Allen & Overy has been breaking into the U.S. legal market for decades. Partners at the London firm joined a hastily called conference call on Sunday to learn that it had finally struck a transformative deal — a $3.4 billion merger with New York law firm Shearman & Sterling.
The tie-up, secretly brokered by top executives from both companies over the course of weeks, is set to be one of the largest in the industry. If voted on by the partners, it would create a legal juggernaut with nearly 4,000 lawyers around the world, marking the first major transatlantic attempt by a British “magic circle” firm in more than 20 years.
“It’s a game-changing move,” said David Wilkins, a professor at Harvard Law School. However, he cautions, “It’s not going to be easy.” . . post-merger integration is really hard. Frankly, there is almost no such thing as a merger of equals, although they always charge that way. “
The Anglo-American legal alliance is notoriously contentious, and the complexities of bringing together competing cultures and compensation systems often lead partners to vote with their feet. The last major attempt was Clifford Chance’s merger with New York’s Rogers and Wells in 2000, which led to a series of exits and culture clashes and became a cautionary tale.
The tie-up with Shearman would be the culmination of a two-year struggle to expand in the more lucrative US market after merger talks with Anglo-US rival Hogan Lovells collapsed this year, with Belgian-born senior partner Wim de Jong putting leadership on the board. first place.
Jomati adviser Tony Williams, who was managing partner at Clifford Chance at the time of the Rogers & Wells deal, said there was “pressure to do something” at Sherman’s leadership At the time, A&O’s move was “opportunistic and strategic”.
The situation allowed for a rare role reversal, he said, as “a British company fights back” after a decade of attacks in its home market by an American rival.
For Shearman, the deal could end a difficult period that also saw it undergo a brutal restructuring.
The US company, which has 1,350 employees remaining after losing partners in recent months, will gain firepower from a much larger business in A&O. While both sides describe the deal as a merger, Shearman pales in comparison to A&O, which employs 5,800 people globally and generates £1.9bn in revenue for the year to April 2022, compared with the US company’s 2022 calendar year. Revenue was $907 million.
“A&O is in the driver’s seat,” says a former partner at the London-based firm. “That can be a challenge.”
Sherman’s recent woes have seen average profit per equity partner slip to levels closer to A&O’s, which was close to £2m last year.
While partner compensation is one of the thorniest issues of any integration because of disputes over how to compensate star lawyers, A&O and Shearman say weaving the new system together will not be difficult. The combined company is expected to adopt a so-called modified synchronous model, with compensation including elements based on performance and on-time service. A&O adjusted its compensation system in 2020 to allow it to pay more to its top partners in the US.
Fearful of accusations that the leak had derailed the deal with Hogan Lovells, Shearman and A&O had been in talks with dozens of top lawyers until Sunday morning, hours before the public announcement, informing other partners.
After abandoning its merger with Los Angeles firm O’Melveny & Myers in 2019 after failing to agree on a valuation, A&O has been going it alone — opening offices in Boston, San Francisco, Los Angeles and Silicon Valley over the past three years and adding Since 2020, there have been nearly 50 partners from rival firms in the US. The investment has generated revenue growth, but the company has struggled to retain staff, with lawyers poached by deep-pocketed domestic rivals.
“For 20 years, A&O has been talking about (the US merger),” said a former senior partner. “We’ve kissed a lot of frogs . . . There’s been a lot of work done over the years, looking at every possible option from the inside out and upside down. This is probably the most amazing deal A&O has ever done.”
Manhattan-based Shearman, once one of America’s most influential corporate advisers, was one of the first major American law firms to expand in Europe, opening in Paris in 1963 and London in 1972.
But it has shrunk in recent years as it endured the costs and management missteps of rapidly expanding its network, hampering its ability to compete with U.S. rivals on pay and prompting the exit of a slew of partners. Its number of lawyers was 727 last year, down from a peak of 1,125 in 2001, according to The American Lawyer, a trade publication.
Under former senior partner David Beveridge, the firm has also undergone a sometimes ruthless transformation aimed at refocusing on more profitable lines of business, including private equity and higher-margin geographies such as the United States. Beveridge was replaced by Adam Harkey last month as part of an accelerated handover after talks at Hogan Lovells collapsed.
To scale, Shearman has been offering hefty security deposits for new hires, a move that has sparked internal tensions, according to several former partners. The policy helped shrink the profit pool for equity partners to $110 million in the fiscal year ended June, according to two former partners. According to The American Lawyer, the firm’s equity partners earned an average of $2.48 million each in calendar year 2022.
Amid the chaos, key personnel have jumped ship, including a group of London-based finance lawyers led by deal star Korey Fevzi and Shearman’s entire Munich office. Over the past five years, more than 130 partners have left the firm, about 20 of whom have retired, while the firm has hired nearly 90 partners.
The head of a rival firm in New York told the Financial Times last month that “everyone in the world has interviewed every single Shearman partner by now”. A principal at another global law firm said it had been “inundated” with Shearman’s resume.
Shearman has shown signs of recovery in recent months, working on deals including CVS Health’s $10.6 billion acquisition of Oak Street Health and the $12.5 billion sale of SAP’s Qualtrics to Silver Lake and others. The company has also been hired by U.S. airline JetBlue to take on the Justice Department in an upcoming antitrust battle over its proposed merger with rival Spirit Airlines.
“Shearman is a strong brand in a weak position,” says a former A&O partner. “The strong brands in Good Place have no interest in merging with British companies. You only get them when it’s fixed uppers.”
Shearman’s current partner said the deal was “a very good move” for the US company. “It’s a great deal for us . . . It gives us the scale to get out there and build more.”
In announcing the proposed merger, de Jonghe praised the “complementary cultures” of the two groups. People who have worked at both companies say that Sherman is more “savage” than the relatively urbane Magic Circle. But others close to the two firms say their lawyers get along well and have collaborated on many assignments over the years because of their similar strengths in banking and finance.
Williams said the deal ended up being “a really good move.” He added that people might “grit their teeth and say that A&O took some risks in this deal and whether it will settle with the Shearmans”. “But they’re adults.”