Ward Bower, principal, Altman Weil
US firms consider mergers to facilitate global reach
7 June 2010
15 July 2013
9 April 2013
2 September 2013
18 November 2013
24 September 2013
The surprise announcement last week by Sonnenschein and Dentons of their proposed merger reinforces a number of trends that we in the US and our strategic alliance partner Jomati Consultants in the UK have seen emerging over the past year.
First, US firms are increasingly focusing on international expansion as their client base demands legal services outside the US. These firms, often based on their experience of developing a London office (Sonnenschein opened in London in the 1990s but closed the office a few years later), realise how difficult, time-consuming, expensive and uncertain the development of greenfield offices in the mature legal markets is. Given that their clients do not just need a UK capability, but often Continental Europe, the Middle East and Asia as well, one or two new offices will be insufficient, so greenfield development will simply take too long and be too expensive. Accordingly, mergers, despite the complexities, have become a more appealing option. US firms have given up looking for a mythical top-tier 100-lawyer London boutique and are considering much larger mergers, especially if the merger partner has a significant international footprint.
Second, US firms, despite many partners’ fixation with profit per equity partner (PEP) rankings, are increasingly prepared to look for merger partners that do not have as strong a PEP. Given that the cost of restructuring (ie exiting staff and partners) in the US is a fraction of the cost in the UK and the devaluation of sterling, it is perhaps inevitable that, in the short term at least, there is a divergence in profitability and firms are prepared to adopt different profit pools and remuneration structures with a view to devising a common structure and potentially combined pool in the future.
Third, to facilitate a merger firms are now willing to consider new corporate structures such as a Swiss Verein, widely used by major accounting firms, as the holding and coordination vehicle rather than insist on an immediate move to one globally, fully financially integrated partnership. This shows a new level of pragmatism given the business imperative of developing a credible international platform. This also avoids addressing the difference between US cash accounting and UK accruals system together with different financial year ends.
To some purists a merger using such a structure is not a ’real merger’, but the proper question to ask is: “will this new firm be able to provide the depth and breadth of coordinated client services that their clients expect?” If the firm can deliver, the structure will be irrelevant.
The March 2010 Jomati report Globalisation after the Crisis predicted that business pressures would force more firms to expand and deepen their international footprint and that mergers would become a much more common way to achieve that. We are aware of many US firms that are actively considering international mergers.
nevitably, there is still a high degree of caution and most initial discussions abort. When you look at practice mix, client mix, client conflicts, international orientation and culture, the list of potential merger targets for any firm is usually very small. In the current economic environment, demanding immediate financial alignment may exclude any UK firm from the equation, thus alternative structures such as those herein.
With the Hogan Lovells deal, the SJ Berwin and Proskauer discussions and the Sonnenschein and Dentons merger, the pace of activity is accelerating. While there may not be many more deals this year, we expect more mergers in 2011 and 2012.