DENTON Hall has pulled out of merger talks with Cameron Markby Hewitt and McKenna & Co at the eleventh hour.
Although the firm was last week still denying it had even entered talks with McKennas and Camerons, negotiations have been in progress between the firms for several months.
It is understood that the two other firms are still in talks and have even appointed a public relations firm - Fishburn Hedges - to handle the publicity surrounding the merger if it goes ahead.
The City had been inundated with rumours about the proposed merger for weeks. If it had proceeded it would have been one of the most complex ever and would have created a top three UK law firm by size.
"It would have been a nightmare to coordinate," said one leading partner in another City firm, adding that he was not sure what the tripartite merger could have achieved, apart from size. There was speculation that such a merger would have produced a 25 per cent staff cut.
However, one Denton Hall partner told The Lawyer that he was "personally quite positive about a merger between the three firms".
Among the reasons cited for Dentons' withdrawal were potential conflicts. There were fears that the merger might have had an adverse impact on lucrative property work for Sainsbury, one of Dentons' most prestigious clients.
Two years ago Sainsbury ended its exclusive relationship with Denton Hall and began sending work to McKennas. It was feared that a merger between the two firms might have prompted Sainsbury to instruct another firm alongside the newly merged firm.
And there was a risk of the law firms losing significant clients through conflicts of interest. For example, Dentons acted for the Department of Transport's Highways Agency, which recently awarded a major PFI road maintenance contract to the UK Highways Consortium, which was advised by McKennas.
Another factor might be a distinct improvement in Dentons' position in the last few months. It has won several high-profile contracts, and its partners may have felt it could continue alone.
Meanwhile, merger talks between the other two continue. McKenna & Co is determined to improve its market position by strengthening its banking, where Camerons is strong.
However, some older partners at Camerons are thought to be anxious about the financial implications of the plan.