are also taken into account before the firm determines its profit.
A source at the firm admitted that “balancing these measures is an art as much as a science”.
Calm before the storm?
Former partners and industry observers point to rumblings of discontent among equity partners from both legacy firms across a range of offices, who are waiting with bated breath to see how the new bonus pool and performance-related units will effectively redistribute profit.
“Money seems to be a catalyst for people being unhappy at the firm,” says a source close to the firm. “It’s combined lockstep with the ’eat what you kill’ policy from the US, and now partners are waiting to see who’ll get what under the new system, although management seems to be served
“Money and changes in atmosphere means even seasoned partners are unsettled. And there’s maybe some dominance from the US side.”
A former partner believes that, while the merger is widely regarded as a success, it is inevitable that some equity partners will be left worse off by the new performance-focused system.
“The change from lockstep to a more ’meritocratic’ way of doing things was probably inevitable; and if you look at most of the top City firms, they’re already doing that,” he says. “Some partners will be worse off and some will be better off. I’m sure those who didn’t get what they thought they deserved aren’t so happy, but maybe they didn’t deserve it in the first place.”
Harris admits that the new bonus pool and merit-based assessments will require some adjustment for equity partners, who will effectively have their take reallocated based on their perceived worth.
“Generally mergers of this scale involve quite a lot of change for people. Lawyers are creatures of habit, and when you put something like this in place it inevitably creates nervousness among some people,” Harris admits.
The merged firm is currently in the process of easing in the new remuneration system with a two-year ’glidepath’, or transitional stage.
“It’s one thing to set out rules and criteria, but people want to see how it’s going to work,” adds Harris.
While legacy Lovells’ managed lockstep already took account of performance to a degree, with management able to freeze or reduce underachieving partners’ equity points as well as raise them, the new system’s bonus pool will mean the focus on performance is more pronounced.
Harris admits that the new structure will produce both winners and losers; but he also says the firm has been conscientious in communicating to all staff how the new system will work.
“We were very clear in terms of explaining to partners the structure we’d put in place,” he insists. “In the new system you don’t have a presumption of progression - it comes over as merit-based.
“Before the merger we could reduce or freeze remuneration but not give a bonus, so we had a big stick and a little carrot. Now we can better recognise and reward a partner throughout their career.”
“We’re rewarding things like team work, cross-selling and high performance,” adds Gorrell. “It means we can apply the same set of expectations across the world, so everyone’s judged by the same standards.”
But another source close to the firm says that, despite Harris’s internal communications, many partners are still uncertain about the new pay system and are adopting a ’let’s wait and see’ approach as to how it will affect their personal incomes before weighing up their futures at the firm.
“People are thinking, ’let’s see what offers there are around’, but they’re waiting to see what’s happening with the firm,” he explains. “We’re seeing some people floating around already and the headhunters are circling. They’re saying it’s going to be next year, and this will be where people are leaving from.”
One legal recruiter believes Hogan & Hartson partners in London have been left feeling particularly vulnerable within the new system.
“People who were part of the legacy Hogan & Hartson haven’t found the merger so appealing and they’re generally the ones who’ve been put out,” he declares. “It was only a 70 to 80-lawyer practice and I don’t think they were ever hiring the crème de la crème of lawyers, so they were the ones who were told quite quickly that their salaries would be reviewed.”
Despite the continuing tension over remuneration, externally the merger has been perceived as a largely successful joining of forces between two firms whose global reach and practice groups complement one another.
“It’s gone extremely well,” insists Harris. “It was very much seen by both legacy firms as a real opportunity. Neither of us had to do a merger, but we saw that by putting two firms together we’d create a really strong global firm.”
Both Harris and Gorrell view their legacy firms as ’mirror images’ of each other, with Lovells keen to crack the US market and Hogan looking for greater representation in London and Europe.
“The merger was very much a reaction to the changing markets and client expectations,” reveals Harris. “We were very conscious of the effects of globalisation and clients looking for you to provide the full range of services to reflect the way their own businesses have grown.
“Whereas typically there’d be one dominant and one weaker firm going into a merger, ours was a merger of equals, which is quite unique in the market.”
On the eve of the merger last May Gorrell admitted to The Lawyer that the success of the combination would be judged on new clients and deals won as a direct result of the tie-up.
A year on, then, what concrete examples of new work does Hogan Lovells have to show for its happy union?
Both lawyers are reluctant to identify new clients and deals, claiming reasons of confidentiality, but they are upbeat about the positive effect that their enlarged presence has had in the market.
“In the future the biggest deals will go to the biggest firms,” insists Harris. “The idea of having scale when competing for major corporates is extremely important.”
Gorrell points to one “huge multinational financial services company” as an example of a top-shelf client that is now channelling a significant amount of extra work Hogan Lovells’ way as a direct result of the merger.
“Last year they worked with 300 law firms around the world, but they were seeking to reduce substantially their number of firms,” he relates. “They interviewed a number of our peer firms and then the general counsel said they didn’t find anyone else with the global footprint we had.”
Gorrell and Harris also point to one of their major deals of last year, advising Ford Motor Company on its $1.8bn (£1.09bn) divestiture of Volvo Cars to China-based Zhejiang Geely Holding Group Company, which was overseen by New York-based corporate partner Bill Curtin.
Ford had been advised by both legacy teams previously, but the merged firm could now draw on expertise from offices across the US, London, Europe, Beijing and Shanghai.
Within a week of the merger Hogan Lovells also secured new work on an international cartel matter, including an EU cartel investigation, a US grand jury investigation and 51 consolidated class actions seeking damages under US antitrust laws.
The pair also attributes the firm’s appointment to China Development Bank’s global legal panel, which was led by Beijing-based corporate partner Jun Wei and which is effectively a new client for the firm, as a direct result of its increased post-merger clout.
On the corporate and M&A side, the firm’s Moscow, London and Amsterdam offices advised X5 Retail Group, a legacy Lovells client, on the $1.65bn acquisition of the Kopeyka retail chain, the largest-ever retail takeover in Russia, with Moscow managing partner Oxana Balayan leading on the deal.
Partners in London, Brussels, Beijing, Dubai, Baltimore and Washington DC, led by London-based corporate partner Ben Higson, also collaborated to advise new client Citi Infrastructure Investors on its $1.5bn acquisition of a majority stake in DP World’s Australian shipping terminal operator businesses.
It is certainly an impressive roster, but it is questionable as to whether the merged firm is snapping up as many new clients, and as much big-ticket corporate and M&A work, as it might have hoped last May.
The firm’s focus still appears to be on litigation and arbitration, employment and regulatory matters, prompting some commentators to suggest that the merged firm’s spread of work raises the spectre of an ’upmarket DLA’.
“The people I know who work in corporate at the firm say they’ve been dealing with the same clients they were a year ago,” says one London-based legal recruiter. “They’ve seen no real evidence of new work.”
And while both Gorrell and Harris had their sights firmly fixed on expansion in China as one of the main objectives of the merger, a local market source says he has not witnessed any marked change in the work the merged firm’s China practice is attracting.
“I haven’t sensed any significant change in their work - it’s pretty much the status quo,” he remarks.
“They’re much higher quality than DLA in terms of their lawyers and they have a much better finance and litigation practice,” he insists. “But I’m not sure it’s realistic for them to expect to see much change within a year.”
While Harris insists there is new work filtering through, he confirms that it is likely to take longer than a year for volumes to really pick up.
“Some clients you’re able to quite quickly cross-sell, but what we were seeking to do [with the merger] was to compete with the leading firms
of the future,” he explains. “That requires you to secure more of that top-quality work.
“But it’s a highly competitive marketplace and you can’t always expect to win these jobs in the short term. It’s not something in which we can demonstrate all the benefits in year one. We now have global reach, but it’s clearly part of a gradual process. The plan would be better tested in three years’ time.”
There is also the question of how to integrate two cultures, two sets of clients and two networks of international offices.
The merger sparked partner defections in Warsaw, Geneva, Moscow and Berlin, with the latter losing 18 partners who splintered off to form boutique firm Raue.
“Talking to partners at the firm, I’ve heard that the merger created a difference in culture,” a German legal source relates. “Boesebeck [Droste] merged with Lovells in Frankfurt and that went well and adjusted well, but now more strain’s been added to the structure by adding the US merger, and from the perspective of many partners the merger was rushed through, even forced through.”
“It came down to individuals from either legacy firm,” responds Harris. “In certain locations we had relatively small practices merging with a larger one, and not everyone’s cut out for that.
“In any merger you’ll get people measuring themselves or calibrating the change around them and measuring that against their objectives.”
The merger also prompted the departure of Lovells Beijing head Robert Lewis for AllBright Law Offices just days before the deal, as well as Hogan Shanghai managing partner Arthur Mok, who left for Ropes & Gray, and the US firm’s Beijing managing partner Roger Peng, who quit for Paul Hastings.
Meanwhile, Garry Pegg, the former head of Hogan’s London office, also departed to become co-head of King & Spalding’s City office.
But the firm continues to promote and bring in laterals, with 36 partner promotions this year, including seven in the City.
So Hogan Lovells’ recipe for a successful merger is a clear strategy: flexibility on both sides and a generous helping of positive spin - both inside and outside its walls.
“We’ve focused very much from the outset on our clients and getting a clear message out that we’ve expanded our capabilities and reach and the range and depth of practices,” says Harris.
The firm has also focused on people integration within its offices, seeking to involve partners across the globe in its new identity and bring them together in a series of global practice group meetings to discuss clients and joint work opportunities.
It also attracted around 850 partners from across the globe to its first partners’ conference, which ran from 3 to 5 March this year at the Gaylord National Hotel in DC.
“We had around 100 meetings in three days, bringing together different practice groups and industry teams. It embraced people right across
the organisation,” relates Harris.
“What was obvious was the level of enthusiasm, which was palpable.
“A lot’s been written about the culture difference between US and international firms, but if you were there you wouldn’t have felt it. It was very positive, very entrepreneurial and very energetic.”
Externally the market is left with the tricky issue of how to categorise the merged firm and whereabouts it slots in along the ladder of global firms.
It is a conundrum that seems to baffle many legal commentators. While the legacy firms clearly had designs on infiltrating the top tier going into the merger, opinion is divided as to how Hogan Lovells has redefined its position in the international market.
One former Lovells partner claims the merger has not particularly done anything spectacular for either firm.
“I don’t see them doing new deals or things they wouldn’t otherwise have done,” he says. “I think it probably puts them in that rather large,unfocused mid-Atlantic law firm category. I’d put them in the same box as Baker & McKenzie and DLA.”
Another ex-Lovells partner is more complimentary. “In a way they almost have their own market,” he says, “but they’re probably up there with some of the biggest international firms.
“A lot of recent mergers haven’t been all that successful, or they’ve been put together as a result of one of the firms feeling they had to merge out of some kind of desperation, but that certainly wasn’t the case with Hogan Lovells.
“I think they’d compare themselves to some of the largest international firms such as Linklaters, Freshfields and Clifford Chance. They were always knocking at the door of the magic circle and were always at the top of the City end.”
“Hogan Lovells is almost on its own in the market,” muses a London recruiter. “They used to be alongside Norton Rose and Simmons & Simmons, but they’re stronger now, although just below Herbert Smith and the magic circle.”
Must do better
There is no doubting the appeal in certain quarters of Hogan Lovells’ increased size and global reach, but it is clear that there is more to do before it is truly rubbing shoulders with the magic circle or top US firms in the critical corporate and finance arenas.
Throw in the fact that the firm’s governance is now much more centralised and performance-orientated and the days of individual star partners running the show are well and truly over.