Legal Business Blogs

Comment: The cost of culture – HSF finds mega-mergers always come at a price

This month’s cover feature on Herbert Smith Freehills (HSF) looks in hindsight like the end of an informal trilogy on storied London firms agreeing high-stakes mergers, following earlier pieces on Hogan Lovells and Ashurst.

Taken together, patterns and contrasts emerge. The legacy Herbert Smith, Lovells and Ashurst were all wrestling with similar cultural and strategic issues ahead of their unions as they struggled to compete against larger and more driven rivals.

But in many ways the existential question about what kind of firm they wanted to be looks to be the most fundamental point: all three London firms had partnerships not ready to be as competitive and goal-orientated as the Magic Circle – that was probably a bigger issue holding them back than profits per equity partner or lack of global footprint.

All three turned to mergers as much to reboot their culture and find a renewed sense of purpose as to extend networks and fortify balance sheets. All three have found the experience wrenching. These processes may ultimately be positive but none of the three are yet anywhere near concluding that journey.

But what of HSF itself? The deal is so finely balanced, it remains hard to call. Neither Lovells nor Ashurst had a status quo worth preserving but Herbert Smith could have credibly continued alone. The firm had lost its nerve due to the combination of some poor management, ducked decisions and a torrid post-Lehman period for its corporate practice. At this weakened moment, it rushed into a union.

The reasoning was understandable – if a City player was going to tie up with a big Australian partner, Freehills was the one and the superb practice fit and proactive commercialism of its suitor were very considerable assets. On paper, HSF looks far more potent than Ashurst or King & Wood Mallesons and is potentially a market leader in Asia.

But it’s not that simple. While Herbert Smith has not always made as much of its unmatched disputes pedigree as it should have over the last 15 years, the objections of its litigators to the Freehills deal carry some weight.

Herbert Smith’s organic growth was robust not only in the post-2008 period but stretching back even further. In 2000 the firm earned £167m. By 2012 – even after a troubled 2011/12 – that figure was £480m. It’s striking that the firm was so unsettled despite outpacing peers by a considerable margin on income growth.

There were profitability and leadership issues so there is a strong argument that the firm should have put its house in order before a major deal, especially when the alternative was committing to a suitor that would drag down its profitability.

Still, such issues are largely academic now – HSF must look forward. It has weathered a run of notable departures with considerable resilience and for now appears to have settled its business and morale. Its international push in the US and Germany could be going a lot worse and its deal team is regaining momentum, alongside a continued run of respectable form from its disputes practice.

The trade off must surely now be that the Freehills figures who are increasingly shaping the firm’s future contribute their energy and ambition in return for HSF shifting focus away from a slowing Australia market and further back towards the global stage. Otherwise, HSF will be wrestling with the cultural fall-out of this union for a long, long time.

Subscribers can click here to read ‘Consumed’, the full-length cover feature on Herbert Smith Freehills’ post-merger fortunes

See ‘After Charlie’s War‘ for earlier coverage of Ashurst and ‘The Daily Grind‘ for Hogan Lovells