Legal Business Blogs

Comment: A&O merger bid risky but US question can’t be delayed forever

‘It is an odd couple. I wouldn’t have put them together,’ is one take from a London peer to the news that Allen & Overy (A&O) has sought a $2.8bn union with O’Melveny & Myers. It is certainly a representative view.

Since news of the talks broke in early April, One Bishops Square has gone uncharacteristically coy. However, it is understood that management indicated earlier this year that it was talking to two, then unnamed, US firms. A&O, of course, has to tread carefully – getting a deal through the demanding audience of its London partnership with O’Melveny or any comparable firm is a big ask.

Despite A&O’s peer-leading run over the last decade, its management – which has been sounding out US firms outside New York for at least six years – will know that many of the beliefs of its London partners about potential US partners do not reflect current market realities.

A US marriage for A&O is walking a tightrope – it needs a US firm strong enough to make it worth the industrial amounts of trouble involved in a union but also with enough problems to actually consider it. That leaves a very small pool of suitors.

Realistically there is not a much better conceivable deal on the horizon for the Magic Circle.

O’Melveny is a strong West Coast player that has had a troubled ten years, while A&O is at the top of its respective pecking order. The US firm was the 19th largest law firm in global revenue terms in 2007 – in 2017 it was down to 59th. It was also the second worst-performing practice for revenue growth in our Global 100 table over the previous five years, with revenues shrinking from $779m in 2012 to $725.4m in 2017.

The practice mix is also hardly glove-like. O’Melveny has historically majored on litigation, West Coast corporates, finance and the entertainment industry – not the neatest fit for A&O but acceptable. But it is the cultural challenges – and some believe O’Melveny’s lingering hopes of a union with Willkie Farr & Gallagher – that seem more problematic.

There is talk of a crunch meeting in June to thrash this out, though as Legal Business went to press there were already mutterings about opposition in A&O mobilising. While senior partner Wim Dejonghe wants to secure a US breakthrough before the end of his term, such an outcome is far from a foregone conclusion.

That said, much of the knee-jerk response against such a marriage in London fails to grasp how much the transatlantic tide has turned against the City elite over the last decade. Realistically there is not a much better conceivable deal on the horizon for the Magic Circle. The already-narrowing window to secure a substantive tie-up is closing. The London elite have at best three years – unless the global economy swings dramatically back in their favour – before the only serious deal they can get is being taken over.

It is hard to see how the Magic Circle can leave the US question hanging ominously over them. Either they take decisive steps to Americanise their businesses organically or accept more compromises to secure a high-risk merger. A&O feels that with nearly 400 US-qualified lawyers it is getting there but its expansion has been expensive and the US market is hardly standing still as London firms dither. But the Magic Circle must make key US decisions soon or risk the market taking the matter out of their hands.