Following the announcement of the proposed A&O Shearman merger, news came that Shearman & Sterling had lost two partners to Ashurst in London, which leads the headline moves – dominated by energy and infrastructure hires – in recent weeks.
London-based Shearman partners Sanja Udovicic and Julia Derrick moved over to Ashurst to expand the firm’s global energy team.
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The proposed merger of A&O and Shearman & Sterling has got the market talking about the biggest news in the legal industry for decades. LB finds commentators sanguine on the deal – but management will have much work garnering partner support this summer ahead of the vote.
‘Allen & Overy and Shearman & Sterling to create the first fully integrated global elite law firm,’ proclaims the 21 May joint statement from the two firms, stating their intent to merge to create Allen Overy Shearman Sterling. Thankfully, the branding gurus also came up with the far snappier (and not quite so ampersand-devoid) A&O Shearman, ‘for short’. The combined firm would boast 3,900 lawyers across 49 offices and roughly $3.4bn in combined revenues.
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Easily the most enjoyable part about analysing the proposed merger of Allen & Overy and Shearman & Sterling has been hearing the reactions of leaders at peer firms around the City on the video featuring senior partners Wim Dejonghe and Adam Hakki on the new A&O Shearman website.
Hot-take reactions from the c-suite around the Square Mile have been telling and often amusing. Says one US firm leader: ‘It’s clearly not a merger, is it? It’s a takeover of Shearman by A&O, isn’t it?’ That is a point echoed by many, and it certainly does feel like A&O’s Dejonghe is in the driving seat of what is undeniably a very slick pitch, even if it does at times look like Hakki is in a hostage situation with Stockholm Syndrome.
Indeed, the fact that the announcement is conveyed in the language of dealmaking is not lost on most, as another US leader remarks: ‘This has been presented to appeal to the partners of both firms because it looks like a proper M&A deal. It’s the same language – “subject to customary closing conditions,” and with a financial adviser and independent legal advisers. That has to be part of the strategy to win the voters over. They are all shareholders.’
Several sources have noted surprise that the deal was announced before the vote this summer, which would require 75% of the partners at both firms to get behind the deal. Clearly, there are dangers in assuming this is a fait accompli and it might be worth the firms lowering that high threshold if they haven’t already, as one London managing partner suspects they have.
That commentator also cynically points to the staggering amount of times Dejonghe and Hakki insist this transaction is all about the clients (you could play a dangerous drinking game for every time they mention ‘clients’) but let’s look at the real motivations behind this deal.
The numbers are compelling enough to make even the most hard-bitten sceptic concede that this merger must happen, for the sake of both firms. The tie-up would see 3,900 lawyers operating across 49 offices and generate around $3.4bn in combined revenues, putting A&O Shearman fourth in the current Global 100 table, between DLA Piper and Baker McKenzie.
However, revenue per lawyer would be $872,000 – less than RPL at A&O and Shearman separately ($1.1m and $1.4m respectively) and over $1m per lawyer less than both Kirkland and Latham and significantly less than many of what might be considered ‘global elite firms.’
But profits are aligned, with PEP at A&O $2.7m, while the average partner at Shearman is taking home around $3m. This means that full financial integration, the thorn in the side of many a law firm merger, will be much easier to pull off, especially as the firms have agreed on a compensation model that moves A&O further away from a pure lockstep, a process that has been in train for about a decade.
Indeed, A&O voted through reforms as recently as 2020 in a bid to increase rewards for star performers even as the assault from US competitors continued to take its toll on London’s big four international firms.
Many commentators point to the strong pedigrees both firms have in their home markets, and this is evident in the data. In the US, A&O Shearman has the potential to enjoy top-tier rankings in The Legal 500 for securities litigation and project finance, and second tier rankings in key areas such as antitrust, disputes, capital markets and tax. However, for M&A (large deals) the firm would only be ranked in the third tier, tier five for restructuring, and would not be ranked at all for private equity.
The UK rankings would be much stronger. Tier one rankings would abound in numerous areas within finance, as well as restructuring, TMT and energy, while tier two rankings would apply to commercial litigation, big-ticket M&A and tax. Crucially, A&O Shearman would also be in the chasing pack for private equity.
You have to hand it to Dejonghe for not allowing his US merger imperative to be thwarted by the whimpering end to the merger talks with O’Melveny & Myers in 2019. If anything, that experience will mean that a lot of the hard yards have already been done to prime the partnership for what, don’t forget, would be only the second US merger for a Magic Circle firm ever (if Clifford Chance’s disaster-strewn takeover of Rogers & Wells 20 years ago really counts).
While one London managing partner damns the combination with faint praise: ‘It would be wrong to write this off as a hopeless or desperate merger,’ they have a point. These two firms have come of age and grown stronger with the battle scars, not least those born by Shearman after its damaging failed merger talks with Hogan Lovells, which prompted a string of high-profile exits in recent months.
As we pointed out when the O’Melveny talks collapsed, the only transatlantic deal that the Magic Circle globalists were ever going to strike was with a firm in decline. Shearman is certainly that, which is the reason it has swallowed its pride to countenance this deal at all.
We have known for some time that, with the insidious creep of thrusting US firms in the City, the term Magic Circle was becoming obsolete. Now it can safely be said that A&O Shearman heralds the death knell of the Magic Circle. It’s extremely difficult to imagine how Clifford Chance, Freshfields or Linklaters can meaningfully respond to this, a deal which would place A&O on the trajectory to becoming the world’s top UK-based law firm.
While there is clearly much to be done in terms of financial due diligence and the ironing out of issues relating to Shearman’s pension liabilities, time will be of the essence. A long courtship never works, so Dejonghe and Hakki would be well advised to work quickly on getting buy-in from rainmakers and locking them in as soon as possible, while not dragging their feet on the vote. Once the stars are aligned, the rest will inevitably fall into place.
A merger of two historic brands does not create a market leader overnight, but it is heartening to see that Dejonghe and Hakki are addressing the problems posed by market forces with the only viable solution. Let’s hope it works this time around.
In what the firms describe as ‘the first fully integrated global elite law firm’ Allen & Overy and Shearman & Sterling today (21 May) announced a planned merger to create a ‘unique global law firm’ named Allen Overy Shearman Sterling – A&O Shearman for short.
In a statement, the firms said: ‘This merger will combine two of the world’s most prestigious law firms, leaders in their respective markets, to create an integrated global elite firm.
‘Together A&O Shearman will have 3,900 lawyers and 800 Partners across 49 offices. Allen & Overy and Shearman & Sterling have 250 years of combined experience and some of the greatest legal talent in the world. A&O Shearman will be the only global firm with US law, English law, and local law capabilities in equal measure. This merger is driven by clients’ needs for a seamless global offering of the highest quality and depth to support them in navigating an increasingly complex legal, regulatory, and geopolitical environment.
‘Allen & Overy and Shearman & Sterling are complementary with distinct market leadership, and between them they have huge strength in the US, UK, and markets all across the globe. This merger will transform their offering to clients: Shearman & Sterling will gain access to a dramatically expanded ‘rest of the world’ offering across practice areas, and Allen & Overy will benefit from increased board-level recognition and expanded access to a corporate client base in the US. The combined firm will be perfectly positioned to capitalise on global macro trends including energy transition, technology, and private capital.’
Wim Dejonghe, senior partner at Allen & Overy, said: ‘This combination of two great firms is such an exciting step for us. Both firms have a history of excellence, and together we think A&O Shearman will be a firm unlike any other in the world. We have listened to our clients and their requests for the highest quality advice to help navigate the demands they face, and to do so in an integrated and globally consistent way. We, A&O Shearman, will do this by accelerating our ability to bring the best of both firms, regardless of geography.
‘Shearman & Sterling is an incredible group of legal minds; a firm built on integrity and excellence, founded like us in a premier global financial capital and with an extraordinary group of longstanding clients. What excites me about this merger is the complementary cultures of our two firms. We have striking similarities across the board, and I believe we are going to be wonderful partners to one another on this journey.’
Adam Hakki, senior partner at Shearman & Sterling, said: ‘Client need for global elite firms has never been greater. They are calling for integrated global legal solutions and advice: merging with Allen & Overy will dramatically accelerate our ability to meet their needs in an increasingly complex environment. Allen & Overy is an outstanding firm whose work we have long admired and thought of as a kindred spirit. We have both always placed great emphasis on attracting and retaining top talent, were early to globalise, and are relentlessly focused on quality, excellence, and collaboration.
‘This is truly a game-changing moment for both firms that will create an unparalleled offering for our clients. It is also a fantastic opportunity for our people to be part of a transformative transaction and an institution of such significance, and we look forward to recruiting even more stellar talent in the coming years.’
Lazard is serving as financial adviser and Simpson Thacher & Bartlett is serving as legal counsel to A&O, while Davis Polk & Wardwell is advising Shearman.
The proposed merger is subject to customary closing conditions, including a vote of the partners of each of the respective firms.
More detail can be found on www.announcingaoss.com, a site set up by the firms.
mark.mcateer@legalbusiness.co.uk
Further analysis to follow in the coming days.
Allen & Overy’s global litigation co-head Karen Seward (pictured) and project finance and infrastructure partner Kent Rowey have been appointed to co-chair US operations.
The pair will succeed US senior partner Tim House, the well-regarded litigator who has led the Magic Circle firm’s US practice since 2017. Seward and Rowey will take on their new roles on 1 May 2023 and will continue their client work alongside leadership responsibilities.
The highly-rated Seward threw her hat in the ring to succeed Andrew Ballheimer as London managing partner in 2020 but was pipped to the post by global head of projects and energy, Gareth Price.
She will bring to the job more than three decades of experience practicing employment law, crisis management and litigation. Having worked out of A&O’s City office for more than 20 years, she recently spent a year in California to support the growth of the firm’s West Coast offering.
Seward discussed with Legal Business the challenges, strategies and what she hopes to achieve with the mandate: ‘There is a lot to do and it is going to require a level of personal resilience to achieve. As you build and recruit at the US end of a global firm you want to make sure to create a great experience so that people choose to join us, rather than a US-focused firm. You have to unite diverse cultures across global boundaries, especially now that clients increasingly want global solutions.
‘You also need to focus on kindness, empathy and getting people together in a positive way. Integration of laterals is the key to success – they need to join up global products and work together with the partners who are already there. Making this successful is going to be a big challenge and I will continue to be heavily involved in the recruitment side of things.’
Seward concluded: ‘One of my priorities is engaging with the amazing talent that is available to the firm that want leadership around them to engage their abilities. Leadership is not a position; it is a choice to live up to your values, and the engagement part of leadership is becoming increasingly important.’
Meanwhile, former Freshfields attorney Rowey has been a member of A&O’s projects, energy, natural resources and infrastructure practice since 2012, based in both the Los Angeles and New York offices. Rowey was a driving force behind establishing the Los Angeles office and its 19-strong project finance and renewables team in 2021.
The news of the pair’s appointment follows a significant push to expand A&O’s US offering, which saw the opening of new offices in Silicon Valley, Boston and San Francisco with the recruitment of laterals from competitors White & Case and Goodwin over the past two years. These new offices are in addition to those already established in New York and Washington DC.
For more on Karen Seward and what makes her tick, read Legal Business’ 2022 Life during Law profile
I grew up in a shipbuilding town in the north. Barrow-in-Furness.
Bill Bryson described it as ‘the very worst town in England’. It brought with it a sense of community back in the day. I’m working class and I kind of bring my middle-class self to work.
My mother is only 18 years older than me. My dad worked in the shipyards. He was frequently on strike for months at a time. I remember one summer my mother, who was a lab technician and worked in a school, went to work in the fish and chip shop at the end of the street so that we could have dinner. I grew up in that kind of cauldron of crypto communism. I was disrespectful of authority for authority’s sake.
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Allen & Overy (A&O) has set an early Magic Circle benchmark, today unveiling a robust 10% uptick in global revenues from £1.77bn to £1.94bn.
Growth was broadly matched in terms of profit before tax, which was up 9% from £822m to £900m. This translated to a milder 3% jump in profit per equity partner (PEP) from £1.9m to £1.95m, but the figures are cast in a favourable light given significant US investment.
According to the firm, over half of its revenue growth for the year came from the US. A&O added an eye-catching 27 partners across the jurisdiction last year, 24 of which via lateral recruitment, and opened new offices in Silicon Valley, San Francisco and Boston. In a statement, the firm said the new offices had ‘performed beyond expectations’.
The growth will fuel A&O’s belief that a slow and steady stateside approach, making surgical lateral hires in key practices such as tech, life sciences, and private capital, is a valid alternative to pursuing a high-profile combination. Notably, merger discussions with Los Angeles-bred O’Melveny and Myers collapsed in 2019.
Gareth Price, A&O’s global managing partner (pictured), told Legal Business: ‘This is a good performance that really validates our US strategy, which has started to bear fruit. When the talks with O’Melveny were called off, we said at the time that we would keep all options on the table when it came to the US, and we still hold that view.
‘We wouldn’t pretend that the way we do it is the only way, or even the best way. It’s just the way that works for us at the moment. I’m sure there are peer firms that look at our investment in the US and think “well they won’t be able to do a merger now”, but the 50% revenue growth is evidence that the additions have settled in well and that client demand is strong.’
A&O also pointed to ‘strong financial performance’ across its European network as well as its UK heartland. This neatly intertwined with the firm’s stated ambitions in private capital on a mandate advising Bridgepoint on the sale of Element to Temasek, with A&O teams from across Europe, UK and the US offering M&A, finance, antitrust and IP advice.
The upbeat results contrast with the firm’s frugality displayed at the end of last month, when it announced it would be freezing its newly qualified (NQ) solicitor salaries at £107,500. Herbert Smith Freehills quickly took advantage, announcing a bold 14% boost in its NQ rates from £105,000 to £120,000.
With the rest of the Magic Circle yet to reveal financials or stick or twist on their NQ remuneration, A&O appears to have used its first mover’s advantage to make a wider point. Today’s more than respectable results suggest a decision made out of principle rather than necessity.
Price takes a different view however: ‘You need to look at the financial year and remember it’s not all even – we started to see a softening of the market towards the end of the year. These salary decisions are made by looking forwards, not backwards.
‘It isn’t born purely out of principle – we aren’t trying to be the Bank of England!’
In a surprise twist in the Magic Circle pay war saga, Allen & Overy (A&O) has frozen its associate salaries citing a ‘more challenging business environment.’
The firm typically reviews pay in the summer, but A&O has decided this year to pre-empt any salary-increasing brinksmanship and freeze its rates.
A firm spokesperson said: ‘After careful consideration and consultation we have decided not to increase the London NQ salary at this time. It was last increased in November 2021, to £107,500. This is a prudent decision based on a number of factors, including the more challenging business environment. We will keep the situation under review.’
In November, A&O matched Linklaters’ £107,500 NQ salary, with both firms representing the bottom end of the Magic Circle’s remuneration. Clifford Chance (CC) on the other hand announced in May that it would be hiking its NQ pay by 16% to £125,000 to match that of Freshfields Bruckhaus Deringer.
Slaughter and May meanwhile is remunerating its novice lawyers to the tune of £115,000.
According to data gathered by Simon Marshall at TBD Marketing, A&O may have been emboldened by the fact that it currently receives the most applications per job of all the Magic Circle firms. Likewise, the firm has grown by 317 people over the past six months – equivalent to adding a Winkworth Sherwood-sized firm to its numbers. It is now only 89 employees away from matching CC’s overall staff headcount.
Marshall commented: ‘A&O is calling the market here by refusing to budge on NQ salaries. They’re having to balance a load of things at the same time: the possibility that US firms will ramp up again and attract more of their talent, the fact that in-housers have had enough of NQ rates spiralling upwards, its own pipeline and the broader macroeconomic picture.
‘Its first mover advantage is that it can always change its mind later, of course. In years gone by, we’d see Linklaters move first on something like this, so it’s refreshing to see A&O take the reins.’
The top end Magic Circle rate of £125,000 pales in comparison to the eye-watering figures touted by US firms this year. Akin Gump tops the list, having announced a new rate of £164,000 in April, ahead of Gibson Dunn (£161,700), Goodwin (£161,500), Davis Polk and Fried Frank (both £160,000).
A&O’s move is certainly a brave one, and while there is an obvious risk in terms of talent recruitment, the news will be welcomed by beleaguered in-house leaders, who have persistently protested the rapidly increasing charge-out rates associated with such bloated NQ pay. With the backdrop of global uncertainty triggered by the Ukraine crisis, all eyes will be on whether other elite firms will join A&O behind its line in the sand.
What has been the absolute deal highlight of your career so far and why?
Advising Liberty Global on its fixed and mobile UK telecoms joint venture in the UK to create what is now Virgin Media O2. We negotiated the transaction over a relatively short period right at the start of the first Covid lockdown, and it was amazing to watch a huge team adapt and still find a way to get the deal agreed.
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Why did you decide to become an M&A lawyer? Was there anyone in particular who inspired you early on in your career?
I loved the buzz and fast pace of corporate finance and M&A on my vacation scheme and during my training contract. I was particularly inspired as a trainee and junior associate by the managing partners of the London M&A team at the time – Andrew Ballheimer and Richard Browne – and my supervisor in corporate – Richard Hough: they had a tangible sense of ambition to grow the profile of the A&O corporate team so that we would be mentioned in the same breath as our UK-based rivals and I wanted to be a part of that.
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