As chats over lunch go, it was pretty casual. There was no presentation, no pie charts, no powerpoint. But when the Allen & Overy (A&O) management lightly floated the idea of combining forces, Freshfields' reaction was a polite no.
Freshfields, which would prefer to investigate US deals, did not realise that this conversational gambit was the culmination of a year of internal discussion at A&O on merger strategy.
A&O can play the Freshfields approach down as much as it likes, but it is an astonishing demonstration of its weakness. That A&O considered the approach at all shows a remarkable lack of self-confidence. The biggest appetite internally is actually for a US deal, precisely because it is less threatening to the corporate group. However, this lunchtime merger approach was based on the notion that Freshfields' M&A muscle would solve A&O's problems.
And A&O's problems are legion. As The Lawyer pointed out several weeks ago (10 July), A&O is the sick man of the magic circle. Its US operation has lost it £70m over the last four years. It has fudged its lockstep and culled points for short-term effect. Its Continental mergers have brought it the number-one M&A practice in… er… Benelux. Its flagship banking group has fallen behind Clifford Chance.
A&O is starting to resemble Lovells, not a global player. Indeed, the six-year figures from The Lawyer UK100 say it all. A&O is getting edged out of the magic circle and is in danger of losing out to Clifford Chance, Freshfields and, clearest of all, Linklaters in the race to become a true global law firm of quality.
In the six years since the UK legal market last reached the kind of heights witnessed in 2005-06, average profit per equity partner (PEP) at Clifford Chance and Freshfields has grown by 18.2 per cent and 23 per cent respectively. Linklaters' PEP has ballooned by almost 50 per cent.
And A&O? All but stagnant, with just a 6 per cent rise in PEP last year on 2000's level. But that is not the only measure by which A&O has lost ground. A snapshot look at PEP among the magic circle in 2000 shows A&O, on £744,000, trouncing all three of its rivals. That year Clifford Chance, Freshfields and even Linklaters all lagged behind A&O, with PEPs of £685,000, £675,000 and £710,000 respectively.
So A&O's appetite for a transformative merger is suddenly clear. But it might as well wait for the tooth fairy to appear. Back to the drawing board, eh?