Can Ashursts and Fried Frank still be friends?

Julia Cahill examines the finance axis which propelled the merger talks between the two firms

Fried Frank Ashursts. Just allow yourself to picture what might have been: a transatlantic M&A heavyweight; a private equity powerhouse.

But it was the mutual interests of the two firms' slightly less high-profile finance practices that provided the catalyst for the protracted merger talks that finally ended two weeks ago.

At Ashurst Morris Crisp, it was the arrival of collateralised debt obligation (CDO) queen Erica Handling from Weil Gotshal & Manges in March 2001 that led to the initial cooperation on structured finance deals for clients such as JPMorgan Securities (see box). No surprise, then, that with such a strong working relationship with Laurence Isaacson's team at Fried Frank Harris Shriver & Jacobson, the group around Handling was firmly in the pro-merger camp.

Meanwhile, at Fried Frank, it was co-managing partner Valerie Ford Jacob, a woman credited with single-handedly building the firm's capital markets practice, who emerged as the chief proponent of the deal.

There is no denying that, from a pure finance perspective, there would have been huge benefits. The two firms were already playing a powerful double act for clients such as JPMorgan and Goldman Sachs (see box) and there is plenty of anecdotal evidence in the market that Fried Frank has been working hard to channel work to Ashursts and vice-versa.

So perhaps it is not so surprising that Ford Jacobs was prepared to go on the record last week to say that the two firms would continue to work together as before in finance and other areas.

It was the need to preserve relationships she had originally carved out – with the likes of Merrill Lynch and JPMorgan – that started Fried Frank on a course that ultimately led it to Ashursts' door.

Fried Frank launched a two-partner office here in 1970, but with the somewhat curious intention of focusing on M&A advice under US law. Clients tended to be other law firms.

The massive migration of bankers into Europe from the early 1990s, though, transformed Fried Frank's UK strategy. It dispatched capital markets partner Tim Peterson and associate Daniel Bursky (now a partner) to London in 1997. A somewhat misguided three-year securities joint venture with Simmons & Simmons followed, before Fried Frank turned to organic growth. Ford Jacob secured its first UK-qualified banking partner, the highly talented Christopher Kandel from O'Melveny & Myers, in 2000, and with him relationships with Deutsche Bank and BNP Paribas. So far so good.

The appointment should have been the first of several as part of a defensive strategy to preserve the firm's high-yield practice. Mounting pressure to be able to advise leveraged finance desks on all slices of a debt structure, or deal with intercreditor issues, have compounded the need to gain UK capacity.

But the London strategy has remained dangerously confused as to how it should go about preserving the Fried Frank franchise. By the time Kandel left for Cadwalader Wickersham & Taft just two years later, his disappointment over Fried Frank's failure to recruit any other UK-qualified partners was widely known.

The subtext to that failure is, of course, Fried Frank's efforts to merge with Ashursts. For most of Kandel's two years, there was the possibility that the Ashursts guys were just around the corner, but the firm ended up losing both and derailing its strategy for three valuable years. Others, such as Latham & Watkins, have moved aggressively forward in that time.

Fried Frank now faces the prospect of returning to a strategy of organic growth in the face of stiff competition from established platforms like this and will be hard pressed to attract a lateral as talented as Kandel.

For Ashursts' finance practice, the collapsed merger talks are less of a disaster. Nevertheless, it still has to secure the US capability that managing partner Geoffrey Green accepts as crucial for moving its finance practice on. This despite its continued efforts to hire laterally in this area while the Fried Frank talks were ongoing. A better option would be to renew and seek out new links with US firms lacking substantial UK practices.

Its relationship with Kirkland & Ellis remains very much intact, but that is first and foremost a private equity arrangement with minimal impact on finance.

For now, at least, the spirit of cooperation is the best possible option for both Ashursts and Fried Frank.

The Ashursts-Fried Frank double act
• Joint counsel to Barclays and Royal Bank of Scotland (RBS) on acquisition of Riverdeep in management-led buyout worth $376m (£232m). Barclays and RBS committed $135m (£83.3m) in senior credit and $45m (£27.8m) in mezzanine credit.
• Fried Frank was counsel
to Bank of America and JPMorgan in financing United Auto Group’s (UAG) offer for Synter (a UK public bid). Ashursts advised UAG. The value of the acquisition was £95.3m.
• Ashursts brought in Fried Frank as US securities counsel on the reorganisation of Railtrack.
• Ashursts brought in Fried Frank to assist advising Clubhaus in its restructuring of high-yield bonds. The restructuring related to notes worth £60m.
Three deals, two lawyers, one client: the Erica Handling-Laurence Isaacson connection
July 2002: Handling and Isaacson advise JPMorgan Securities as initial purchaser of Promus II BV on a e65.3m (£46.3m) deal.
April 2002: Handling and Isaacson advise JPMorgan Securities, the initial purchaser of Lafayette Sovereign CDO I. The offered notes, including up to $145m (£89.5m) of ‘Class A’ notes, $13m (£8m) of ‘Class B’ notes, $13m (£8m) of ‘Class D’ notes and $45.5m (£28.1m) of secured subordinated notes, were secured by a portfolio of dollar-denominated emerging-market sovereign-debt securities, loans and synthetic securities.
April 2002: Handling and Isaacson advise JPMorgan Securities, the initial purchaser of Jass CDO I BV. The offered securities comprised five classes of notes, with an aggregate principal balance of $238.5m (£147.1m) secured by a portfolio of primarily investment-grade bonds and synthetic assets, managed by Axa Investment Managers Paris.