Clash of cultures can scupper law firms’ mergers

THE Americans are coming. Hammonds has become the latest firm to announce that it is to merge with a US firm, confirming last week that it is to link up with Squire Sanders. It follows the merger of Hogan & Hartson and Lovells earlier in the year, and the announcement that SJ Berwin is talking to Boston-based Proskauer Rose about a tie-up. Denton Wilde Sapte's link-up with Sonnenschein Nath & Rosenthal will be signed at the end of this month.

Mergers between British and American firms are nothing new, of course. City stalwarts DLA Piper, Clifford Chance, Dechert, Mayer Brown, Jones Day and Reed Smith are all the results of US/UK link-ups. The million-dollar question is: are they a good idea?

That depends on what you want out of a merger. In the Hammonds-Squire Sanders deal, it’s pretty clear. Hammonds says that it wants to strengthen its presence in Central and Eastern Europe, areas in which Squire Sanders is strong.
For Hammonds it is about survival. The firm’s announcement of the deal is telling, boasting that when the merger goes through on 1 January the new firm will have 1,300 lawyers and revenue of $400m. That suggests that size means solidity, and is intended to head off worries about the firm caused by its shedding 42 fee earners and a larger number of back-office staff at the end of 2008.

Hammonds suffered during the downturn. Its revenues fell 6 per cent to £117.8m in the 2009-10 financial year. The redundancies allowed it to shore up its profits, although they were still only £22.6m in 2009/10. Profit per equity partner rose 32 per cent to £364,000. That number looks healthy enough, but the accusation of smoke and mirrors is strong; the figure only remained so high because of the savings gained from the redundancies. Hammonds certainly looks like a firm in need of a shot in the arm. Squire Sanders’ revenues in 2009 were $545m (£353m), and so it seems that it might be in a position to offer one.

So from the point of view of Hammonds’ partners it’s clear that this is a good move, but many lawyers in the City are wary of mergers. Some argue that they are all too often the inevitable result of internal pressure, rather than carefully thought-out commercial tactics. As firms grow they hire young associates, goes the argument, but as their careers progress they eventually demand to be made partners and there is a pressure to move into new practice areas to create work for them. This means more associates, and eventually the firm balloons dangerously out of control, desperately taking on more work that is far from its core competency. Sooner or later, a merger starts looking attractive, just to pull in more work to fuel the uncontrolled growth.

One lawyer who worked for a traditional City firm taken over by an American one several years ago is sceptical about whether these deals can work at all, suggesting that in the end something has to go. “In my firm they ended up cutting all of their traditional UK work, which suggests they didn’t know what they were getting in the first place,” he says. “The Americans never quite know what they’ve let themselves in for.”

US/UK MERGERS | CITY VIEWS
Kevin Gold, managing partner at mid-sized London firm Mishcon de Reya: “There’s no doubt these international mergers will dissipate cultures and cause clashes. It can take many years to build the new firm. You have to think about the fallout on people who had loyalty to the old firm. You have to wonder if you are adding value, or just creating a bigger problem.”

Matthew Rhodes, founder of legal community website RollOnFriday: “Firms on both sides of the Atlantic are looking to crack Asia, and know that consolidation and global reach are vital. Add a market obsessed with brand, and mergers look attractive. The Hogan Hartson-Lovells merger has created a firm that competes in size and reach with Baker & McKenzie and DLA Piper, but a better brand than either.”