Law firm merger activity picks up
Law firm merger activity picked up after a sluggish first quarter in part due to a renewed increase in transatlantic marriages between large domestic firms and those headquartered in England.
Among the 10 mergers reported last quarter by legal consultancy Hildebrandt Baker Robbins -- one more than during that time frame last year -- was the union of Washington stalwart Hogan & Hartson and London-based Lovells to form Hogan Lovells, which the report characterized as the second-largest since Hildebrandt began tracking quarterly merger activity.
A second cross-border marriage of equals, between Chicago-based Sonnenschein Nath & Rosenthal and London's Denton Wilde Sapte, was announced last quarter but is not included in that figure because the merger will not be completed until later in the year.
Industry analysts say that after a period of caution, U.S. firms are once again looking for markets in which to expand -- and the obvious one for some is London, where many firms specialize in the kind of corporate transaction work that has long been the bread and butter of New York.
"We're seeing more inquiries with regard to possible transatlantic expansion by merger with United Kingdom firms," said Altman Weil strategist Ward Bower. "In some cases, it's just a matter of profiling what firms would meet the criteria they want."
Mayer Brown, a Chicago-origin firm with more than 1,500 attorneys in the United States, Europe, South America and Asia, confirmed last week that it was seeking to expand in Britain less than a decade after absorbing the London office of Rowe & Maw in 2002. Ultimately, the firm said it called off discussions with England's Simmons & Simmons, but the talks stoked speculation about what other firms may be ready to travel across the pond.
Some firms have found it difficult to expand on their own, making mergers a more attractive means of scaling up, analysts said.
"The firms that have grown more organically just haven't been able to get that step up," said Lisa R. Smith, the head of Hildebrandt's law firm strategy group. "If you have 100 lawyers, it's hard to compete with firms that have 1,000 lawyers in London."
One of the first big pairings came in 2000 when English firm Clifford Chance absorbed Wall Street's Roger & Wells. Though the union created what was then the largest law firm in the world, which also consistently dominated revenue-based rankings, the process gave similarly situated firms pause.
"I think that particular merger wasn't seen to go as well as expected, so people took that as a lesson and were risk-adverse," Smith said.
Law firms in the United States and those in England have traditionally relied on different fiscal years, accounting systems, management structures and compensation practices, so there have always been obstacles to overcome before two can be melded into one entity.
"Despite the fact we speak the same language, there are some differences," Bower said.
Now, a decade after Clifford Chance, an increased openness to inventive accounting structures that have proved successful and the reality check provided by the recession have prompted firms to give transatlantic mergers another look.
Many successful unions have been completed using an umbrella accounting structure that allows firms to merge operations while still keeping separate books. London's DLA used such a structure when it merged with Piper Rudnick Gray Cary in 2005. Sonnenschein said the combined firm of SNR Denton will operate as a Swiss Verein, the structure favored by global accounting firms.
"Firms have realized that you can provide integrated services without necessarily having to completely integrate the books of the firms," Smith said. "I think that's maybe been eye-opening."
Despite the uptick in activity, the number of mergers so far this year still lags far behind 2009, when 33 were finalized during the typically busy first quarter compared with only four in 2010.
Smith said she expects the pace to pick up as smaller and mid-size firms pursue domestic mergers, larger firms establish offices in Asia and the true behemoths pursue unions with their English counterparts.
"I think the largest firms kind of feel like their domestic platform is pretty well filled out, there may be some holes but they tend to be looking at laterals to fill those holes and are focused more on international growth," Smith said. "And it's hard to be a global firm without a presence in London and New York."