The breakdown of the Arthur Andersen/Wilde Sapte merger is bad news for Wilde Sapte, but it is equally bad for Andersens, reports Robert Lindsay.
Nick Prentice, head of tax at Arthur Andersen, broke the news to Wilde Sapte's managing partner Steve Blakeley and banking partner James Johnson at a face-to-face meeting at Andersens' offices on the Strand last Tuesday.
The Wilde Sapte partners were dumbstruck. Blakeley knew the surprise departures of asset finance partners David Smith and Mario Jacovides, to join their two former colleagues at Allen & Overy, had put the deal in jeopardy.
A week earlier, rumours had been going around Garretts that the deal was off, but Blakeley was almost certain the departures would simply mean the firm would be given less money for the next two years to distribute to the remaining partners.
But from the way Prentice talked, there was no room for argument. The deal was off. All they had to do was agree a statement for the press.
The next day at Wilde Sapte, senior partner Mark Andrews penned a memo to staff breaking the bad news. He said Andersens had anticipated that a small number of partners were likely to leave but had not counted on the surprise departure of big hitters Smith and Jacovides.
“That development shook Andersens' confidence (rather more so than should have been the case),” he said. “Coming at a very delicate stage of the negotiations, along with all the inevitable issues and uncertainties which are thrown up by a revolutionary deal of this nature, it eroded their faith in the transaction.”
He went on to accuse Andersens of making an “error of judgement” as “it did not understand the true nature or internal dynamics of our business”.
Although it is not stated in the memo, it is understood that Andrews, Blakeley and Johnson concluded that Andersens was afraid Wilde Sapte would become “another Archibald”. Why else would it scupper the deal just because a couple of partners had left?
In 1993, troubled but prestigious Paris firm SG Archibald became the first law firm to sign up to Andersens. Despite offering lucrative incentives to many of the partners, one, Tom McDonald, decided not to join and resigned. Ironically McDonald went to Wilde Sapte and is now leaving there for White & Case.
Of the 14 partners who agreed to merge, only four partners now remain. The others departed, one by one, for rival Paris practices. In addition the firm's prestige dropped significantly. Archibald's lack of top-bracket work was one of the reasons Wilde Sapte's Paris office did not want to merge with Andersens.
Blakeley thinks Andersens saw the head-hunters gathering around Wilde Sapte and got frightened that more lawyers would leave after the deal, just as they had at Archibald.
It is true that many US and UK firms saw their opportunity to poach staff, and head-hunters have been ringing individuals at the firm for weeks.
There is even a bizarre rumour going around that top firms got together in a bid to scupper the deal.
Interestingly, Andersens' headquarters in Chicago appears to have been nervous about the effect of rival lawyers' comments on the whole deal, and told one of its main advisers in New York, Weil Gotshal & Manges, that it took a dim view of lawyers bad mouthing it.
It appears to have thought, wrongly, that Weil Gotshal's London office was knocking the arrangement.
Andersens' acquisition of Garrigues and Dundas & Wilson went ahead without too many people defecting, the argument goes, because they were the number-one firms in Spain and Scotland, respectively. The head-hunters had nothing to offer lawyers who were afraid of the accountancy firm.
Blakeley and his team think Andersens failed to grasp the fact that, in the City, when you acquire a second-tier firm, the big City and US firms will inevitably be able to pick off some lawyers.
Some at Wilde Sapte are even questioning the timing of Allen & Overy's offer of partnership to Smith and Jacovides.
So did the bean counters simply underestimate the strength of the City legal marketplace – or were other factors at play?
There is speculation that during its due diligence Andersens found some practice areas did not present a rosy picture.
One ex-partner is said to have left because he thought the firm should have 40 partners not 70. In the financial year ending 1997, Wilde Sapte brought in £50m, but its 75 partners reportedly averaged only an estimated £162,000 profit each. Several of its City rivals manage much higher profits on similar revenues.
Perhaps the deal foundered on whether or not certain partners should be stripped out of profit sharing. Blakeley denies this. Prentice will only say that the departure of Smith and Jacovides was not the sole reason that he broke off the deal.
Whatever Andersens' reasons, there is no doubt that both firm's strategies have been badly damaged.
Wilde Sapte says it will continue to seek an international partner to help it expand, and it is confident, according to Andrews' memo, that “there are attractive merger options in the market”.
Price Waterhouse has been keen on Wilde Sapte for some time and is likely to initiate talks after a decent interval. Paul Downing, PW's head of legal, said: “Steve Blakeley and Mark Andrews have done a good job in pulling Wilde Sapte around and they had put together a strategy which everyone had bought into… I don't believe that strategy was wrong.”
In the meantime, the firm must be very vulnerable. The big five City firms and the US firms in London are redoubling their efforts to recruit, particularly at the assistant level. Management last Friday warned all staff not to provide lists of lawyers to head hunters.
In Wilde Sapte's Paris office the two remaining partners, Richard Macklin and Olivier Tordjman, are still considering whether to stay with the firm. McDonald's assistants could well go with him to White & Case. Smith's and Jacovides' assistants are also likely to follow them, leaving the asset finance department badly depleted.
As for Andersens, its plans for a global legal capacity are likely to have been set back by at least a couple of years.
“Whatever the reason Andersens broke off, what other law firm will want to do a deal with Andersens and take the risk that they may pull out?” asks Hammond Suddard's managing partner John Heller.
Andersens has lost the opportunity to add 300 lawyers to its network and to offer clients truly international legal advice. It reconfirmed in many lawyer's eyes its inability to understand the way the legal market works.
And the collapse comes at a difficult time for other parts of Andersens' legal empire. Last month, leading construction partner Alastair Morrison became the first to resign from Dundas & Wilson since it tied up with Andersens last year.
And in Madrid, Garrigues' leading international finance partner Fernando Bautista, one of 12 Garrigues partners granted Andersen Worldwide partnership, became the first partner to leave the firm since it joined Andersens in 1996. Significantly, he defected to that big-five City player Freshfields.
Garrigues is still the leading practice in Spain, but Bautista's defection shows that even the biggest incentive Andersens can offer – Andersen Worldwide partnership – is not enough to ensure it keeps some of the brightest and best lawyers.
Andersens' Prentice says: “We remain committed to our strategy of building a strong international legal network.”
He adds that one way to do this is to recruit “individuals and teams – which is not a bad option”.
Undoubtedly, but organic growth takes a long time. He may be replaying that Tuesday meeting in his head for some time.