Last Monday’s (15 November) revelation that Norton Rose was merging with Canada’s Ogilvy Renault and South Africa’s Deneys Reitz had been in the pipeline for a year.
Indeed, there were plenty on the inside who knew nothing about it either. So the twin deals also gave the firm’s first partner conference that featured the lawyers it added by merging with Australia’s Deacons in 2009, held over the weekend of 5-6 November at London’s Park Plaza Westminster Bridge Hotel, some additional fireworks.
“It added a bit of spice, for sure,” says Simon Currie, head of one of Norton Rose’s five core headlight groups, energy, which informs the strategic drivers behind the move. “There were a lot of partners outside the core negotiating group who had no idea until then.”
But this deal was always going to be about a lot more than making headlines for Norton Rose.
For Martyr – the principal catalyst of the merger and now sole CEO of a $1bn (£630m) firm – the deal is transformative.
“Everyone keeps saying, ’Go east’,” says Martyr. “We’ve already done that with the Deacons deal.
“These deals are about us standing there, looking back and asking where we and our clients in the East are doing business.”
Call it a reverse strategy, if you like.
Ian McCubbin, the leader of Norton Rose Australia’s China business group, who acts for a significant number of Chinese banks, says the level of outbound investment by his clients into countries rich in natural resources and urgently requiring infrastructure projects made this deal a must.
It is not just about things that come out of the ground either. Ogilvy has a life sciences and pharmaceuticals practice that Norton Rose, with only a fledgling team, is keen to develop.
And finance underpins the whole exercise, adding significant legal muscle to handle deals for the likes of Royal Bank of Canada – an Ogilvy client for more than 100 years - Société Générale, BNP Paribas and a raft of Chinese banks such as the Industrial and Commercial Bank of China, China Construction Bank and Bank of China.
The complete picture
“For us, these two mergers logically extend the strategy we started with the Deacons deal and fill two key pieces of the jigsaw puzzle,” McCubbin says, adding that the firm won an $8bn multijurisdictional financing a month ago that it would not have stood a chance with before.
But the underlying strategy of Norton Rose’s rapid expansion in the past 18 months is to have a significant presence in countries rich in resources and high in population. In other words, Canada, South Africa and Australia.
Link this to those countries with high demand – India, Japan and China – and Norton Rose believes it has covered the majority of the places where business is being done and where the business doers reside.
Martyr, sounding perilously like a 19th century imperialist, adds: “This deal gives us the chance to put our footprint very hard on Africa.”
Cecil Rhodes would be proud.
Martyr the explorer deserves the credit for getting the ball rolling on both deals.
“Having done the Australia deal we had the concept of linking up with sophisticated lawyers in jurisdictions that were limited in global reach, but with a client base that’s going international,” Martyr says. “We thought Canada and South Africa had significant similarities, so I went and had a look around at the end of last year in both places. I wasn’t exactly trailing my shirt around
the market, but I met a number of firms.”
As Martyr adds, not everyone was receptive to the idea of being part of something bigger.
“Some saw it and some didn’t,” he admits.
The heads of Deneys and Ogilvy, Rob Otty and John Coleman respectively, clearly got it. Martyr met Otty earlier this year for initial talks, having already met Coleman in the autumn
“We didn’t actually talk about a combination until the early spring,” reveals Coleman.
Gradually, more partners became involved in the talks.
As Otty recalls, his first meeting with Martyr was in Johannesburg, when he and Deneys Reitz chairman Mike Hart also met Norton Rose deputy CEO Don Boyd.
“Then we broadened it to practice group leaders, four on each side,” he adds.
“This was followed by our 14-member supervisory board, and finally we put it to our group of directors for the first time last Thursday [11 November].
“There was a vote on Friday at 11.30am, which was unanimous. We were confident we’d get buy-in.”
The description of the deals as mergers raises two issues. One is that these are nearer to associations because the three firms will not be sharing profits from day one. The second is that, if the deals are viewed as mergers, they are less mergers of equals and more takeovers by the UK firm.
The latter point is particularly germane when you consider the relative size of the African firm in particular and Norton Rose.
The latter firm, which has just posted a 9 per cent rise in fee income at the half-year stage, posted a total revenue of £307m in 2009-10. Deneys’ turnover last year was in the region of £35m.
Critically, the South African firm’s average profit per equity partner (PEP) is around a third of Norton Rose’s, at £176,000. That compares with £486,000 at the UK firm.
Ogilvy’s turnover is considerably larger – Canadian firms have long fought shy of revealing financial data, but sources suggest its total fee income is in the region of $300m, also with a lower profitability than Norton Rose’s. Like Deneys, it is joining up with Norton Rose from a position of relative weakness.
Both the smaller firms are primarily domestic players, with clients that are outgrowing their home markets. Both risk losing market share to globalised firms, particularly in the areas of financial institutions, natural resources and infrastructure. And both crystallised the need for a tie-up with larger player during strategic reviews last year.
These contributing factors led to a gale of criticism last week that this is not a true merger at all.
“It’s a branding and badging exercise at the moment and, until you move from that to full integration, it’s little more than an Olswang-Greenberg Traurig-style deal,” claims one London-based legal market consultant. “The behaviour you want to achieve – ie client sharing, referrals and properly working together – only comes from having a single profit pool. That’s when you’ll get a partner sitting in London saying, ’I’ll help my partner sitting in South Africa’.”
The criticism was crystallised last week when K&L Gates managing partner Peter Kalis described recent international mergers – including this one – as “Noah’s Ark” arrangements because of the dual systems and management structures, rather than as mergers in the true sense.
Martyr’s response to the criticism is pithy, to say the least.
“Yawn,” he says. “Everyone else is doing it the same way.”
In fact, as Martyr knows, several of the accountancy firms that have championed the Swiss Verein coordination vehicle Norton Rose is using, notably KPMG, are moving away from it in favour of fully integrated partnerships.
But Martyr insists that for his firm this is the only way to get businesses together that have differing equity structures and profitabilities, and face currency issues.
“You could wait until there was parity, but that wouldn’t allow you to reach your strategic goals,” he adds, claiming that the firms are “really nailed together” with “common systems, management, name, strategy, resources” and, most importantly, “one CEO”.
“The only thing we’re not doing on day one is splitting the pre-existing profit pools,” he says.
In any event, the two smaller firms had already identified the need to get into bed in some way with a larger beast.
Ogilvy’s Coleman says his firm had for years been assisting its clients abroad, helped by an international office network (including a London representative office) and the presence of high-profile individuals at the firm, such as former Canadian prime minister Brian Mulroney, former ambassador to the UN Yves Fortier and former ambassador to Korea Derek Burney.
“But you can only go so far with an international strategy when you’re not on the ground,” admits Coleman.
Eggs in one basket
Deneys’ Otty is similarly enthusiastic about the Norton Rose deal, but admits that the merger will all but put an end to the referrals his firm has enjoyed until now.
“We approached this on the basis that we’re going to lose all of the referral work we’ve had up to now from US and European firms,” admits Otty. “We assumed it would come to a halt. It’s not necessarily going to be the case – referrals are relationship-driven, so a proportion may continue. But we’re confident we’ll replace it and end up in a net gain position.”
That said, one of Deneys’ biggest referrers was Norton Rose. And Otty claims that the merger has already opened the door to enquiries that would have been out of the firm’s reach previously.
“Within two days of the deal we had five referrals, including for dispute resolution,” beams Otty. “South Africa is at the apex of East and West in relation to Canada and Australia. It’s perfectly positioned.”
A similar comment could be made about the next logical step in the evolution of Norton Rose’s rapidly growing network – the US.
Martyr says the next six months will be all about integrating systems and client programmes, building up resources and getting the firm’s headlight strategy embedded across the new offices.
The firm is also likely to be keeping its eyes and ears open for new US-based opportunities.
“We have to do it at some point,” admits Martyr. “This makes us more attractive than we were before.”
He might find the US a harder nut to crack.