Allen & Overy’s planned merger with Shearman & Sterling would blow away the UK-founded firm’s recent stateside ambitions while also posing the tricky task of transatlantic integration.
Allen & Overy has already doubled its US partner count to 100 in roughly two years. More than half of its 10% firmwide revenue growth last year came from the US. The firm was plotting further growth, with ambitions to add 50 more US partners after it opened offices in key markets including Boston, Silicon Valley, and Los Angeles.
Its proposed merger with Shearman, a 700-lawyer New York firm known for a major M&A brand would, render that strategy an afterthought. The deal would give Allen & Overy the US scale it has sought for years, including through unsuccessful merger talks with O’Melveny & Myers.
“A&O made it very clear after the failed O’Melveny merger that they’d continue to look at opportunities in the US and that they wanted to double or triple the size of their US partnership in a few years, and this merger does that in one fell swoop,” said London-based Adam Brown, co-chief executive officer of legal search firm SSQ.
It would also pose significant hurdles: melding business models, partners and clients from firms with a combined 3,900 lawyers and $3.4 billion in revenue.
Both firms, whose partners must approve the deal before it is finalized, have seen advanced merger discussions fall apart before. For Shearman, a merger provides stability following a string of departures and access to a new a global client base.
“They found Shearman at the right place and the right time, which should hopefully make this merger easier to execute,” Brown said.
Allen & Overy did not immediately respond to a request for comment.
Talking Tie Up
Allen & Overy engaged in talks with O’Melveny & Myers for more than a year before the firms walked away from a deal in mid-2019.
It was seen at the time as emblematic of the challenges UK firms faced seeking to merge with US firms. UK firms traditionally pay partners based on seniority, while US firms more often compensate partners on merit or the business they generate.
Another challenge is finding a merger partner with similar profitability. Allen & Overy and Shearman have seen their profits per equity partner even out in recent years, with Allen & Overy partners earning roughly $2.4 million on average last year, compared to more than $3 million at Shearman.
Two other common challenges for mergers between US and UK firms are cultural misalignment and practice group or client differences, said Tony Williams, a former managing partner of Clifford Chance.
“These issues seem to be well-aligned on the A&O Shearman deal,” Williams said. “However in most cases the lack of alignment causes talks to break down and, hence, large scale US/UK mergers of law firms are relatively rare.”
Transatlantic mergers have also become more difficult since US law firms have enjoyed what Williams called a “golden decade” of major growth in revenue and profitability compared to UK firms. That’s resulted in relatively few high quality US firms willing to contemplate a major merger with a UK-based firm, Williams said.
More recently, Shearman and Hogan Lovells in March called off merger talks, with Shearman saying a combination was “not in the best interests of either firm.” The firm has laid off lawyers and suffered a string of departures, including a 20-lawyer group in Munich departing to Morgan, Lewis & Bockius.
Any large law firm merger faces the likelihood of partner departures as the deal is finalized, especially in cities and practice groups where the firms overlap. That could mean some Shearman partners in European cities depart for other firms.
The key asset for Allen & Overy is Shearman’s New York-based M&A practice, which has performed well despite the firm’s leadership upheaval and layoffs.
“This is a US play,” Brown said. “A&O is fully built in Europe, it’s not looking to add more partners in Europe, apart from some key strategic areas. Shearman doesn’t offer that. They offer that brand name with US corporates in the US markets.”
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