This article sits in the news leader slot of our latest issue, but when considering Allen & Overy (A&O) and its epic courtship of O’Melveny & Myers, the defining factor has been the absence of news. Since it emerged last spring that A&O was in merger talks with the Los Angeles-bred firm, there have been bare scraps of information, alongside alternating whispers the deal was/was not on. Finally the resolution came on 2 September, with the pair announcing the end of the talks with the traditional noises about mutual respect.
The reason for the long delay was as much the scale and ambition of the merger as the inevitable complications of bringing 700 partners on side. The looming spectre of a messy ‘no-deal’ Brexit and fresh falls in sterling further strained a delicate situation, probably tipping it over the edge. Not only were the firms aiming for full financial integration upfront – a move never attempted on the scale of a £2.4bn transatlantic union – the aim was to do an immediate merging of governance, leadership and remuneration. Forget vereins and grace periods kicking tricky issues down the road. That all-in approach raised the stakes and logistic issues enormously. Not least it would have involved substantive reform of A&O’s remuneration structure to make it more compatible with a US firm.
A&O had already gone further than its Magic Circle peers in paying top performers above its core lockstep, with above-plateau deals and ‘eagle points’ bonuses. It appears more than 20 partners are already in line for such rewards. Yet the view is that is not enough to ensure A&O remains competitive against key US rivals. By the last week of August, the talks were faltering but still on.
Not that the talks’ end will be seen as a disaster. The question for many is why the best-managed of the City’s Magic Circle globalists was going through all this hassle for what looked like a faded US force. There can be no doubt O’Melveny has suffered more than its share of reverses. Once one of the West Coast’s strongest firms, the 700-lawyer practice has failed to keep pace with natural peers like Gibson, Dunn & Crutcher, let alone firms like Latham & Watkins that once toiled in its shadow. O’Melveny was the 19th largest law firm globally in revenue terms in 2007 – this year it was down to 65th place, even though it posted one of its strongest years for a decade with revenues up 8% to $800.6m. Despite that strong year, O’Melveny has been the single worst-performing practice in revenue terms in the Global 100 over the last ten years.
These are the only kind of deals that will ever be on the table for the City elite and on current trends even this window will soon shut.
The other obvious critique is that even a step as bold as merging with O’Melveny would hardly have finished the job stateside for A&O. O’Melveny still has a West Coast-dominated practice and is disputes-heavy even by the standards of US firms. The legacy of its unhappy 2002 takeover of New York private equity boutique O’Sullivan Graev & Karabell, which leaked a string of corporate partners to East Coast rivals, meant a deal would have brought scant benefits in key New York deal markets.
The case for the union was still considerable. With a history stretching back to 1885, O’Melveny has prestige and clout, particularly in the huge California market, an economy not only larger than the UK but one that has risen in global prominence over the last 20 years along with the Golden State’s booming entertainment and tech leaders. And while critics saw a lack of practice crossover in litigation – A&O remains a second-tier disputes player generating only 19% of its income from litigation – for the deal’s supporters, access to the Americas’ vast disputes market was core to the appeal.
With well over half of its revenue from contentious work, O’Melveny remains a hugely potent name in litigation, a status underlined by prestigious mandates such as its role as lead counsel for Johnson & Johnson on more than 1,600 pending opioids lawsuits. Combined, the pair would have boasted 900 litigators with a practice exceeding £700m globally.
And while O’Melveny has lost much transactional ground with peers, having squandered an early stronghold in private equity, it has strong corporate connections in the media and entertainment industries, not to mention a respectable showing in projects. As important given the cultural challenges of such deals, O’Melveny is famed for having a cohesive partnership and strong associate morale.
Even having faced plenty of reverses, critics should remember that O’Melveny’s margins and revenue per lawyer remain far beyond Magic Circle levels. Those highlighting O’Melveny’s diminished stature must accept that the only quality US firm that will consider a transatlantic union with a City partner is one that has suffered considerable problems. These are the only kind of deals that will ever be on the table for the City elite and on current trends, with Brexit set to pile further pressure on sterling, the City’s stature and the global currency of English law, even this window will soon shut. The end of the talks only makes these questions more pressing.
A&O’s assessment that the gravity of the global legal market is shifting towards the US as American regulators and creditors become ever-more dominant worldwide remains inarguable. The vast US market requires the kind of decisive response that so far only A&O of its London peers has considered.
The end of the deal leaves A&O pledging to re-double its efforts in terms of lateral recruitment in the US while keeping a weather eye for potential other deals. But it seems doubtful that management, having been exhausted by this deal, not to mention striving to bring around the 15-plus corporate partners in the City who led the opposition, will have the appetite to try again soon.
So if A&O is serious about its determination to secure its US breakthrough, heavy investment and further reform of its remuneration is the price. A&O now also has the tricky job of keeping its US practice, which has supported the union, onside. The failure of best hope for a high-end US/UK marriage is a highly significant moment for the Magic Circle. They had better take the right lesson from it.