14 May 2012 | By Yun Kriegler
25 July 2012
1 March 2012
2 April 2007
12 December 2011
1 February 2013
Translating Slaughter and May’s European best friends approach to Asia-Pacific faces major challenges
It was a slap in the face. In April Slaughter and May’s decade-long Australian best friend Allens Arthur Robinson (now Allens) turned away from the relationship to form an exclusive alliance with Linklaters.
Commenting on his firm’s strategic change, Allens executive partner Michael Rose told The Lawyer on the day of the announcement that, despite the warmth between the two ex-best friends, his firm had effectively outgrown Slaughters’ strategy.
Melbourne-based Allens corporate head Paul Quinn elaborates. “Having global capability has become more important in our market, particularly given the recent entry of global law firms,” he says. “We’re responding to the changing market conditions and fulfilling the growing needs of our clients to have access to a global capability. Under the alliance the two firms can pursue an integrated approach. With a single point of contact for clients, a single bill and first-tier coverage in key jurisdictions, we’re able to service our clients better and provide them with better access to a global capability.”
Cutting the apron strings
All of this is implicit criticism of Slaughters’ approach, and the Allens story is not an isolated case. Recently a couple of US and European firms have been edging away from best friends relationships with Slaughters. In January this year Davis Polk & Wardwell launched an English law practice in London with the appointment of equity capital markets partner Simon Witty from Freshfields Bruckhaus Deringer. Davis Polk managing partner Tom Reid noted at the time that the rationale behind the move was the recognition of the services the firm needed to offer clients and the requirement “to be neutral among the major legal systems of the world – US, English and Hong Kong law”. Prior to that his firm relied on best friends relationships with UK firms, in particular Slaughters, for English law advice.
In Hong Kong Davis Polk also worked regularly with Slaughters on local law-related matters for capital markets work. But the collaboration on this front will grow weaker due to the fact that Davis Polk acquired a Hong Kong law capability in 2010 by taking on a team of Hong Kong-qualified partners and lawyers.
As more firms across the world look at new markets for opportunities and adopt different strategies going forward, the pool of potential best friends for Slaughters is shrinking swiftly, meaning the foundation of this particular approach is eroding.
“My view is that the best friends strategy works for some firms in some jurisdictions.
But it will work for a smaller number of firms in a smaller number of jurisdictions,”
says a Hong Kong-based partner at a large US firm. “Some of Slaughters’ best friends have pursued their own international strategies. As more firms can now offer combined US, UK and Hong Kong law advice, there are fewer chances for Slaughters to be invited into certain deals.”
These events have prompted a rare opportunity to review the merits and validity of Slaughters’ nuanced best friends strategy and to address new new questions about its approach, particularly in the context of the increasingly dynamic Asia-Pacific region.
A world away from Europe
Australia’s legal service market has undergone a significant transformation. The arrival of global law firms such as Allen & Overy (A&O), Clifford Chance and Norton Rose to the market, the integration of DLA Piper and DLA Phillips Fox, and the strategic alliances between Ashurst and Blake Dawson and King & Wood with Mallesons Stephen Jaques, all mark a quantum shift in thinking.
International firms’ expansion into Australia is not simply a move to target the country’s domestic market, but is driven by the critical understanding of the country’s role in Asia.
Facing all the changes and an increasing amount of high-end, cross-border M&A and finance work between Australia and the rest of the world, in particular Asia, traditional market leaders, including Allens, have been impelled to rethink the strategies and strengths of their regional and global offerings. An informal referral relationship with a UK firm can no longer service the course of market development. Allens has opted to join forces with a firm boasting a global platform.
From Linklaters’ perspective, Australia is a missing link in its global presence, and one that has become more important strategically; it sees Allens as an ideal partner.
“We’ve been looking at Australia for a while. We’ve known Allens for a long time and have worked closely with each other on a number of major transactions in recent years,” says Linklaters Asia managing partner Stuart Salt. “When it became clear that we both shared the same strategic vision, it was a relatively straightforward decision to form a much closer relationship. Not least because we share a similar culture, but also due to the alignment of our client bases and complementary practices and compatibility in Asia.”
You know your real friends
Salt is underplaying the situation. When you dig deeper into the statistics you can see a different story, and one that should worry Slaughters. Despite Slaughters’ friendship with Allens, the Australian firm has worked on more transactions with all of the other magic circle firms than with its English partner.
According to deal data provided by Thomson Reuters, since the beginning of 2009 Allens has worked alongside or opposite Linklaters on 10 M&A deals and Slaughters on only four.
It is understood that Allens and Linklaters have approximately 80 clients in common, including Rio Tinto. In BHP Billiton’s £40bn mega-bid for rival mining company Rio Tinto, Allens and Linklaters co-counselled Rio Tinto, with joint advice from Slaughters and Blake Dawson (now Ashurst).
In this transaction, which lasted 18 months and ended in November 2008, Allens chairman Ewen Crouch led the team and worked alongside Linklaters corporate partners Richard Godden and James Inglis.
A five-partner team from Slaughters advised longstanding client BHP Billiton. The team was led by relationship partner Nigel Boardman, who advised on BHP’s merger with Billiton in 2000. Boardman is the partner in charge of liaison with relationship firms in Australia. Melbourne-based partner David Williamson, as head of corporate
at Blake Dawson, led the team advising on Australian law. In 2010 Williamson was appointed by BHP Billiton as its chief legal counsel. It will be interesting to see whether Williamson will favour Ashurst or Slaughters to team up with on its next international venture.
The failed takeover bid is regarded by some Slaughters partners as an event that diluted the firm’s relationship with its best friend in Australia. For Linklaters, though, it was the beginning of a growing relationship with Allens, as the two firm co-counselled again on a number of Rio Tinto’s other major transactions, including the terminated $19.5bn (£12.07bn) Rio Tinto-Chinalco deal in 2009.
Slaughters’ relationship with Allens can be traced back to the late 1990s, when they shared an office in Singapore. Centred there, the two firms shared work and secondees. The friendship and mutual trust was strong in the early part of the century, and was the foundation on which Slaughters based its strategic decision to close its own Singapore office in 2004 and to rely on its best friend for Singapore- and Australia-related client matters.
However, since Slaughters’ withdrawal from Singapore, the relationship has dwindled. Slaughters senior partner Chris Saul is conscious of a low level of overlapping work between the firms over the years, which has diluted the relationship further.
“Allens has adopted a different strategy and we wish them well. But we don’t view this development as significant in best friends terms. We’re privileged to have other good options in Australia,” says Saul, citing Clayton Utz, Corrs Chambers Westgarth, Gilbert & Tobin and Minter Ellison as good firms to work with in Australia.
In Europe Slaughters has closer and more defined relationships with its core group of best friends, each from a different jurisdiction. They are supposedly non-exclusive, but each sees the others as default first choices for referrals, and partners from these best friends firms spend a lot of time travelling and meeting each other, conducting business development initiatives and training programmes jointly on a regular basis.
Me old Chinas
In Asia, a vastly different region from Europe, the firm has had to adopt a broader approach in executing its strategy. China is a good example.
It is a story of long-term friendship that Slaughters partners are proud to tell of when they introduce lawyers from one of its Chinese best friends – Jun He Law Offices.
In 1995 Xiao Wei, one of Jun He’s five founding partners, worked in Slaughters’ London office on a three-month placement as part of the one-year Lord Chancellor’s Training Scheme for Young Chinese Lawyers. The two firms have maintained a good relationship ever since.
When Slaughters launched its Asia network in April 2006, Jun He was referred to regularly as the firm’s best friend in China. However, Slaughters partners are cautious about using the term ‘best friend’ in the context of Asia – it has simply not been possible to replicate the tried and trusted European strategy further afield.
“We don’t have just one best friend in the major jurisdictions in Asia.
We have good relationships with a number of top-tier law firms in these countries,” Slaughters practice partner Paul Olney emphasises.
He makes sure the message comes through loud and clear. Besides Jun He, Slaughters works with Fangda Partners, Haiwen & Partners and Zhong Lun Law Firm in the country.
“We’ve worked with and supported key independent firms in Asia over many years and we have a clear idea of the firms we like to work with in particular areas of work,” says Olney.
The same principle applies across Asia-Pacific – the firm’s Asia network is more appropriately described as a group of ‘good friends’.
To understand why Slaughters needs to adjust its approach in Asia, it is important to understand the concept of its international strategy.
“We operate globally and work as seamlessly as possible with the best local counsel who, with the deepest experience and textured local knowledge, are, we believe, best equipped to deliver the best advice to our clients,” stresses Olney. “One of the key advantages of this model lies in its flexibility and our ability to assemble the most suitable team tailored to the client’s specific needs. In this way we aim to deliver a full-service capability and hope to avoid suffering from patchy quality, which can be a challenge for one-stop shop firms.”
The broader approach is also aimed to hedge the risks caused by the volatility of the nascent but fast-changing legal landscape in Asia.
“Some Asian firms evolve over time and different firms may have different expertise in particular areas. Therefore we often need to have good relationships with multiple firms in some countries,” says Saul.
Chinese law firms have become known for their astonishing rates of growth.
Consequently, changes frequently occur in their partnerships and quality of service varies widely across any given firm. Jun He, for example, had around 50 partners in 2005, but that number had doubled to more than 100 by the end of 2011.
“It can be challenging for us to maintain the relationships with the firms as they grow rapidly,” says Saul. “Our solution is to establish and build up strong personal ties with key individual partners at the leading firms. So when we refer clients to them we’re fully confident our clients will be well looked after and that the services offered will meet our clients’ expectations.”
Another issue Slaughters encounters, probably with increasing frequency, is that when top-tier Asian firms reach the pinnacle of their domestic markets, they will naturally want to branch out and step up to the global stage. Like Allens, King & Wood is another case in point. Slaughters previously mentioned King & Wood as one of the firms it would refer work to, but due to its recent combination with Mallesons, the name has now been omitted from the list.
Friendships of convenience
As borne out by the Allens case, in Asia’s rapidly changing markets relationships can change just as quickly. Here Slaughters’ strategy may mean the worst of all worlds.
Because there is neither set rule nor written obligation for Slaughters’ best friends arrangements; the success of its strategy depends on two elements – the depth of its ties with its allies and its ability to remain a premium firm that can get the deals in. The two elements are also heavily interdependent: working on more deals helps to build up relationships, while good relationships lead to high-quality work and repeat customers.
To help build ties with its best friends in Asia, the firm organises biannual joint training programmes for associates and an annual conference for partners. The most recent joint programme took place in Hong Kong, where nearly 20 of the firm’s allies across Asia participated, including Jun He, Fangda and Japanese firm Mori Hamada & Matsumoto.
There are also occasional secondment placements between its allies. Slaughters’ practice heads and senior partners also visit best friend firms in Asia as often as possible.
Slaughters has undoubtedly invested significant time, money and personal effort in maintaining these relationships. But many lawyers at international firms argue that the best way to get to know local lawyers well and build up relationships is working with them on live deals.
That is simply not happening with Slaughters. Although the firm works with local outfits on Asia-related matters, its IPO and M&A deal counts in the region are much lower than those of its magic circle rivals. For example, in Hong Kong Slaughters completed only six IPOs between 2007 and 2011, while Freshfields was involved in 52 IPOs during the same period.
“The best way to know good local counsel is through working closely with them. You can only understand their competence when they’re working on pressurised deals with you – observing how they resolve challenging and novel issues and how their associates and partners respond to questions,” insists a Hong Kong-based partner at Davis Polk. “One thing we’ve learnt is that international firms need to have strong commitments to the local markets and be willing to make big investments. It’s important to reach a minimum efficient scale in key jurisdictions before one can seize opportunities of working on deals and forging strong ties with local firms through working regularly on deals.”
From the perspective of Slaughters’ relationship firms, the opportunities of training and networking with leading independent firms from other jurisdictions are very welcome and supported. But they put equal enthusiasm into the events organised by other international referral networks of independent law firms, such as Lex Mundi and Multilaw.
Again, take Jun He. The firm is a member of both Lex Mundi and Multilaw. A partner of the firm’s management committee notes that the firm values and participates in the training and networking opportunities provided by these networks. As neither is exclusive, Jun He’s partners have the freedom of working with a wide range of foreign firms and making referral decisions independently to best serve clients’ interests.
Jun He also often hosts client meetings, seminars and training programmes in conjunction with other international firms. In March it co-hosted a seminar on Chinese M&A in the UK with Reed Smith in the international firm’s Beijing office.
“Our partners have their own preferred firms to work with and trusted partners in these firms,” says a partner at Jun He. “They also receive referrals from a number of different firms. Even if there’s a rule that we have to refer work to a particular firm, it’s hard to implement and won’t make sense. We have a very good relationship with Slaughters and we regard it very highly, but that doesn’t mean it’s everyone’s first choice or the go-to firm by default when it comes to outbound work.”
The number of foreign secondees working at Jun He demonstrates the firm’s extensive international links. In addition to Slaughters’ secondees, Jun He also plays host to secondees and visiting lawyers and partners from other firms, mostly independent outfits from outside Slaughters’ network, such as the UK’s Macfarlanes, two from Japan and one apiece from Ireland the US.
A Tokyo-based Mori Hamada partner voices the same view. “Our firm has a good relationship with Slaughters,” he says. “We’ve exchanged secondees and referred deals to each other. But it’s certainly not on an exclusive basis, as many large Japanese firms also work with Slaughters.”
Mori Hamada has recently engaged Slaughters on a major cross-border M&A transaction for long-term client, Japanese financial institution Glory. The two firms worked together for Glory on its £650m acquisition of the UK’s Talaris Group. Slaughters’ French best friend Bredin Prat was also called in to advise Glory on French Works Council issues.
The experience between the two firms has been very positive. Even so, the Mori Hamada partner is still reluctant to acknowledge that Slaughters is his preferred firm for Japanese companies’ outbound investment into the UK and Europe.
“A few magic circle firms have offices in Tokyo and to some extent they compete with us in the domestic market. But we have good relationships with them and often work on deals together. Outbound M&A by Japanese companies is currently very active, fuelled by the strong yen. However, we make our referral decisions independently from Slaughters’ best friends network. We’ll find the most appropriate local and international firms to work with on a case-by-case basis,” he explains.
“Slaughters’ strategy works relatively well in Japan. It allows the firm to work with all four of the biggest firms in Japan, giving it access to market-leading local practices and strong client bases. But the flip side of this non-exclusive strategy is that there’s no guarantee it will get the outbound referrals from these Japanese firms.”
Given the non-exclusive nature of its approach, Slaughters knows its Asian allies do work with other firms and it endeavours to be an understanding friend.
“It’s not surprising that the top-tier firms in Asia receive work from many other firms,” says Olney. “They’re rightly confident about their independence and market positions and enjoy many opportunities in their fast-developing markets. As an increasing number of their domestic clients develop into multinational companies or expand their operations abroad, they’ll naturally want to stay close to these clients and become the interface with international firms.
“We’re wholly supportive of this approach. The fundamental goal of our strategy isn’t about winning referrals, but about being able to work effectively with the best firms to deliver the best possible client service.”
Indeed, Slaughters has plenty of good intentions. But this approach is regarded by some lawyers as a rather passive defence.
“I assume Slaughters’ proposition in Asia isn’t to gain more market share there, but a defensive move to hold on to its clients,” muses a China-based Clifford Chance partner. “Instead of losing clients to its magic circle rivals who have offices in Asia, Slaughters services its clients’ needs in Asia with its best friends. We don’t see much competition from Slaughters at all in China, although we do occasionally come across the firm in some Hong Kong capital markets transactions, where they have a long-established, reputable office.”
A London-based partner at Link-laters echoes the observation. “Clearly it’s a longstanding strategy for Slaughters. The firm has strong relationships among blue-chip and FTSE100 companies and has been running a very successful business on that. From that perspective, it probably doesn’t see the need to have exposure to risks on the ground in Asia,” the partner says.
In view of this, one of the reasons for Allens to turn to Linklaters for a closer relationship may be because the latter has been investing in building a large presence in Asia, which is now very important to Australia’s economy and its firms.
“Different firms adopt different strategies, which come with different risk profiles.
Slaughters’ highly focused strategy is completely different from the one spreading out globally like ours. It requires a very different structure and allocation of staff and resources, and it has a different risk-return ratio from us,” elaborates the Linklaters partner. “But it’s hard to generalise which one’s better.”
Even though Slaughters’ best friends strategy enjoys a good reputation in Europe and has gained the endorsement from allies and peers, it still needs to put in significant effort to sell it to prospective Asian clients.
An Asia-Pacific regional general counsel at a global financial services group notes that he knows Slaughters is a top-quality English firm, but says in Asia it has a small presence and is relatively less known and talked about. He has never considered using it for regional deals and is yet to come across it in transactions.
Slaughters’ partners know this. “The challenge is always to sell the model to potential clients. If you have a global brand, it’s easier to market your services to clients. Our model does require possible explanation on why it’s going to work in an effortless way for them,” concedes a Slaughters partner. “There’s potential for causing nervousness in clients when a large number of firms will work together on their transactions. However, once people see it in operation, there’s no problem at all.”
In Asia foreign firms are barred from practising local law in most jurisdictions. So when international firms are undertaking regional transactions they need to engage and work alongside capable local counsel when there are local law implications. This reality has meant Slaughters’ approach is not so unique in this part of the world, and in the Indian legal market, which is completely closed to foreign firms, it provides for a good case study.
Many international firms offer Indian law advice through their best or good friend Indian firms; this is a very similar proposition to Slaughters’, which has close relationships with a number of Indian law firms, notably Amarchand & Mangaldas & Suresh A Shroff & Co.
“Indian corporations have been expanding all over the world into Europe, the Americas, Africa and Australia,” says a Herbert Smith partner. “If a firm doesn’t have offices in these key jurisdictions it will have fewer opportunities to advise these clients going abroad.”
Where do we go from here?
The challenges Slaughters is facing in Asia are not unique to it. Any international firm jostling for a position in the region will encounter similar issues. Although its international approach does not provide Slaughters with a competitive edge in these markets, it does shield it from the direct competition pressure on the ground and avoid the overhead costs of operating offices in Asia.
However, as the proverb says: “He who does not advance loses ground”. Slaughters’ passive approach in Asia is doing fine at present, but the question is, how long it will last? While its magic circle rivals dominate all the major legal adviser league tables for Asia-Pacific-related equity capital markets and M&A deals, Slaughters’ constant absence in the top rankings is a worrying sign.
“There’s always room for a small group of firms with alternative strategies that have something different to bring to the table. Slaughters has carved a niche for itself in the market and will continue to do well,” says a Hong Kong-partner at a US firm. “But its business model limits the growth opportunity to a defined area.”
It may be that it’s the old school ties that bind, but at the premium end of the market a chunky global platform might just count more.
Closer to home: the Hengeler relationship
The relationship between Hengeler Mueller and Slaughter and May is not much talked about in Germany nowadays.
European deals occasionally turn up where they appear together, but the highlights of Hengeler’s corporate practice over the past few years have been domestic, not cross-border.
Hengeler is playing the major role (along with Linklaters) in the wholesale restructuring of the German banking scene. It has also recently gained ground on its major competitors with key corporations, such as E.On (Freshfields Bruckhaus Deringer) and ThyssenKrupp (Linklaters).
Since the strong recovery of the M&A market in Germany, you can see Hengeler once again on major real estate portfolio deals.
All of this would only involve Slaughters on a marginal level. Hengeler’s corporate practice is able to focus on domestic work because of the strength of the German economy as well as Hengeler’s deep roots with the boards and general counsel of German industry.
If the best friends relationship with Slaughters is less important than it was five years ago, then that – at least from a German point of view – is a reflection of the diminishing importance of London as a source of M&A work.
It is Hengeler’s relationships with Chinese firms that will determine its position in the
cross-border corporate market.
Aled Griffiths, editorial director, JuVe