Allen & Overy has been seeking to crack the US legal market for decades. Partners at the London firm on Sunday joined hastily convened calls to learn it had finally struck a transformative deal: a $3.4bn merger with New York law firm Shearman & Sterling.
The tie-up, secretly brokered in a matter of weeks by the top ranks of the two firms, would be one of the biggest in the industry. If voted through by partners it would create a legal giant with almost 4,000 lawyers worldwide and mark the first time in more than 20 years that a UK “magic circle” firm has attempted a major transatlantic tie-up.
“This is a game-changing move,” said David Wilkins, a professor at Harvard Law School. However, he warned: “It’s not going to be easy . . . post-merger integration is really difficult. Frankly there is almost no such thing as a merger of equals, even though they are always billed that way.”
UK-US legal unions have been notoriously vexed, with the complexities of knitting together competing cultures and pay systems often leading partners to vote with their feet. The last significant attempt, Clifford Chance’s 2000 merger with New York’s Rogers & Wells, led to a string of exits and clashes over culture and has served as a cautionary tale.
A tie-up with Shearman, fresh from the collapse this year of merger talks with Anglo-American rival Hogan Lovells, would be the culmination of A&O’s two-decade struggle to expand in the more lucrative American market, something Belgian-born senior partner Wim Dejonghe has made a priority of his leadership.
Tony Williams, a consultant at Jomati who was managing partner of Clifford Chance when it struck the Rogers & Wells deal, said A&O’s move was “opportunistic and strategic” at a time when Shearman’s leadership was “under pressure to do something”.
The circumstances allowed for a rare role reversal, he said, with “a UK-based firm fighting back after a decade of attack in their home market” by American rivals.
For Shearman, the deal could bring an end to a turbulent period in which it has also undergone a brutal restructuring.
The US firm, which has 1,350 remaining staff after haemorrhaging partners in recent months, would gain the firepower of a much larger business in A&O. Although both sides have characterised the deal as a merger Shearman is dwarfed by A&O, which has 5,800 staff globally and revenues of £1.9bn in the year to April 2022 against the US firm’s $907mn for the 2022 calendar year.
“A&O is in the driving seat,” said one former partner at the London firm. “That could be a challenge.”
Shearman’s recent woes have caused average profits per equity partner to slide closer to that of A&O, where the figure was almost £2mn last year.
While partner pay is among the thorniest issues in any integration because of jostling over how to remunerate star lawyers, A&O and Shearman said weaving together a new system would not be difficult. The combined firm is expected to operate a so-called modified lockstep model, with pay including elements based on performance and on time served. A&O tweaked its pay system in 2020 to allow it to pay top partners more in the US.
Wary of the leaks that some blame for scuppering the deal with Hogan Lovells, Shearman and A&O kept the talks between a few dozen top-ranking lawyers until other partners were informed on Sunday morning, hours before the public announcement.
After abandoning a merger with Los Angeles firm O’Melveny & Myers in 2019 following a failure to agree a valuation, A&O had been going it alone — opening offices in Boston, San Francisco, Los Angeles and Silicon Valley in the past three years and adding almost 50 partners in the US from rival firms since 2020. That investment created revenue growth but the firm has struggled to keep hold of staff, with lawyers poached by deeper-pocketed domestic competitors.
“A&O has been talking about [a US merger] for 20 years,” said one former high-ranking partner. “We kissed a lot of frogs . . . A huge amount of work has been done over the years to look at every conceivable option inside-out and upside-down. This is probably the most amazing deal A&O could have done.”
Manhattan-based Shearman was once one of America’s most powerful corporate advisers and among the first big US law firms to expand in Europe, opening in Paris in 1963 and London in 1972.
But it has shrunk in recent years as it suffered under the costs of rapidly expanding its network and from management mis-steps, hampering its ability to compete with US rivals on pay and prompting a flood of partner exits. Its lawyer headcount stood at 727 last year, according to trade publication The American Lawyer, down from a peak of 1,125 in 2001.
The firm has also gone through at times ruthless transition under former senior partner David Beveridge aimed at refocusing on more profitable business lines including private equity and higher-margin regions such as the US. Beveridge was replaced by Adam Hakki last month as part of an accelerated transition after the collapse of the Hogan Lovells talks.
In a bid to build scale, Shearman had been offering new hires big guaranteed payouts, according to several former partners who said the move had sparked internal tensions. The policy helped reduce equity partners’ profit pool to $110mn in the fiscal year to the end of June, according to two ex-partners. For the 2022 calendar year the firm’s equity partners each took home an average of $2.48mn, according to The American Lawyer.
Amid the turmoil, key personnel have jumped ship including a group of London finance lawyers led by deals star Korey Fevzi as well as Shearman’s entire Munich office. More than 130 partners have left the firm in the past five years, including about 20 through retirement, while it has hired almost 90.
The leader of a rival New York firm told the Financial Times last month that “everyone in the world has interviewed every Shearman partner by now”. A leader at another global law firm said it had been “overwhelmed” with Shearman CVs.
Shearman had shown signs of a resurgence in recent months, working on deals including CVS Health’s $10.6bn acquisition of Oak Street Health, and the sale of SAP’s Qualtrics to Silver Lake and others in a $12.5bn transaction. The firm was also hired by US carrier JetBlue to take on the Department of Justice in the looming antitrust battle over its proposed merger with rival Spirit Airlines.
“Shearman is a strong brand in a weak place,” said one former A&O partner. “The strong brands in a good place have no interest in merging with the UK firms. You only get them once it’s a fixer-upper.”
A current Shearman partner said the deal was “a very good move” for the US firm. “This is a great transaction for us . . . it gives us the scale to go out and do more building.”
Announcing the proposed merger, Dejonghe hailed the two groups’ “complementary cultures”. People who have worked at both said Shearman was more “cut-throat” than the comparatively genteel magic circle firm. But others close to both firms said their lawyers got along well, having worked together on many mandates over the years due to their similar strengths in banking and finance.
Williams said the deal was ultimately “a very good move”. People may “suck their teeth and say A&O are taking some risks on this deal as to whether they settle down with the Shearman people”, he added. “But they’re grown-ups.”