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Allen & Overy Still Open to Merger, but Transatlantic Deals Rare

Sept. 6, 2019, 8:47 AM

London-based Allen & Overy still would like a U.S. partner, but its failed talks with O’Melveny & Myers illustrates the difficulty of nailing down transatlantic law firm mergers.

Culture clashes, compensation, and governance issues appear to be stumbling blocks for U.S.—U.K. legal combinations as few have been consummated. A rockier global economy could make any near-term prospects even more challenging.

Powerhouse A&O and O’Melveny formally called it quits last weekend after more than a year of talks despite both “agreeing that there were some compelling synergies.”

Although neither outlined why the talks foundered, the split likely centered on different cultures and compensation schemes, law industry observers said.

Any deal would’ve been less a merger of equals and more an A&O acquisition. A&O is a powerhouse with 2,300 lawyers while Los Angeles-based O’Melveny has about 750.

A&O said building a U.S. presence “remains our highest priority.” It’ll focus more aggressively on lateral and individual team hires for now, and will remain open to “considering opportunities for larger combinations.”

Kent Zimmermann, a law firm consultant with Zeughauser Group, said A&O still offers scale and other strengths in the right merger scenario.

But there’s no escaping that few U.K.-based law firms have finalized mergers with American counterparts.

Lure of U.S. Business

Large U.K. firms without a partner have a harder time establishing a beachhead in the U.S., which has a big population of multinational corporations. Legal rates are also higher in the U.S., which paves the way for larger annual revenues.

Sticking points in past transatlantic merger talks focused on the fraught issue of compensation.

London-based firms largely adhere to the lockstep compensation model, which is still favored by elite American firms like Cravath Swaine & Moore.

Such traditional compensation, which is based on seniority, has fallen out of fashion at most American firms. They now mainly recompense partners based on revenues from client business they generate.

Other tricky financial questions involve capital contributions and their return, and funding retirement schemes. Governance also is a delicate issue. Law firm founders and rainmakers like to have a large say in how firms are run.

Few Successes

Hogan Lovells is one of the few firms built through a transatlantic marriage. Washington-based Hogan & Hartson merged with London-based Lovells in 2010, creating an integrated firm with 47 offices in two dozen countries and 2,800 lawyers.

Bryan Cave Leighton Paisner more recently was formed from a merger of U.S. and U.K. entities. It took around a year to hammer out the full integration.

“Compensation was a huge issue, and comparing lockstep and merit-based compensation is a challenge,” said Therese Pritchard, who negotiated the 2018 merger while she chaired the firm. She then became firm co-chair along with Lisa Mayhew.

“There needs to be a recognition that people who bring in business need to be rewarded,” said Pritchard. “And we also have made the effort to reward teamwork.”

Kirkland & Ellis and other U.S.-based firms have made inroads in London, a global financial hub, by setting up offices that compete with their U.K. counterparts.

A&O and other U.K. firms have established New York offices, stocking their ranks with piecemeal hiring of individual attorneys or lawyer teams.

“The lateral market is extremely competitive,” said Jack Zaremski, president of Hanover Legal Personnel Services, a legal recruiter. “The going rate for an experienced lawyer with a substantial book of business is higher in the U.S. than it is compared to a U.K. firm.

“And many American lawyers do not want to sign up to report to someone across the ocean in London,” he said.

Finding a Fit

The challenge now will be for A&O to find a law firm that is willing to merge and also has legal practice strengths that complement the London firm’s transactional prowess.

“For A&O, a U.S. firm with strengths in sectors such as energy, infrastructure, technology and banking could be ideal choices, especially if they have strong transactional and litigation practices,” said Zeughauser’s Zimmermann.

“There are not a lot of A&O’s out there, and scale and cross border transactional strength is increasingly important in the legal market over time. So, this could be an opportunity for a firm with shared strengths to think about doubling down on them, and increasing its depth, deal lists and resilience, to advance its long-term best interests,” Zimmermann said.

To contact the reporter on this story: Elizabeth Olson in Washington at egolson1@gmail.com

To contact the editors responsible for this story: Rebekah Mintzer at rmintzer@bloomberglaw.com; John Crawley at jcrawley@bloomberglaw.com

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