‘Til death do us part
The decision to merge with an international law firm is never taken lightly – but many Australian firms have made the leap.
Over the past five years, the Australian legal market has looked much like a dating scene. A whirlwind of international mergers have swept through the industry with some firms getting married, some remaining bachelors and others starting non-committal, open relationships with overseas players.
A natural experiment in business occurs when firms take different paths, apparently at random. The recent dating frenzy in the legal industry has created one such experiment.
As global law firms swooped into Australia after 2010, national firms had a decision to make. Would they stay staunchly independent within Australian borders, or merge to become international players?
There was no telling which strategy was stronger at the time, but five years on we can examine which firms made the right choice – and unpack the consequences of this division in the market.
Top-tier national firms like Clayton Utz and Minter Ellison have undoubtedly had overtures from global firms over the years; practically all large Australian firms have. “Given the movements in the market, any firm that is of any quality in Australia that said they never gave a merger a thought are telling you pork pies,” says Bruce Cooper, deputy chief executive partner at Clayton Utz.
Mr Cooper says Clayton Utz made a decision not to merge four years ago. “We still think we made the right decision because we made it on strategic and carefully thoughtthrough client grounds, rather than just crowding on the global bus,” he explains.
Similarly, Maddocks was in earnest discussions over a merger with global firm Pinsent Masons in 2013. The decision to remain independent split the partnership.
Globetrotting firms
Other firms have reached that fork in the road and taken a different path. Gadens is the most recent example of this, succumbing to the allure of global giant Dentons late last year. But there are numerous others, including Herbert Smith Freehills, King & Wood Mallesons, Allens and Ashurst, which all chose to jump into bed with overseas counterparts.
For these firms, creating a global brand in a globalised world is a “no brainer”, according to legal consultant Philip Gleed. He says firms with a cross-border M&A practice, in particular, will have much to gain from merging with a global firm.
The logic behind global mergers is that multinational corporate clients prefer service providers that operate seamlessly across jurisdictions. New markets also represent new growth opportunities and integration lowers overheads.
Sue Kench, King & Wood Mallesons’ managing partner Australia, says firms that can offer “global insights” have an edge. “Clients want depth and breadth – firms that have deep local capability across multiple markets,” she says. Firms might be of comparable quality in Australia, but if one firm can work consistently across borders that will appeal to the client, as they can rely on one trusted brand, she continues.
She adds that it is important for firms to have a “global mindset” regardless of whether they have a global presence or multi-national clients. “Markets, products and practices increasingly have an international exposure,” she explains.
A global strategy has delivered strong financial performance for some firms. Since merging in late 2012, Herbert Smith Freehills has seen a jump in profitability, according to former Australian managing partner Jason Ricketts. “[This] show[s] that the rationale behind the merger was right but, more importantly, that it’s being delivered in the way that was envisaged,” he says.
Tim Lester, a partner at Hogan Lovells, goes further, saying: “It is naive to think you can be incredibly successful in the Australian market by simply being a domestic law firm.” Mr Lester believes the Australian market is simply too small to nourish “outstanding domestic law firms” like the ones seen in the UK, such as Slaughter & May.
“[The UK] market is so huge; it is a true global financial centre,” he continues. “Australia is very important in the Asia Pacific region but it doesn’t have the size, it doesn’t have the volume of transactions, which would allow the existing domestic Australian law firms to continue to enjoy the type of work that they have enjoyed today.”
Mr Gleed agrees that the Australian market is saturated – however, he believes this spells trouble for the global players.
“I don’t think that our market is: 1) big enough; 2) mature enough; or 3) robust enough, to have all these international firms,” he says. Mr Gleed doubts that the rate of globals entering the Australian market is sustainable. “If they keep coming in at this level […] can they all achieve what they want to achieve? I suspect that at some point in time the answer to that must be ‘no’.”
Fad or paradigm shift?
While globalisation might be here to stay, not everyone in the legal industry is convinced that this new environment necessitates global mergers. There is an element of ‘me-too-ism’ in international tie-ups, according to Mr Gleed. “I do wonder whether sometimes there is an element of ‘well, a competitor has done this, therefore we need to do it ourselves to be competitive’,” he says. “That is no good reason to do it.”
This sentiment is mirrored by fiercely independent firms such as Clayton Utz and Corrs Chambers Westgarth. Mr Cooper says his clients have little interest in engaging a “onestop-shop” global law firm “just because it’s a global brand”. He explains that international law firms may have a wide jurisdictional spread but that does not mean they are “at the top of their game”. He claims that Clayton Utz is “as global as any other firm” and accesses work through its independent relationships with overseas firms, such as Freshfields Bruckhaus Deringer, and through networks like the Pacific Rim Advisory Council and Lex Mundi.
Steve McGarry, the founder of Lex Mundi, even says that international mergers are “asking for trouble” as it is almost impossible to harmonise salaries, divide resources, ensure a return on investments and integrate cultures across continents. He argues that firms are much better off joining professional services networks to develop a global reach.
Corrs Chambers Westgarth’s CEO John Denton believes firms can be globally connected without compromising their independence. Corrs Chambers Westgarth belongs to an international network of 45 firms and claims to have grown its international client base up to 40 per cent. “We can assure our clients that they are not at the mercy of the conflict decisions, resource and team allocations common in other global models,” Mr Denton says.
Minter Ellison’s chief executive Tony Harrington takes a similar tack, arguing that ‘national’ and ‘international’ tags are beside the point. “Everybody likes to create buckets, don’t they?” he says. “National, international – we are just in the business of serving clients.”
Stratification of clients
It is difficult to tell whether nationals are successfully competing with globals for the best clients. Mr Lester argues that domestic firms can’t hope to compete and that there will soon be a “distinct division” in the market. Australia is a “shrinking market” for legal services but the global market is growing, he says. “If you don’t have the platform and the reach and the ability to work with clients beyond the Australian market, then you are necessarily constrained.”
Ms Kench tends to agree. Some practice areas lend themselves to global law firms, particularly those that are tied to the flow of cross-border capital, investment and trade flows, she says. However, clients are increasingly in need of global support across almost every practice area and firms with greater reach will offer clients a “distinct advantage”, according to Ms Kench.
She cautions that it is a “long game” and that it is not yet clear if firms have gained as much as they hoped they would through international mergers. “Firms with an international platform and local depth are doing well,” she says. “We won’t speak on behalf of our competitors, but […] KWM is going from strength to strength.”
The IBISWorld Top 1000 Australian Companies report singled out King & Wood Mallesons as experiencing the greatest drop in revenue for the legal sector for FY2013-14, but Ms Kench contests these figures. She says that KWM, like all law firms, suffered declines following the GFC, but that KWM didn’t fare any worse than its competitors.
It makes sense for globals to capture work that crosses international borders, but, in the M&A space at least, the numbers tell a different story, according to Mr Cooper. As evidence, he points to Clayton Utz’s involvement in the largest M&A transaction in Australia last year – Japan Post’s $8 billion takeover by Toll Holdings. “If we are going to have a fight about the zeros behind M&A numbers to tell everybody that only the international firms get into big deals, then I think the facts speak differently,” he says.
Mr Gleed said the pressure on inhouse counsel to slash external legal costs was opening the door to domestic firms of all sizes to compete with the global firms. “No longer will a brand or firm name alone mean that a client will choose that firm to do the work,” he says.
Large international firms are losing their hold over clients, who are now looking to some of the smaller players to do niche work or individual matters. Mr Gleed said that it was not uncommon for even the biggest deals to have a boutique or a mid-tier firm acting for one of the parties.
Mr Cooper agrees, adding that the terms ‘top-tier’ and ‘mid-tier’ are “pretty much a dead expression these days”. With Australian firms pursuing different strategies, “realistically, clients are spoiled for choice”, says Mr Gleed.
Partner exodus
Firms chasing the high-end transactional and corporate work through global mergers appear to be “trimming their sails” when it comes to lower return practice areas, according to Mr Gleed.
Cost-constrained areas like property and insurance are not always suited to global firm fee structures. “Quite often the consequence of the merge is that some of the practices that have traditionally sat within the firm […] no longer sit well and they are either told to find a new home or they find a new home themselves,” he says.
These partners often move to a mid-tier or start a boutique that can accommodate the purchasing power of the clients, he continues. For example, when partner Jodie Masson left K&L Gates last year, taking a team of five with her, she said “property clients shouldn’t have to pay a ‘global rate’ to support a platform they don’t need and haven’t asked for”. Rapidly growing mid-tiers have capitalised on this disillusionment with the global model by snapping up partners. In April this year, for instance, Mills Oakley hired 12 DLA Piper staff.
As the large Australian firms eye foreign work, the mid-tiers are pushing up from below to become powerful national firms, according to Mr Gleed. HWL Ebsworth, Moray & Agnew, and Colin Biggers & Paisley are all growing their partnerships, with Mills Oakley and Hall & Wilcox topping the charts for the fastest-growing firms this year.
In addition, Mr Gleed points to “the development of a whole new class of boutique practices of 10 partners and under with highly skilled practitioners with amazing client bases”. However, he worries that the loss of the “firms in the middle” will affect graduate recruitment as traditionally these firms have been a big employer of young lawyers.
While mid-tiers such as Mills Oakley have said they are under pressure to expand into every state, globals do not feel the need to have boots on the ground across Australia, according to Mr Lester.
“Our experience when dealing with clients from overseas is they don’t care whether they are ringing 02, 03 or 07 on the east coast,” he says. Like globals Clifford Chance, Jones Day and Allen & Overy, Hogan Lovells only has two offices in Australia, one in Sydney and one in Perth.
“[These are] both gateways to Asia,” says Mr Lester. “Those firms that believe they’ve got to be in a lot of locations in Australia will find themselves struggling in the years to come because that’s not the way that legal services are heading. I think you need to be quite focused.”
The ‘true’ global firm
Law firm mergers, like marriages, are an exercise in cultural, structural and financial integration. But not all mergers are created equal – and very few involve the formation of a single profit pool worldwide.
Hogan Lovells is one of only a few firms that have a global revenue pool. Also on this list are Allen & Overy, Ashurst and Jones Day. But other firms also see greater financial integration as the ‘holy grail’ of global structures. For instance, DLA Piper COO Andrew Darwin has said in the past that he is a “great believer in financial integration” and that removing financial barriers is a way of aligning the interests of your partners. DLA Piper operates as a single brand but (like Norton Rose Fulbright, King & Wood Mallesons, Dentons and Baker & McKenzie) is actually a Swiss verein, with each entity within the firm having a separate revenue pool.
Without revenue sharing across borders, the firm may not reap all the benefits of a close alliance, according to Mr Lester. “There is no embedded incentive for partners to work collaboratively together for the benefit of the client [without shared profits],” he says. “They are serving different financial masters.”
Mr Gleed says global firms sometimes won’t see the fruits of that new relationship until a number of years after the merger. “Two and a half years in, they are just starting to see some flow of deals from the firm that took them over.”