Hammonds’ stated aim of merging with Squire Sanders needs a bit of work
It is a truth universally acknowledged that any firm that announces a remarkable profit recovery is usually in want of a merger. And so it was with Hammonds. This year the national firm proclaimed an average profit per equity partner (PEP) increase of 32 per cent to £364,000. Just three months later its two-year search for a merger partner paid off with preliminary talks with Cleveland-based Squire Sanders & Dempsey.
Unfortunately this looks distinctly like a shotgun marriage. Although both sides anticipate that partners in both firms would be asked to vote before Christmas, with just over three months to go there is not even any draft agreement reached on the key issues of remuneration, profit distribution and the management structure.
That is a startling amount to sort out and put to the partnerships.
“We need to get it sorted,” admits Hammonds managing partner Peter Crossley, who says the partners have just been fully brought into the process.
Given how important this deal is for Hammonds in particular (it has few cards to play with to attract a US suitor), it will have to move fast. But that may be counter-cultural for a firm that has spent the past five years trying to hold itself together.
Crossley’s caution has served him well over his two terms as managing partner. Most observers credit him with keeping the firm alive – helped by a partner lock-in.
“There was a time,” recalls one leading consultant, “when the only thing people talked about when you mentioned Hammonds was the size of its overdraft. They definitely could have been another Halliwells.”
However, is the very caution that saved it now too ingrained for Hammonds to transform itself?
Veterans of transatlantic mergers all warn that getting the partnership comfortable and allowing them to forge personal relationships with future colleagues on the other side of the Atlantic is absolutely crucial to long-term success.
It is unlikely that Hammonds partners know much of Squire Sanders; while it is not quite in the Orrick league of failed UK merger attempts, its lack of success in building a substantial City arm – organically or through merger – shows its brand has little purchase in the UK. Establishing early links between individuals will be key if the two sides are not to resent each other further down the line, and Hammonds is giving precious little time to its partners to begin to foster those relationships.
“Merging during the downturn isn’t the best timing,” says one senior partner at a transatlantic firm. “Now it’s about building up the friendship between partners. If both firms don’t have the budget to fly people over to meet each other regularly, then they’ll struggle to build up the friendships you need to make it work.”
Show and tell
What is more, given Hammonds’ unfortunate past, the issue of transparency and full disclosure is crucial. One of the many reasons that Hammonds ground to a halt in the middle of the decade was that former senior partner Richard Burns and former managing partner Chris Jones created a partnership culture where the minimal information given out by the leadership team was never challenged. This led to a sky-high overdraft, cash calls, rafts of exits and legal disputes with ex-partners.
Crossley is staking a lot on this merger. For him it must be a step change or nothing.
“Everybody thinks there’s a silver bullet out there that will transform their fortunes overnight,” he told The Lawyer in 2009 (The Lawyer UK 200 Annual Report 2009). “It just isn’t like that. A merger must create value and deliver strategic advantage.”
But how does a merger between Hammonds and Squire Sanders (which is already being dubbed ’Squammonds’ in the City) fit in to a rapidly evolving global market? Of all the recent transatlantic moves, it is a combination that will hardly trouble Hogan Lovells or even SNR Denton. Hammonds’ financial performance over the past decade has deteriorated to an extent that its current turnover of £118m is below its 2001 revenue following the merger between Hammond Suddards and Edge Ellison, which made it the 15th-largest in the country. It is now 24th in The Lawyer’s UK 20.
There are indications that Hammonds is belatedly targeting the space occupied by two formidable firms that have eclipsed their former national rival, DLA Piper and Eversheds, and their one-size-fits-all deals with multinational companies.
“Strategically, commercial and corporate clients are becoming more sophisticated and global in their outlook,” Crossley says. “There’s now a trend among in-house lawyers to reduce the number of legal providers they use, and a growing demand for firms that can service requirements across the globe. There’s been a significant demand for bigger, more global firms, and with our complementary practices there’s a real opportunity for revenue growth.”
And yet, alarmingly, Crossley does not name any practices where this synergy might be located. Rather, he focuses on geographical spread alone.
“They [Squire Sanders] have offices in a number of countries where we don’t,” he says, “and that will provide strength and depth in a number of key practice areas.
“We’re slightly bigger in Hong Kong and they’re bigger in Beijing, but then we don’t have an office in Shanghai, where they have a large and well-established practice.”
As well as offering an opening into the US, Crossley says, Hammonds will also gain access to the previously untapped markets of Latin America, where Squire Sanders has a series of associations, and the Middle East.
But to be a sole point of contact for multinationals, as Eversheds famously pioneered with DuPont and Tyco, requires vision. It also requires hard thinking about the shape of the practice and the acceptance that the firm will need to approach legal services differently. Whether or not Hammonds’ lawyers – already so bruised after a difficult four years – are willing to engage in a bout of radical re-engineering is moot. But given the strategic options available, do they have much choice?