I wasn’t going to write about Dacheng/Dentons until I was. When I first heard about the mega tie-up creating the largest law firm in the world – records are made to be broken, as any number of athletes will happily confide in you – I had only two thoughts: First, this will get everyone’s attention; and second, there is no way any rational person can forecast whether it will succeed or fail or muddle through.
But as I kept thinking about it, one undeniable aspect struck me as profoundly odd, and I wondered what could explain it. That’s simply that every other Western firm around seems to be either hedging their bets in China or retreating. Did Dentons know something no one else did?
Now, there are bedrock reasons the Chinese legal market is not like that in the US, the UK, the EU, Australia, or essentially anywhere else, for that matter. Consider the following quick data points. (The Economist’s coverage of the story also makes some strong points.)
In the world’s largest legal market, the US, the total revenue of private law firms is estimated at about $260bn/year. In a $17trn economy, that’s about 1.53% of GDP.
In China, the legal sector is estimated to account for $7.6bn of revenue. On a $9.6trn economy, that’s about 0.078% of GDP.
Meanwhile, the recent trend among Western firms who have planted flags of their own in China is to downsize or even close up shop. With invariate consistency, you hear that lawyers are viewed in China as extremely peripheral to business transactions and deals; that their advice is hardly ever sought and even more rarely welcome; that clients are relentless on demanding discounts and price cuts; and that even after a client has seemingly agreed to a fee, it’s open to renegotiation—in the client’s favor. Certainly on a pure numbers basis, the tie-up looks like a gross mismatch, even allowing for the verein structure Dentons is accustomed to: Its US revenue per lawyer last year was about $505,000 (per The American Lawyer), while Dacheng’s is reported to be about $88,000.
So what was Dentons thinking?
Two clues may help. First, last year outbound ‘exported’ acquisitions from China into other countries exceeded inbound ‘imported’ purchases from elsewhere into China for the first time in many decades, perhaps the first time in modern economic history. And second, Dacheng’s client base is concentrated in secondary cities among mid-market or lesser companies. Top tier Chinese companies know who all the players are in Hong Kong, London, and New York; Dacheng’s typical client may not, and therefore may acquiesce without much question into a referral to a Dentons lawyer abroad.
If I’m half-right, think of Dacheng’s widespread offices and lawyers as being embedded within their local communities but with, all of a sudden, global connections. If the analogy of retail stores connected to a global distribution network comes to mind (it does to me), you aren’t far wrong. Nor is this remotely to downplay the role Dacheng’s network could play. Apple Stores are not ‘secondary’ to Apple, nor are BMW dealerships peripheral to BMW. We could do worse than to learn from other industries.
Let’s not forget Dentons’ recent past, either: From the base of Sonnenschein Nath in Chicago plus Dentons Wilde Sapte in the UK, Dentons grabbed Salans in France and Fraser Miller Casgrain in Canada. What other horizons are left to conquer?
Back to where we came in:
To be sure, this deal grabbed everyone’s attention, but after it seizes your attention you need to ask what it means. I have a theory (above) and you may have your own.
And while the only responsible, dare I say sane, prediction at this point about the odds for its success are along the lines of ‘it’s about three to seven years too soon to tell,’ you can certainly see why it might be viewed from the Dentons’ side as the most plausible, if not the only, way to maintain momentum. As President Lyndon Johnson said somewhat plaintively, but with unerring accuracy, during the depths of his Vietnam War despair, ‘I’m the only President you’ve got.’ Sometimes you go with the only strategy you’ve got.
Bruce MacEwen is the president of Adam Smith, Esq. You can read his blog here.
