The weakest link

The rumour mill has been grinding in UK-US merger circles: apparently one managing partner of a UK firm can communicate with his US counterpart only through a designated US intermediary.`And this is one of the mergers that went ahead. Many more have fallen by the wayside, most notably Ashurst Morris Crisp's talks with Latham & Watkins and Bird & Bird's with Orrick Herrington & Sutcliffe, while Clifford Chance aside, none of the magic circle firms are anywhere near.`Failures notwithstanding, US firms have been sniffing around potential London mates for quite some time, and at the same time complaining of a string of polite English folk suggesting the same route. In the wake of Bush's election, however, there is a slight whiff of recession in the air, enhanced by the blip in the over-inflated technology markets. As the short burst of US-UK merger fever calms down, many lawyers must now be reflecting on whether it is, in fact, a good idea after all.`Meanwhile, lateral hires have been unremitting, including Allen & Overy's (A&O) hire of Cravath Swaine & Moore supremo Dan Cunningham to head its New York securitisation practice, and Clifford Chance's head of competition Chris Bright's move to Shearman & Sterling (The Lawyer, 23 April).`With a New York office staffed by 50 fee-earners, including 13 partners working primarily on M&A, securitisation, derivatives, insolvency and business reconstruction work, A&O senior partner Guy Beringer claims: “I think it's often easier to integrate a small but regular number of lateral hires into a firm rather than a big bang merger with 300 people. Some firms may have decided that this is the way forward, rather than larger mergers, at this time.” A&O aims to continue to increase its US capability through the cherry-picking of significant lateral hires. “It would appear that both the market and our clients are impressed when a US hard-hitter is happy to go to a firm like A&O,” he adds. “They also tell us that as long as the lawyers are local to the client, it doesn't matter whether they're in Wall Street, London or Paris.”`It seems amazing that a US big-hitter should practically halve their salary while remaining in the same location working for a UK firm. Cunningham, for example, is understood to be facing a drop in salary from £2m to £1m. Beringer points out: “In our view, it's the interesting, international work here opposed to the predominantly domestic work that they do over there that brings them over. When you reach a certain seniority, the kick doesn't come from money any more. The kick comes from the sort of work they're involved in.” Or, as one commentator succinctly puts it: “These guys could put their feet up and never work again if they wanted.”`It is highly unlikely, then, that it is the loot that attracts US lawyers, be it a merger or lateral hire situation. So why should US firms be hot-footing it to join with UK enterprises when Wall Street has apparently cornered the market in lucrative investment banker clients?`Mark Abell, practice development partner at Field Fisher Waterhouse, claims that last year many US firms were anxiously eyeing the activities of fellow firms with European capabilities. “Last summer we received flattering but unwanted visits from US firms three times a week,” he recalls. “The view was that if we don't have a meaningful presence in Europe, we'll find the likes of Brobeck Hale and Dorr and Reed Smith stealing away our clients. This was scary for those regional firms without European competency.” From the UK perspective, it became clear last decade that nearly all major M&A activity would require some kind of US advice, which UK firms at that time were often lacking.`Faced with the choice of sending “a man and half a dog” to Europe or casting around for a likely firm to take over, the US firms will generally alight on a certain tier of firm with core skills, including technology and corporate and international finance. “It made perfect sense, but in our experience many of them hadn't thought it through,” recalls Abell. “For some, it was just a hunch that this was what they should do; for others, it was the clients' need, but they hadn't thought through the cultural and managerial issues.”`One of the key stumbling blocks for mergers is accounting systems. Steven Fogel, senior partner at Dechert, the merged entity of Titmuss Sainer Dechert and Dechert Price & Rhoads, which became one last July, explains that while US firms run on a cash system, whereby profits are entered onto the books only once payment is received, the UK firms run on an accrual system, whereby profits are entered as soon as bills are sent out, with the result that when the books of a UK and US firm are placed side by side, things can look rather different. And while in the UK firms usually remunerate partners on a lockstep system, whereby they automatically attain a certain level of equity and therefore payment at certain stages in their career progression, US firms reward partners for other factors, such as profitability and leadership.`On top of economics, there is still the culture hurdle to surmount. Will Britons and Americans actually like each other enough to present a united front? “Yes, there are real differences,” says Fogel. “But quite often when you get beneath the skin of a culture, you find that the people are basically pretty similar.” This is not a view shared by all. The huge disparity in hours appears to be difficult for UK lawyers. The disparity, which he says can sometimes be as much as 1,000 hours more a year, can be explained, according to Fogel, by the fact that US peers account for every little bit of time they spend working, down to “thinking about work in the bath”. The high expectations of US assistants, who often start on more than twice the salary of their UK counterparts and command their own large offices at a specified and early stage in their career, can also be difficult to overcome.`And even with all these cultural and economic differences aside, the sheer cost of merging can be prohibitive. Having researched all the possibilities, Field Fisher was advised that the cost of a transatlantic merger would amount to a minimum of three months worth of turnover for both sides. “If the profit margin of a law firm is 25-30 per cent, this effectively wipes out the profit,” says Abell.`So why not keep the status quo and simply stick to lateral hires, combining discrete practice areas and avoiding the headache of the big bang merger? Fogel points out: “You can combine practice areas, but what happens after a time is that you find the decisions you make are not harnessed to each other. In recruiting, for example, the criteria on both sides of the Atlantic are not the same. And profit – whose profit is it?” This is particularly true of large corporate transactions that could involve lots of different departments around the firms – tax, due diligence, property and so on. “If you're becoming a very successful organisation, it becomes very compelling to [go down the merger route]. Firms within a firm can be a dangerous thing,” warns Abell.`With the merger in place, what happens to the two sides of the equation? Surely one side must be subsumed in the other, however hard each side would like to hold on to its identity. “Management is a big question. We wouldn't give up our independence,” claims Abell. “There has to be a dominant side to any deal, it's a fact of commercial life.” Geoffrey Green, senior partner at Ashursts, agrees. “There's the question of, is someone going to take over someone else, or is that someone willing to be taken over?” he says. “Then there's this compensation culture that tends towards the short-term view on the US side, whereas we tend toward longer-term investment.” While Rogers & Wells moved over to UK accounting systems in its link with Clifford Chance last year, in Fogel's case it was the other way round, which he says has led to “some financial consequences that will take some time to sort their way through”.`With two such diverse ways of doing things, it would seem that one side certainly needs to concede in order to smooth the fairway.`Dismissing the notion that his firm was in any way pushed into the merger, Fogel says: “We were free to direct our own strategy; we got together with them years ago. When we'd negotiated for a while it became clear that we had to do it, and that was good because it drove the deal along.” He concedes that the deal looks like the UK side is being swallowed up, primarily by virtue of the disparate sizes of the firms (roughly a one-third:two-thirds ratio). “I wouldn't regard our London offices as having been swallowed up,” he claims, adding that he is on Dechert's 13-strong elected international policy committee, which includes chairman Bart Winokur. The board includes two Europeans and the rest are Americans.`Despite the very public nature of Ashursts' failed merger talks with Lathams, Green claims the firm has not suffered at all. Indeed, contrary to prevalent thinking on the dangers of publicly-known merger discussions, the firm announced a raise in profits of 24 per cent in 2000, even higher than the 1999 raise. Recalling the merger, Green says: “It wasn't something we needed to do, but there are parts of our business where a US capability is an important brick in the wall.” While he says the firm is not currently in talks, Green does not dismiss the possibility in the future. “We're always looking at all the options with regard to the US, be it hiring or working with different groups of law firms. We're not going out looking for large-scale mergers for the sake of it, but if the right one came along, we'd consider it.”`Perhaps Green has become as sceptical about US advances as one commentator from another firm that is prey to attack, who opined: “The US law firms are incredibly naive. They come over and do these presentations and give this incredibly favourable impression, and I can understand why you'd believe what they say the first couple of times. But after that, you just think it looks very dodgy.” Advising anyone contemplating being poached by a US firm or merging, he says: “There's no mercy in the US legal profession. As soon as the going gets tough, UK partners will be dropped like hot bricks.”`With global economic commentators turning to the East for the next world superpower, perhaps law firms should be doing the same. Now that China is in the World Trade Organisation it can only grow internationally, and Shanghai is changing apace. However, Abell points out: “The US has always taken more of an interest in China than the UK. It has a Pacific rim coast and lots of ethnic Asians fully integrated into the legal population in a way that lawyers here aren't. It may be that firms will start to see Asia as an area that they should be concentrating on.” n