Like teenagers who won’t admit their mutual crush despite an ardour plain for everyone to see, Linklaters and Sullivan & Cromwell should surely get it together.
Linklaters and Sullivan: The missing link” class=”inline_image inline_image_left” src=”/pictures/web/images/15972_16_linklaters.gif” /> Just over a week ago, The Lawyer ;exclusively broke the news that Linklaters was preparing to enter into a New World (23 January). The firm’s latest major structural overhaul will see up to 120 City lawyers and 150 business support staff leave as it strives to become a leaner, more profitable business.
How new and radical this world will be is yet to be seen. But in the US there was only one question on most people’s lips: does Linklaters’ second restructuring in five years mean it is finally getting itself in shape for a merger with Sullivan & Cromwell?
This is the rumour that refuses to die. More than a decade ago Linklaters’ US merger quest was already in full swing. Back then the firm’s partners who had the mortifying task of undertaking courtesy visits to the likes of Cravath Swaine & Moore, Simpson Thacher & Bartlett and Sullivan got a simple response: “Merge? Surely you must be joking? Here, have some more coffee.”
Now, as Linklaters gears up for its strategic slashing, The Lawyer wondered whether things had at last moved on. First, we quizzed partners at both firms about the chances of a deal finally taking place. Neither side (officially) showed much enthusiasm.
“We’re continuing with our current strategy,” insists one Linklaters partner. “The New World won’t change that. If a merger opportunity with a top-tier US firm was apparent, we would of course explore that, but in reality that’s not likely to happen.”
Over at Sullivan the response was a little more tart. “Yes, Linklaters would want to merge with us, but it doesn’t mean it’s going to happen,” says a Sullivan partner. “Everyone wants to marry Cindy Crawford.”
Well, maybe not everyone, but you get the point. But with both sides stonewalling, The Lawyer believes the time has come to ask both firms a more pertinent question: “Are you sure?”
Will they or won’t they?
There is a good reason to doubt the sincerity of the two firms’ denials and believe the time for the formation of the long-awaited global behemoth – let’s call it Linklaters & Cromwell – is nigh. Every firm is now working in a different legal market from a year ago. Linklaters’ lawyer cull is aptly named.
Last Wednesday on US television, George Soros described the ;collapse ;and ;subsequent bankruptcy of Lehman Brothers as a “game-changing” event. For most international businesses the world did indeed change last September. It is, as Linklaters succinctly puts it, ‘new’. And in this world, anything can happen.
“Of course there would be significant challenges for any major US-UK merger, but is it really that far-fetched?” asks US legal market consultant Bruce MacEwen. “I don’t think it is. If the fit was right, both would experience significant benefits from a truly global platform. The magic circle wants to have better traction in the US and a successful merger is the ideal option. I think you may see such a merger in the next few years.”
In today’s new world, anyone who argues that a merger between Linklaters and Sullivan could not happen risks sounding a bit like those people who said Lehman could not fail. These days, there are no absolutes.
A deal between these two legal market titans would create conflicts, for sure.
There would be issues to resolve. There are major cultural differences. But all of these stumbling blocks are surmountable if the will is there. The Sullivan partner’s quip about Cindy Crawford displays both a certain arrogance and a certain defensiveness.
Certainly, as far as Linklaters is concerned, there is the will to do a major US deal. The firm has been unofficially targeting just such a deal for years while concurrently pursuing a variety of short-term plans in the US centred on organic growth. Despite these, making it in New York remains essential for Linklaters’ ambition to be a truly global firm. Right now the market remains less than overawed by the firm’s local presence.
“Linklaters’ position in the US right now is pathetic,” claims one former partner. “It still has no resources. It’s a global firm in aspiration only.”
The former partner also criticises the fact that Linklaters’ Americas managing partner John Tucker only spends part of each month in New York, claiming that this is indicative of how the firm is currently viewed in the States.
“Why should a US client give [Tucker] 30 seconds of his time if he won’t commit 100 per cent to New York?” asks the ex-partner. “That’s the way this town sees it. It’s a joke.”
‘Joke’ may be a little harsh, but it brings us neatly back to the idea of a transformative merger with Sullivan, the surefire way to address those all-important US concerns in one go.
So. Linklaters & Cromwell. What would it look like? Geographically, the slow-growth Sullivan, which has taken well over a decade to get from the 100-partner level up to its current total of around 160, would suddenly have one of the world’s most extensive, top-quality European and Asian networks on its hands. Linklaters would have partners from arguably the US’s leading and most profitable full-service law firm sharing the dining room tables at Silk Street.
Financially the firms are well matched. On the most recently available numbers, Linklaters’ average profit per equity partner (PEP) stood at £1.44m, while Sullivan’s corresponding figure for 2007 was £1.56m (the firm’s financial results for 2008 are not yet available, although sources suggest average PEP may be similar to last year’s level).
From day one the merged firm would be an unmatched international corporate powerhouse, a fixture at the top of the world’s M&A rankings, and it would have no problem winning the top capital markets work on both sides of the Atlantic.
“It would create a securities practice that’s second to none,” adds a partner at a rival US firm. “But if Links wants to focus on litigation in the US, then Sullivan isn’t necessarily the way to go.”
Sullivan’s pedigree needs no introduction. It is personified by its chairman Rodgin Cohen. Last year, as The Lawyerreported (29 September), Cohen popped up on almost every notable credit crunch-related matter, including Bear Stearns’ takeover, Fannie Mae’s nationalisation and AIG’s bailout.
But Cohen’s time as head of Sullivan is nearing its end. Within 12 months the man who has led his firm so ably since July 2000 will have handed over the reins to real estate partner and current vice-chairman Joe Shenker. It is a changing of the guard that could perhaps signal a shift in policy (although currently, understandably, the official line is ‘no change’).
If the cultural stumbling blocks of a full-blown merger do indeed prove insurmountable, the two firms could always head down the best friends route (apologies to Slaughter and May, which currently has friendly relationships with many Sullivan partners).
“If it was a merger then Linklaters would have to be prepared to abandon their name,” argues one US partner. “Everyone knows who Links is in the rest of the world, but it’s not like that here. Sullivan & Cromwell wouldn’t want to give up their name and their culture. No way.”
Instead, a Slaughters/Hengeler Mueller-style arrangement might meet the needs of a global one-stop shop while maintaining Sullivan’s top-tier brand awareness in the US. The reality is that Linklaters could plug away for years with its bit-by-bit organic growth strategy in the
US and never achieve the name recognition held by any of its leading rivals in that market.
“The real obstacle to a deal like this would be cultural integration,” says MacEwen. “Who’s losing their soul?”
Cultural integration is always the number one barrier to any merger, and putting hypothetical musings to one side for a moment, there are obviously some real barriers to a Linklaters-Sullivan merger.
Among the most glaring cultural differences between the two firms is management style. It is an understatement, in light of the current developments, to say that Linklaters is managed aggressively. It is a metrics-orientated firm that contrasts with Sullivan, where the all-equity partnership operates in a more loosely managed environment with a carefully constructed culture of autonomy.
“Merging with Linklaters and diluting that culture doesn’t make any sense,” says a partner at one leading New York firm.
“Sullivan partners wouldn’t take kindly to being managed, particularly from practice heads in the UK,” offers another. “It’s not how the firm works and it wouldn’t be well received.”
That management style has far-reaching permutations. As reported by The Lawyer last week (26 January), Linklaters has already been through one major restructuring aimed at raising its profit. Around seven years ago the firm adopted a strategy called ‘Clear Blue Water’, which was premised on establishing a level of profitability that was so far ahead of its competitors’ that the firm would be able to pick off the partners it wanted at rivals and then build the practices it wanted as a result. It would then create distance between itself and its rivals.
Slashing the equity partnership was a fundamental part of this. Between 2003 and 2006 Linklaters chopped equity partner numbers from 410 to 353.
But the strategy failed. The restructuring, which was every bit as big as arch-rival Freshfields Bruckhaus Deringer’s, saw it overtake its closest rival on PEP in 2006, only to surrender its lead two years later. ;So ;now Linklaters is about to do another restructuring – a move that partners at its closest rival believe is highly risky.
“Having done two major restructurings, they’re going to try and recruit some of the world’s top lawyers?” asks one sceptic. “It’s difficult enough after doing it once to tell potential recruits that it was a one-off and for them to buy it. Do it twice? You’re an investment bank.”
There are other barriers. The two firms’ billing systems are at odds, with Linklaters favouring the hourly rate in contrast with Sullivan’s usual project-based approach.
Sterling’s current chronic weakness is also likely to give any US firm pause for thought when considering bringing on board a hefty chunk of revenue derived from the UK.
In terms of remuneration, The Lawyer can reveal that Linklaters uses a foreign exchange spot rate to pay its US partners, in contrast with other firms that pay partners on a floating rate. The Sullivan partners who want to be locked into a compensation system that results in them effectively subsidising the pound’s current weakness (assuming that any such system survived the merger negotiations) are likely to be few and far between.
“Compensation is the single most challenging aspect of a US-UK merger,” says one Clifford Chance partner. “It’s not just a case of expanding or breaking with lockstep. US partners will be subjected to currency considerations that haven’t been an issue for them before.”
The coy boys
No barrier, though, is insurmountable. Linklaters’ management, Simon Davies and David Cheyne, describe the current state of play perfectly when they call their latest adventure a ‘New World’. All bets are off, and that includes a deal with Sullivan.
So The Lawyer would like to repeat its question for Linklaters and Sullivan: “Are ;you sure?” And if we may be so bold, we think the answer should be: “Why the hell not?”