The odd couple
16 September 2002
You have to admire Ahurst Morris Crisp's bravery. After two sets of failed merger talks, the firm is back for more, this time with New York's Fried Frank Harris Shriver & Jacobson. Ashursts, though, is at pains to deny that any talks are taking place at all.
The party line is that Ashursts and Fried Frank are working together on structured finance deals, inspired by the arrival of Erica Handling from Weil Gotshal & Manges in March 2001.
Handling's arrival plugged a gap in finance, specifically on the collateralised debt obligation side, through her strong relationships with arrangers such as Morgan Stanley. Ashursts was already strong in terms of issuers, including Intermediate Capital Group and AIB Capital Markets.
A joint venture with Fried Frank would complete the picture, bringing in the US capability that Ashursts has been lacking. Push Ashursts a little further and its partners will say things like: "We might make joint pitches on a whole range of things."
Indeed, Geoffrey Green, senior partner at Ashursts, talks about his expansion ambitions when he took over from Andrew Soundy in 1998. Was the US a target then? "I would say no," says Green. "At that point the first priority was to build in Europe, and I'd say that's still the first priority."
Meanwhile, Robert Mollen, managing partner of Fried Frank's London office, goes so far as to say: "I think that we'd like to have UK capability on all the things that we do."
Speculation, however, is rife on both sides of the Atlantic that the firms are indeed talking to each other, albeit tentatively, and have been doing so for nearly a year. "They're nowhere near a combination yet," says one US lawyer familiar with the process. "The firms are really at a due diligence stage and it will be quite some time before anything is announced."
The fact that negotiations are progressing at what can only be described as a snail's pace may indicate that Ashursts has learnt its lesson after previous failures to tie down a merger.
A brief flirtation with Clifford Chance in 1998 turned out to be a no-go, as the thought of being swallowed up by a larger firm was just too much for certain Ashursts partners to bear. And the decidedly more advanced powwow with West Coast giant Latham & Watkins floundered in 2000, when both sides blamed conflicting cultures for the disintegration.
All of which leaves one question: if Ashursts is talking to Fried Frank, what makes it think that things will be different this time around?
Either Ashursts has a strong masochistic streak and does not mind the thought of becoming the top tier's equivalent of Theodore Goddard (a serial flirt which last year said au revoir to its third potential merger partner Salans Hertzfeld & Heilbronn), or the firm really does believe, in its heart of hearts, that it could integrate successfully with Fried Frank and still retain a strong degree of independence, on which it prides itself so highly.
A quick glance reveals that there may well be synergies between the two firms. Ashursts and Fried Frank have similar numbers of partners: the London firm has 142, while the East Coast practice houses 136. Geographically, a merger could potentially be a snug fit. Fried Frank's London office, established in 1970, contains just five partners, including a single UK partner in the form of Christopher Kandel. And, more importantly, Fried Frank's City branch does not have the same clout at the head office in New York as Latham's UK practice, which was resolutely opposed to a merger with Ashursts in 2000.
In the rest of Europe, Fried Frank has scant coverage, with a small but strong office in Paris and a recently established presence in Germany; while in the US, the firm has branches in New York, Washington DC and Los Angeles. Ashursts, on the other hand, has a tiny office in New York, which still only offers UK legal advice. But in Europe, which accounts for around 20 per cent of its annual turnover, Ashursts has been making some progress - although not enough to take on the magic circle. Its Paris office already has a strong reputation and it has tried to grow both its German and Spanish branches. Turnover also tallies between the firms (to a certain extent): last year Fried Frank grossed £201.9m, while Ashursts notched up £185m.
So far, so good. However, burrow beneath the surface and problems begin to appear. Maurice Allen, head of finance at White & Case in London, says the first thing that firms contemplating a UK-US merger must get out of the way is remuneration. Once this is sorted out, talks can accelerate.
Ashursts operates on a strict lockstep, which takes partners 10 years to reach plateau. Partners at the firm state that there is scope for junior partners to be awarded a discretionary bonus for exceptional performance. And interestingly, profits per equity partner at Ashursts over this past financial year are slightly higher at £600,000, compared with the £563,000 average at Fried Frank reported in 2001.
However, Fried Frank's remuneration system is an altogether different animal. Operating on a modified lockstep, it takes partners around 12 years to reach plateau as they progress from 200 points to 400 points. Then it gets complicated. First, there are a small number of major billers on 500 points. These include Audrey Strauss and William McGuinness in litigation, as well as Joseph Stern and Stuart Katz in corporate. On top of which there are 'the immortals'. These immensely powerful partners bill around $15m-$20m (£9.7m-£12.9m) a year, are on 825 points, and some say they are the real decision-makers at Fried Frank.
The immortals (or "the barons", as one lawyer refers to them) are made up of corporate partner Stephen Fraidin, Jonathan Mechanic in real estate and Brad Scheler, chairman of the firm's bankruptcy and restructuring department. This 'super point' group also includes Sanford 'Sandy' Krieger, a corporate expert and senior partner of the London office, as well as Valerie Ford Jacob and Gary Cooperstein, both in corporate.
US sources say that some of the star billers are less than enamoured with thoughts of a merger and think that Fried Frank should, in fact, be going in the opposite direction and downsizing to concentrate on core areas.
Sitting at the pinnacle of this influential group is Arthur Fleischer Jr, a veteran of Fried Frank, who despite surpassing Fried Frank's mandatory retirement age of 65 is still practising. Fleischer is widely credited - alongside Joe Flom of Skadden Arps Slate Meagher & Flom and Marty Lipton of Wachtell Lipton Rosen & Katz - with pioneering the bold legal tactics behind hostile takeovers, the number of which swelled during the late 1970s and 1980s.
How Fleischer's remuneration is assessed is not clear, but many partners say he is treated as a special case. Where Fleischer would fit in to a collegiate pay system is anybody's guess.
Also, Fried Frank employs a system whereby client relationship partners gain credit for deals that they may not have worked on. For example, if a lockstep partner worked for Goldman Sachs on a deal, the partner who brought the relationship to the firm in the first place would still get some credit. Partners at Fried Frank say this has long been a bone of contention at the firm, but it is a system that is unlikely to change.
Overall, remuneration is a potential minefield. Clifford Chance's manoeuvring over systems of pay after the Rogers & Wells merger gives some clues as to the obstacles that must be navigated.
During the course of integrating the merger, it is understood that certain parties within the London office were unhappy about the fact that US star billers Kevin Arquit and Steven Newborn, both from Rogers & Wells, remained outside the lockstep. Also, Clifford Chance was forced to cut 25 US partners out of equity in May last year. Where the cuts would be made if an Ashursts and Fried Frank merger went through would no doubt be dependent on which firm held the power. And the thought of pushing the idea of retirement to someone like Fleischer is, quite frankly, laughable.
So this presents another problem: if a merger did go through, which firm would be in the driving seat? With the Clifford Chance talks it was the thought of being subsumed into the firm that scuppered things for Ashursts. It is well known, for example, that star partners Charlie Geffen and Chris Ashworth were firmly against such a move.
As one US lawyer says: "Fried Frank thinks that it's taking over Ashursts, while Ashursts thinks it would be taking over Fried Frank."
Whether the likes of Geffen and Ashworth would still be able to sway the partnership would be interesting, but in any event the firm will require the support of 90 per cent of the partners to carry a merger vote through.
Should that happen, just where would managing partner Justin Spendlove and Green fit into the equation, given the power that 'the immortals' already exert over the management at Fried Frank?
At Fried Frank, tax partner Peter Cobb and Michael Rauch, a litigation expert, are the co-managing partners. It has a governance committee, which has around 14 members (Ashursts' board has 13). Now, these may seem huge numbers, but it is much better than a couple of years ago when at Fried Frank there were at least 20 members on the committee.
But one former Fried Frank lawyer says: "The firm might have a governance committee, but effectively its function is to just rubber-stamp the decisions that have already been made by the senior partners."
In terms of culture, it is almost impossible to imagine two firms that are more different. It is understood that one of the things that attracted Ashursts to Latham in the first place was the fact that it hailed from the West Coast, thereby giving off the air of a 'laid-back' kind of outfit, but with stellar lawyers. One senior Ashursts partner was known to have commented that the firm would never contemplate talks with a New York firm.
However, Latham turned out to be not so laid-back after all. One lawyer says: "Latham has very clear views on how the firm works - for example, insisting that all partners must be interviewed by associates. These were things that weren't negotiable."
On issues such as gender and race, Fried Frank has some noble conditions. In a somewhat bemusing, but obviously well-meaning document detailing its hiring policy, Fried Frank points out that it is non-discriminatory, "committed to attracting lawyers of colour" and open to employing gay and lesbian lawyers. Indeed, the firm boasts that in 2000 an African-American woman at the firm became a partner, that it has a Hispanic partner and two openly homosexual partners.
Overall, 17 per cent of Fried Frank's partners are women, with the likes of Valerie Ford Jacobs, Audrey Strauss and Dixie Johnson, who took over the securities mantle from Harvey Pitt after he left to chair the Securities and Exchange Committee last year, as big hitters in the firm.
One lawyer says: "People at the firm care about this very much and would like to have more women partners. Generally, it wants to be gender blind."
For its part, Ashursts has had a startling increase in the number of women who have been made up to partner in the past few years, as well as recently recruiting female partners Handling and Helen Burton from Weil Gotshal. From virtually a standing start in 1999, when the firm could boast just three female partners, Ashursts has admitted an astounding 14 women (two in 2000 and 12 in 2001) into equity. A not unimpressive 14 per cent of the partnership is now female. But those women are very much at the junior end of the partnership.
At the end of the day, however, if talks are proceeding, has Ashursts picked the right partner? Or has it, as many US and UK lawyers believe, once again set its sights too high?
A merger of equals is nigh on impossible. Those that have attempted it, for example Denton Hall and Wilde Sapte, have made a success of it, but only after some fallout. And while there was initially much griping about where Rogers & Wells stood in terms of top tier, second tier and so on in the US, Clifford Chance has made a success of it by knowing integration would be easier, since it was effectively a takeover.
US law firms recognise that Ashursts is a good firm with talented lawyers and, as many have said, "nice people"; but chasing equality through a merger is virtually unworkable for all the above reasons.
Alan Hodgart, the European director of management consultants at Hildebrandt International, says: "It's often a delusion within firms that a merger of equals is possible. They must be more realistic about it."
Also, how committed is Fried Frank? The firm's London office, after 32 years of being in business, has just five partners, and its attempt to dally with a UK firm when it set up a joint venture with Simmons & Simmons finished after only three years in 2000.
The biggest danger to Ashursts if the talks fail will be a loss of credibility stateside. US firms would no doubt begin wondering why the practice was incapable of tying down a merger.
Moving cautiously, as Ashursts seems to be doing, will hopefully pay off. But in the end, prolonged talks could end up doing Ashursts more harm than good.
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