Merger talks between U.S. firm Hunton & Williams and U.K.'s Addleshaw Goddard have been held up because of... Brexit?
That’s the news out of London, according to Addleshaw partners speaking with the U.K. publication Legal Week .
As is usually the case when firm partners speak about merger talks winding down, it’s a sensitive issue and one that’s received with a fair degree of skepticism among legal consultants, recruiters and journalists.
This was also the case when Pillsbury Winthrop Shaw Pittman and Orrick Herrington & Sutcliffe broke off talks in 2013, citing insurmountable client conflicts .Some speculated at the time, that the real reason was financial differences between the firms, while leaders maintained that it was indeed conflicts.
What intrigued us about Hunton’s possible deal with Addleshaw, though, is that it’s apparently the first time Brexit has been publicly cited as a factor in a specific mega law firm merger.
Wally Martinez, managing partner of Hunton & Williams, and John Joyce, managing partner of Addleshaw Goddard, did not respond to requests for comment.
We did, however, speak with a U.K.-based law firm consultant who broke down how a possible law firm merger could be affected by Brexit. Richard Tromans, the consultant, declined to discuss the Hunton and Addleshaw matter specifically. He is also not involved in the deal.
Big Law Business: How could Brexit affect law firm merger talks?
Tromans: The key thing is that mergers almost always are not just based on the immediate business case and cultural fit, but the expectation that the combination will be able to do better in the future. However, the future is very unclear which rather undermines the prospectus. How do you write a prospectus of a market that no one knows the outcome of? It’s rather tricky.
Big Law Business: So you think it’s harder to do a deal in this environment?
Tromans: Interestingly, no. It was harder last year because most firms in London and the lawyers were working around the clock and were doing very well. And in those circumstances, many firms would not consider a merger because they are too busy and too focused. However, when things slow down a little, and they are shaken, it can make some firms re-appraise their strategic option. In fact, as long as they can quite openly accept the degree of future uncertainty in the U.K. market, then there may actually be more opportunity now for a U.K., U.S. deal, because of the changed conditions.
I track all the mergers in the U.K., and merger activity over the past 12 months have decreased significantly compared to the past three or four years. The predmoninant reason is that law firms were doing so much better than previously.
Big Law Business: But you see that changing now.
Tromans: It could change. When the market slows and managing teams have a little more time on their hands, then they may be more receptive. Also, it’s a basic rule of business if one of your core markets slows down and may remain slow for a significant period, it’s sensible to look at diversifying and trying to generate revenue from other markets. So, we may not see big mergers of equals but it could lead to that. We may see firms making strategic acquisitions in other markets which is exactly what happened in the 2008 financial crisis.
Big Law Business: Which firms do you see as being prime targets in this environment?
Tromans: Some of the small to medium size firms who have a very strong focus on commercial property and property in general are going to have a bumpy ride for the next few months I think is probably certain. [Tromans declined to comment on specific firm names]
A number of banks and financial institutions immediately following the Brexit result questioned whether they needed to move part of their business into continental Europe to continue to access what they call passporting rights, or their ability to sell financial instruments across the European Union. And that really reversed a lot of the positive momentum that had existed in the London market for the last 18 months. Things had been very good up until winter 2016. Law firms had been struggling to keep up with all the hiring. There had been huge demand for young property lawyers and young corporate lawyers, which contributed to the quite large salary increases which we saw in London. I think it’s self evident that there was a positive market and self evidently there has been a slowing. A lot of law firms were in the right shape for a very busy market and couldn’t adapt that quickly to a slowdown, even though we are not in a recession in the U.K.
Big Law Business: But you think this has sort of created a distressed acquisition type of environment for law firms?
Tromans: I wouldn’t say distressed. Not yet. Activity has not dropped to the point that any law firm is particularly distressed. Things have slowed enough for management teams of law firms in London to entertain the idea or to think about the idea of merging with a broad U.S. firm, or perhaps see it as their best strategic path to keep growing.
The American partners who don’t know the U.K. market very well might just think, ‘Well, do I want to do this? The English guys say everything is fine but I don’t know what’s going on and nobody is making us do this, so let’s not do it now.’
I don’t think we are going to see no deals. But they will be doing it with eyes fully open.