A&O's hiccup could prove fatal

European alliances and mergers are all the rage, but conflicting ambitions can be destructive, reports Richard Tyler

As Linklaters readies itself to plunge into a federation of the seven leading firms in Europe, it would do well to take a careful look at the problems its rival Allen & Overy is experiencing on the Continent.

This week The Lawyer can reveal that A&O's association with French firm Gide Loyrette Nouel and Benelux giant Loeff Claeys Verbeke is teetering on the brink of collapse.

A&O describes the problems as mere "hiccups" - but the French firm is rather more fatalistic.

"It is clear that Allen & Overy has more and more decided to be a competitor in France," says Gide senior partner Xavier de Roux.

Asked whether the alliance is dead, he replies: "It is too early to tell, but apparently, yes."

A&O, it seems, has misjudged its French partner's concerns over its designs to create a substantial French banking practice.

And the firm is also at odds with its allies over their plans to merge or ally with German firm Bruckhaus Westrick Heller Lober.

It was all so different when Gide and A&O first came together in 1988.

Philippe Nouel, one of Gide's founding partners, suggested helping A&O to open a Paris office, in exchange for the transfer of A&O's know-how in banking and capital markets to its own French lawyers.

De Roux says that the initiative came as his firm faced strong competition from UK and US firms internationally and the development of new services in banking and capital markets in France.

Nouel and A&O's then senior partner John Kennedy signed an agreement allowing non-exclusive co-operation between the two firms, and A&O's corporate finance partner Peter Hockless was sent out to Paris.

The formal agreement stated that A&O had agreed "not to give advice on French law except in isolated cases on routine matters and also in accordance with agreements made by you [Gide]".

Shortly after this, in January 1990, Belgian firm Braun Claeys Verbeke Sorel merged with Loeff & Van der Ploeg in Holland to become Loeff Claeys Verbeke.

The merger was driven by Belgian partner Louis Verbeke, whose desire was to create a pan-European firm.

Once the merger had bedded down he began looking for new prospective partners.

He soon turned to Gide, aware that the French firm had ties with A&O.

His ultimate aim, according to Loeff partner Sietze Hepkema, was to be part of an integrated European firm.

In September 1991 A&O joined Gide and Loeffs in an exclusive tripartite strategic alliance.

"The idea at the time was that Allen & Overy would be the partner in England, Loeffs in Belgium and Holland, and Gide in France," says de Roux.

That September, A&O and Gide set up a Paris capital markets team, made up of three English lawyers and four French - an expansion of its earlier agreement.

Over the next few months, the relationship between Gide and A&O developed quickly and they soon opened offices in Warsaw and Prague. The two shared costs and jointly staffed the offices.

Loeff was not involved with these moves. Hepkema explains: "We didn't join A&O and Gide in Eastern Europe as there was no direct demand from our clients to do so."

One area where the three firms did immediately co-operate, however, was the practice of EC law. They established a joint office in Brussels. Loeffs also shared an office with Gide in New York and A&O in Singapore.

In the next few years, the tripartite association also committed resources jointly to offices in Moscow and Madrid.

The association was going well. So well, in fact, that in April 1994 A&O senior partner Bill Tudor John said: "We could end up with a full merger."

Cracks first began to appear when A&O's international banking and finance practice began to grow and the firm changed its attitude towards the practice of local law.

In 1996 A&O started going its own way in Warsaw and Prague, opening separate offices there.

Then, in September 1996, it hired asset finance partner Dr Peter Hein from Bruckhaus - which has long-standing informal ties with both Gide and Loeff.

A year later A&O insisted that its agreement with Gide be changed to allow it to recruit French banking lawyers from rival firms to boost its Paris operation.

This caused more resentment at Gide than A&O realised.

Finally, in January, A&O acquired Italian firm Brosio Casati e Associati - which de Roux describes as "not our best friend in Italy".

The move coincided with a report in The Lawyer claiming Gide was considering breaking with A&O.

At the time this was vigorously denied by both firms in a statement.

Now de Roux admits: "It is clear that A&O wants to have a global approach and so wants to be present directly in markets. We had a very successful joint practice - now they want to be alone."

This is not how A&O spokesman James Broomfield sees the position. He says: "The world has changed since 1989 - it has become apparent that we need to strengthen our finance practice in Paris and, in particular, to grow our banking practice to meet the demands of our clients for Anglo-Saxon style service."

Bill Tudor John adds that Gide's strength is not in international banking and finance but in domestic corporate tax and litigation work.

He stresses that, while it might seem that the two firms are competing, in fact they are not. A&O cannot compete with Gide for domestic French work while Gide does not have the depth and resources of A&O in international financial work.

If the differences between A&O and Gide in France are bad enough, the nail in the coffin of the alliance may well be Gide and Loeffs' talks with Bruckhaus, first revealed by The Lawyer two weeks ago.

In a private memo A&O sent to Gide and Loeffs in January, the UK firm gave its blessing to the talks, but it is not taking part and warned in the memo, that it did not believe that "non-US and non-UK firms can compete for international transactions successfully at the present time".

Both Hepkema and de Roux recognise this, but their response to the problem is different.

For Hepkema, the negotiations taking place between Loeffs, Gide and Bruckhaus would benefit from A&O's participation.

But A&O plays a less significant part in Gide's plans. "We have close links with Loeffs and Bruckhaus. Maybe we will have a different link with another English firm - we are looking around," says de Roux.

"We have been approached by several firms, but before there was no point holding discussions - now we are in a different situation."

Tudor John insists A&O has no aspirations to merge to form a pan-European firm, but says he is keen to maintain his links with Gide and Loeffs - and would be happy if they did form an alliance with Bruckhaus.

But only on A&O's terms, it would seem - for Tudor John is determined to grow A&O's Frankfurt office.

It is hard to imagine Bruckhaus and A&O joining the same alliance, given A&O's own German ambitions. The practice has expanded from seven lawyers to 23 in the past 18 months with plans to hit 40 within the next year.

But can the firm really compete with the existing big German players on its own, especially when one (Deringer Tessin), is already linked to Freshfields and another (Alliance of European Lawyers member Oppenhoff & RAdler), is about to be linked to Linklaters?

Freshfields and Deringer are intent on a merger, and Linklaters may go the same way in Europe.

Is this the way forward, or have A&O's experiences taught it that going it alone is the only long-term strategy?