In China the proposed merger of Jun He and Zhong Lun is being described as a deal that “has never been done before”.
Indeed, previous mergers between Chinese firms occur mostly among mid-tier firms, such as the deal between Shanghai-based Boss & Young and JoinWay earlier this year (21 January 2014).
Another main form of consolidation sees large Chinese firms acquiring smaller outlets to expand their domestic network – a model that has been used by the likes of Dacheng and legacy King & Wood.
The merger in question between Jun He and Zhong Lun, considered as two of the three top-tier Chinese firms (along with the now internationalised peer King & Wood Mallesons), is unprecedented. The significance of the move in China is being compared with the magnitude of two Magic Circle firms merging.
Both firms have established a strong track record of high-profile transactions, with Jun He focusing more on foreign investment and capital markets matters and Zhong Lun specialising in real estate, projects and domestic M&A deals.
Their clientele is also complementary to a certain degree. Jun He has traditionally put its emphasis on serving foreign investors and financial institutions, while Zhong Lun has built up a long list of strong domestic clients.
Both have also been spreading their wings beyond the national boarders. Back in 1993, Jun He became the first Chinese firm to open an office overseas as it set up a New York office. In 2010, it opened another US office in Silicon Valley.
Zhong Lun, on the other hand, chose Tokyo to be its first location aboard in 2006. It then opened a London office and a New York office in 2012 and 2013 respectively.
To broaden their global network and connections, Jun He became a member of Lex Mundi in 1997 and Zhong Lun joined TerraLex in 2013. In addition, Jun He is also a long-standing member of Slaughter and May’s best friend network.
Since the establishment of King & Wood Mallesons in 2012, Jun He and Zhong Lun have both reported increasing enquiries and proposals from foreign firms wanting to establish a working relationship with them.
The merger, if goes ahead, would inevitably change the dynamics of their existing international referral relationships. Conflict of interests matters would naturally defer some existing business partners, but the combined firm’s enhanced strength and coverage in a wider range of practice areas would make it a more attractive ally to work with.
“The rationale behind the merger is to create an arguably the strongest PRC legal services provider in every aspect,” says an insider. “Both firms have established themselves as market leaders, but we are hoping to take the firms to another level through a possible deal.”
Lawyers on the ground have speculated that the King & Wood Mallesons move has triggered many firms to think long and hard about their future strategy and has put tremendous pressure on legacy King & Wood’s closest domestic rivals.
International firms that have worked with either or both firms largely see this as a natural progression of the Chinese market.
“It’s probably an inevitable development as the market matures and becomes more sophisticated. Now the group of leading firms are jostling to get a more dominant position,” says Robert Fenner, London-based corporate partner and China chair of Taylor Wessing. “China is a big market and there needs to be more big and powerful firms.”
Some international lawyers have drawn parallel between what is happening in China now with the UK market in the 1980s, when Clifford Chance was formed through a merger between two London-based firms Clifford Turner and Coward Chance in 1987.
“It’s not that different from when Clifford Chance was created. It’s a sign of a growing up market,” Fenner adds. “Generally, Chinese firms have been growing and getting bigger. Their quality is also getting better. There are plenty of good choices for foreign firms to work with.”
If the combined Jun He and Zhong Lun should take the same route as King & Wood Mallesons, the impact on the global market would be even more ground shifting, although that is deemed unlikely in the short term.
“Most Chinese firms’ primary concerns at this stage remain to be how to best compete in China, as more cities become bigger markets and economies. Building up their domestic network and position is more strategically important,” says a partner familiar with China.
However, on the other hand, if that is the case, it will leave China with fewer large top-tier independent firms and limited referral choices for foreign firms.
Whichever the direction the merger talks go, it will have important repercussions for the market. This space is well worth watching closely.
“Chinese firms have enough challenges already as they are now. They should trying to overcome these challenges rather than becoming even bigger,” says a partner of an international firm in China, who holds a more skeptical view. “My guess is that it’s extremely difficult to pull it off.”
Getting the deal done will obviously be challenging. But when King & Wood was negotiating the deal with Australia’s Mallesons Stephen Jaques in 2011, there was also no shortage of doubters and negative voices.
Chinese firms’ ability and determination to get things done should not be underestimated.