The past year has been notable for international mergers, with the 1 May Hogan Lovells tie-up finishing the year in style. Andrew Pugh looks at the motivations behind the moves and highlights the successes and the non-starters
For a growing number of US firms, the past year has been all about the transatlantic tie-up. When legacy firms Lovells and Hogan & Hartson confirmed their merger plans half way through the year it triggered a scramble on both sides of the Atlantic among firms desperate to declare themselves the next global powerhouse.
This acceleration to consolidation has shown off the good, the bad and the ugly side of the transatlantic merger. First the good. When Hogan Lovells went live on 1 May it created a behemoth of more than 2,400 lawyers and 40 offices, with a combined revenue of $1.8bn (£1.15bn). Barring a catastrophe the firm is on course to overtake Allen & Overy (A&O) in the turnover stakes in the 2010-11 year.
As with any marriage, the union has not been without its setbacks. In the run-up to the merger Hogan began haemorrhaging partners in Warsaw, Geneva and Berlin, while Lovells announced that its Chicago office would not be part of the newly merged firm.
It has not been without its difficulties post-merger either. Since 1 May the combined firm has been hit by several departures, including those of former Hogan London chief Garry Pegg and ex-Beijing managing partner Roger Peng.
But if Lovells’ last set of financial results is anything to go by, then joint CEO David Harris has good grounds for optimism. In contrast with some of its rivals in the UK top 10, global revenue for 2009-10 was up by 2 per cent to £542m, driven largely by its success in London, while average profit per equity partner (PEP) rose by 13 per cent to £663,000.
It is still too early to begin drawing any firm conclusions, but the market consensus, for now at least, is that the tie-up will be a success. And that might go some way to explaining the wave of potential mergers subsequently mooted in recent months.
First came the ultimately unsuccessful talks between SJ Berwin and Orrick Herrington & Sutcliffe that began in April 2010. Following a series of meetings spread over several weeks, the talks collapsed when the US firm said it was pulling out of the discussions, with Orrick managing partner Ralph Baxter insisting that no single issue led to the talks breaking down.
Days later the story took another twist when it emerged that SJ Berwin, desperate to boost its presence in the US, had set its sights on New York-headquartered Proskauer Rose. Talks are still ongoing and the merger looks increasingly likely, with one source describing it as a fait accompli – although some have questioned the wisdom of such a move. While both have strong funds practices, there appears to be few other areas where the firms complement each other.
Next up was news that Denton Wilde Sapte and Sonnenschein Nath & Rosenthal were in advanced discussions. Unlike similar merger talks, however, things went well beyond the stage of clandestine meetings, and in June both firms’ partnerships agreed to the deal.
The new firm, SNR Denton, is set to go live on 30 September, creating a 1,400-lawyer firm with a turnover of around $750m. According to Dentons chairman Martin Kitchen, the new firm has set itself an ambitious target of raising revenue to $1bn and growing lawyer numbers to between 1,500 and 1,600 within three years.
Less successful were the on-off discussions between Mayer Brown and Simmons & Simmons. In June 2010 The Lawyer revealed that Mayer Brown had been in secret talks with Simmons over a move that would have created another £1bn global firm with more than 2,400 lawyers in the US, South America, Europe, the Middle East and Asia.
Talks appeared to break down days later, only to resume with a series of discussions between the firms’ senior management teams. Then, in a move reminiscent of the discussions between SJ Berwin and Orrick, Mayer Brown and Simmons released a joint statement saying that a “combination between our firms is not the right option”.
Table: TOP 30 US FIRMS BY LONDON REVENUE, 2009 (Click image to view full version)
Looking at the performances of US firms’ London offices, it is not difficult to see why some are so keen to tie up with a UK outfit. For the majority of the top 30 US firms in London, last year was characterised by plummeting revenues and profits. A total of 21 saw their revenues fall. On average, revenue among the top 10 fell by 12 per cent and among the top 30 by 5 per cent.
In results that presaged the financial figures of the UK 200, almost half posted an increase in PEP, although admittedly none reached the 70 per cent hike achieved by Shoosmiths.
As with their UK counterparts, many US firms ramped up profits by slashing lawyer numbers. A total of 22 of the top 30 firms reported falls in fee-earners. Overall, lawyer numbers among the top 10 fell on average by 14 per cent, and among the whole of the top 30 by 9 per cent.
By and large there was very little movement among the top 30 in terms of the revenue table. Some impressive performances were achieved, however, most notably from Bingham, which increased its revenue by $9.8m to $40.8m, and Paul Hastings Janofsky & Walker, which achieved a 44 per cent hike in turnover to $39m.
Bingham’s success was down to its restructuring and finance litigation practices, which hit boom time when the recession kicked in. Paul Hastings stepped up investment in London with the arrival of seven partners from Cadwalader Wickersham & Taft and, like Bingham, the firm’s strength in restructuring and insolvency protected it through the downturn. The partner exodus from Cadwalader, which left it with only two partners in the capital at the year-end, saw the firm fall out of the top 30.
Firms with a strong finance focus, such as White & Case, were the worst hit last year. Yet despite the firm’s revenue in London falling by 20 per cent it still maintained its position at the top of the table. This was primarily because most its competitors fared equally poorly.
When they were interviewed in April the majority of senior partners were confident that, by the end of 2010, the recovery would be in full swing. Since then a change of government in the UK, coupled with the continuing fragility of the eurozone, has helped spark fears of a ’double-dip’ recession and has subsequently dampened their optimism a little.
Mergers will continue to be on the agenda for US firms in the coming months, a trend highlighted by the news this August that Hammonds and Squire Sanders & Dempsey are in talks. If Dentons chief executive Howard Morris is correct, then the Hogan Lovells and SNR Denton deals will be the vanguard of a period of consolidation in the legal industry for years to come.
US litigation practices in London
An anticipated uptick in commercial litigation, particularly in the financial services arena, has seen several US firms expand or launch litigation teams in the City over the past year.
One of the most ambitious has been US trial outfit Kobre & Kim. It opened its London office in the summer of 2009 and remained under the radar until April, when it launched a recruitment drive with the high-profile capture of Serle Court silk James Corbett QC.
Corbett give the firm an English law capability for the first time; and a month later he was joined by Fladgate litigator Simon Cullingworth and Enterprise Chambers barrister Tim Prudhoe. Further arrivals are expected at the firm, which specialises in cross-border financial services litigation, in the coming months.
US litigation powerhouse Quinn Emanuel Urquhart & Sullivan was another firm to step up its activity in the City. Growing in London is central to founding partner John Quinn’s strategy and he has not ruled out doubling or even trebling the firm’s workforce in the capital. This strategy was underlined with the capture of rising star Alex Gerbi, a partner from Olswang.
In November 2009 Sidley Austin launched its London dispute resolution practice, again in the hope of capitalising on an upswing in commercial litigation as a result of the economic downturn. As with Kobre, the firm is targeting the area of cross-border financial services regulation.
Another firm that revealed its interest in London was US securities class action outfit Labaton Sucharow, which began raising its profile in the UK in a bid to pick up clients in the pension funds arena.
Not everyone shares the Americans’ optimism. One UK-based recruiter, who has seen several US firms fail in their bids to open bases in the UK, told The Lawyer: “In America they make bucketloads of cash from litigation. A star litigator in the US can bill tens of millions of dollars and gain a big following of clients.
“British lawyers don’t have that same kind of following. US firms think that, when they hire a British litigator, they’ll bring lots of clients with them, but that doesn’t happen and then their plans fall apart. It’s a different ball game to the US.”
Table: TOP 30 US FIRMS BY LONDON REVENUE PER LAWYER, 2009 (Click image to view full version)