Charting the new legal landscape
26 April 1999
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THE age of the global law firm is dawning. Just as US firms moved into Europe, so the major players in the UK realise that they must start an invasion of the US if they want a slice of the global market place. The rewards could be phenomenal, but there are risks.
It is uncharted territory and many predict that the next few years will fundamentally change the world's corporate legal landscape after a frenzy of transatlantic mergers. Others question whether a truly global law firm will actually be successful - or necessary.
Clifford Chance, the UK's largest firm, is poised to become the first of the UK's key players to take the plunge and merge with a US legal practice - Rogers & Wells.
The choice of Rogers & Wells has surprised many because it is a second division firm, not considered to be in the top 15.
Philip Brown, senior consultant at Hodgart Consulting, thinks the US firm looks attractive because UK firms must tap into US international capital markets and Rogers & Wells represents many top rank investment banks and boasts a very close relationship with Merrill Lynch. In addition, Rogers & Wells is obviously smaller than Clifford Chance and does not pose a threat to its autonomy, whereas merging with a larger firm would mean more power sharing.
But linking up with a smaller firm does carry its share of risk. "Maybe Clifford Chance are hoping that Rogers & Wells will be a kind of 'Clifford Chance US'," says Brown. "One major problem could be that if Allen & Overy link up with Shearman & Sterling, or if Freshfields merge with Davis Polk & Wardwell, Clifford Chance could suddenly find themselves way behind on the US side because Rogers & Wells, while a very fine firm, are not that big."
Stephen Fiamma, partner in charge of the London office of Jones Day Reavis & Pogue also has concerns about the choice of Rogers & Wells. He says: "If Clifford Chance's goal is to have a Wall Street securities-type practice, a focused firm might very well make sense. If they want a general US practice, perhaps they wouldn't be the right firm."
Others, though, insist it would be a mistake to have chosen Rogers & Wells simply because of its clients.
Eddie Kling, dual partner at the US-UK alliance firm Titmuss Sainer Dechert, which could complete a full merger at any time, thinks the reason is broader. "Rogers & Wells are a very, very fine firm and they have a particular base of skills which would be an excellent centre in New York for Clifford Chance," he says.
So what is in it for the two firms? According to Stephen Rodney, managing director of recruitment consultancy QD Legal, the merger would "have a very positive effect on recruitment to Clifford Chance because, in terms of US coverage, the firm will be able to say it is the most extensive in the market. Candidates wanting to go to the US will be attracted to them."
Although the merger would give Clifford Chance a powerful toehold in the US, Rogers & Wells would seem to be the net gainer. Signing on the dotted line would catapult the firm over its larger US rivals to become a world player and enable it to offer a service to US clients who are beginning to realise there are big bucks to be made in European trade. Clifford Chance has that European expertise, as well as size.
European firm Salans Hertzfeld & Heilbronn, whose clients include Amoco, McDonald's and Coca-Cola, was the first to carry out a transatlantic merger when it joined with New York firm Christy & Viener on 1 January this year.
Salans Hertzfeld senior partner Jeffrey Hertzfeld says the main advantage of a link-up for UK firms is the ability to offer clients a seamless, integrated service around the world, and this is only possible by having a base in the US.
"For the US firms, they know the UK firms are ahead in dealing with Europe, with the euro and the single market, which is now becoming attractive to US companies," says Hertzfeld.
"The US firms may be powerful nationally but some are now feeling the need to be international and are looking for partners in Europe."
This view is echoed by Joseph Blum, managing partner at US firm Latham & Watkins' London office, who says that although it is difficult to break into Europe, the benefits of doing so eventually outweigh the costs.
There are, of course, areas of possible conflict in a merger. Choosing the right merger partner is difficult. Hertzfeld thinks firms should aim to share a common goal, common management and a common identity.
"You certainly should not merge because of the other firm's client base," he says. "You need to look at how they do business and whether their skills are ones that will enhance your company and not hinder it."
The human element is also very important, he argues, because the other firm's lawyers should be people with whom you get on and have got to know beforehand - without this there will be conflict.
Another type of conflict - conflict of interest - can be a major problem when two firms bed down together. Hodgart Consulting's Brown says there can be legal conflict which means one of the merged firms cannot act against the interests of one of its partners' clients.
"There is the commercial conflict for mergers when a client, a car manufacturer, for example, may say it does not want the law firm to act for another car company. This could mean one of the firms has to drop one of their clients."
There is also the potential for a culture clash, with two firms from different countries, used to doing things a particular way, thrust together for the common good.
Jones Day's Fiamma warns it would be foolish merely to pay lip service to what he calls "a tremendous cultural gap" between firms on either side of the Atlantic. "It won't be easy in so many ways - compensation, management, billable hours. There are many, many areas where it's extremely difficult to meld the cultures of firms. These things are underestimated in the enthusiasm to expand."
It is more difficult for law firms to overcome these obstacles than other businesses because they are partnerships and not corporations.
Getting everyone to agree on something is therefore more problematic, although not insurmountable, thinks Ian Coles, managing partner of the London office of US firm Mayer Brown & Platt.
Firms must therefore invest a huge amount of energy in improving internal communications to help foster a feeling that everyone is on the same side and going in the same direction.
There are also physical problems in building a business across several time zones. Firms have to rely far more on technology to enable offices separated by thousands of miles of ocean to talk to each other if an integrated and seamless service is to be provided.
Kling says the alliance that created Titmuss Sainer Dechert demanded facilities such as videoconferencing, new databases and the dove-tailing of two different billing systems into one computer system. He adds: "It was very, very difficult and expensive to set up, mainly because of the mechanics of putting two systems into one."
Exasperation can follow once the system is up and running as the technology quickly becomes outdated and needs upgrading. "It is a real chore," says Kling.
Even if all these conflicts are resolved, there are other potential consequences of US-UK mergers. For example, client fees from UK firms could increase because US lawyers are generally paid more than their UK counterparts, so the new super-firm may have to increase its fees structure. This could alienate some European clients not used to the new scale, unless they believe it is a price worth paying for the "global service".
If the US is the world's largest market, it appears odd, on the face of it, that UK firms have waited until now to start seriously considering mergers when their multinational clients began the globalisation process many years before.
Most large firms, though, have spent the past few years rapidly building up their European networks before turning their sights on the US. Fiamma says this has been for a good reason: "They want to establish a Europe-wide firm. When they have got that off the ground they would feel able to approach a US firm for a merger of equals. Many feel that, at present, for many firms it would be a merger in name only - they would in effect be taken over."
This is a view disputed by Steven Blakeley, managing partner of Wilde Sapte, who thinks UK firms do have the clout - in terms of skills, if not size - to team up with US firms.
"Comparative size doesn't matter as long as each firm has a sizeable role to play in the merged entity," he says. "It becomes a takeover if one firm needs another simply as a source of resources, such as staff or offices. If they need each other for their skills, and can help each other to grow, it will work."
But is it all worth it and should firms be thinking global in the first place? It may work for the large accountancy firms, such as KPMG and Arthur Andersen, but there are question marks over whether the partnership-based profession of law is suitable for global expansion.
Hertzfeld says his firm's merger was client-driven and teaming up was essential to match clients' expectations - law firms have to mirror what is happening in industry.
"Our clients are global and we want to follow our clients and provide a fuller service," he explains.
Jim Boynton, his counterpart at Christy & Viener, the firm with which Salans Hertzfeld merged, says the US firm linked with the UK one for the same reason. "We had to react to the clear trend in the industrialised world of globalisation," he says.
Brown's legal consultancy strongly advises suitable candidates to seek a merger in the US. He says: "UK law firms which hope to achieve a global position in higher value work must merge or have closer links with US firms because the market demands it."
Kling says merging to provide an integrated service offers a faster and better service. He explains: "Previously, lawyers used to work through people in the UK and the US whom they knew and had a close and friendly relationship with.
"It just isn't the same as merging to form one larger company where one individual can pursue a deal or case around the world. This makes all the difference."
The concept of global law firms should be capable of offering global clients a one-stop shop simplifying management, instructions, information, communications and the retention of corporate memory and a common professional standard, according to Peter Coleman, management consultant at Independent Corporate Mentoring.
"There is a perceived need for this but not a proven need," he says. "Will it prove to be the value-added option and where is the evidence that it will work? Is it ultimately being driven by the needs of clients, or is it being done for the benefit of the firms who naturally want to expand?"
Only time will tell whether firms can adapt to being global and still provide a high-quality service. They may reach a critical mass when they become so big that service deteriorates and they become almost impossible to manage.
"I think looking at the US is on all the big UK firms' agendas and if the Clifford Chance merger goes ahead, it will move the issue much further up their agendas," says Brown.
Observers say a Clifford Chance merger could be the catalyst for others to start putting their plans into action. Where this will all end up throws up many intriguing scenarios.
"There will be more mergers over the next few years," says Brown. "It could end in a few globally dominant firms, as happened in accounting, and they will be Anglo-American based."
Equally, the globalisation of law firms could, according to many partners, open the way for a new breed of "niche firm" in areas such as telecommunications, insurance and construction.
What is certain is that if the merger does go ahead the legal world map will never be the same again.