In the summer of 2008, Peter Martyr, chief executive of London's Norton Rose, was pondering his firm's next big move. In the previous decade, the 1,000-lawyer British firm had steadily expanded across Europe, the Middle East and Asia, cementing its place as a global player standing just outside the Magic Circle firms. There seemed to be a natural next step. "I was really focusing at the time on the States and Latin America," he recalls.
When London legal consultant Tony Williams called to propose a meeting with an Australian firm, Martyr agreed, mostly out of politeness and curiosity. But after that July 2008 meeting, Australia stayed on Martyr's mind. Over the rest of the summer, he thought about how a cross-border relationship could work, and by November the two firms began serious discussions. In June, Norton Rose announced that it would merge with Australia's 500-lawyer Deacons at the beginning of 2010. Deacons's biggest offices are in Sydney, Melbourne, Perth and Brisbane, but Martyr is clear that the combination is not about Australia. It is about Asia.
"This is an early play for us to gain a weight of people and resources in that part of the world," says Martyr. In a few years' time, he predicts, other large U.S. and U.K. firms looking for similar critical mass in Asia will tie up with most of the other major Australian firms.
It is the largest international merger in the Asia-Pacific region to date. But Norton Rose is not the only firm to have recently looked at Australia and seen Asia. Last year, British legal giant Clifford Chance discussed an even bigger combination with 1,000-lawyer Mallesons Stephen Jaques, generally regarded as one of Australia's top three firms, alongside Allens Arthur Robinson and Freehills.
The marriage "would have been about giving Clifford Chance, or the combined firm, the same scale in Asia as in the U.K., Europe and the Americas," Mallesons chief executive partner Robert Milliner says of the proposed deal, which would have created a firm of almost 4,000 lawyers. "We had shown we had capability in Asia and could expand upon that, which would have allowed Clifford Chance to concentrate on other regions." (Milliner says the foundering global economy put an end to the talks.)
Do Australian firms really have the key to Asia? Only recently regarded as regional also-rans next to U.S. and U.K. global players, Australian firms have been raising their profiles in the past year. While the rest of the world continues to wait for the long-anticipated tide of outbound Chinese investment, Australia is seeing it now. The resource-rich nation has become perhaps the hottest destination for Chinese state-owned enterprises with an insatiable appetite for Australian coal and iron ore. The Aluminum Corporation of China (Chinalco) may have failed in its $19.5 billion bid to acquire an 18 percent stake in Rio Tinto Limited -- a deal that would have been the biggest outbound Chinese investment ever -- but over $12 billion in Chinese money flowed into Australia in the first half of 2009, quadruple the figure from a year before.
The scale and complexity of these deals have spotlighted the sophisticated transactional skills at such Australian firms as Mallesons, Allens, Freehills, Minter Ellison, Clayton Utz, Blake Dawson and Deacons. That such capable lawyers, increasingly multicultural and multilingual to boot, are available in great quantity and at considerably lower cost than at large U.S. and U.K. firms (Australian associate salaries start as low as $50,000) points to a significant advantage in the region. Likewise, though geographic proximity is often overstated (Sydney is a longer flight from Beijing than London), time zone proximity is a genuine plus (Perth is in the same time zone as China, and Sydney and Melbourne are only two hours ahead).
As a result of these factors, many Australian firms are at a crossroads. They could aggressively expand in Asia's biggest markets, but that would mean going toe-to-toe with wealthier U.S. and U.K. firms that have already made large investments in offices and practices in the region, not to mention rising local firms. Australian firms could team up with global Europe-based firms to tackle Asia, but that would mean a loss of independence and possibly a painful financial restructuring. Or they could just stay closer to home and focus on domestic work, perhaps venturing to less competitive Southeast Asian markets such as Vietnam, at the risk of falling behind globalizing peers.
Australian firms have faced tough choices before. As the country's economy privatized, consolidated and welcomed foreign investment throughout the 1980s, many Australian firms grew into national players. "You didn't have places like California that is just a bloody big market by itself," recalls Deacons chief executive partner Don Boyd. "In this country in the eighties, all the big banks and the retailers all lined up and wanted to be -- they had to be -- in Sydney, Melbourne, Brisbane and Perth. Eventually you had to have integrated law firms."
Some firm mergers led to behemoths with more than 1,000 lawyers. The present Mallesons is the product of successive mergers of firms in Sydney, Melbourne, Perth and Canberra. The firms now known as Blake Dawson and Deacons both resulted from four-way mergers in 1988. The trend continued into the new century with the 2001 combination of Sydney's Allen Allen & Hemsley and Melbourne's Arthur Robinson & Hedderwicks.
Deacons' Boyd notes that some well-regarded firms failed to find other Australian merger partners. "So, when the music stopped, they were left alone," he says. "I think, to some extent, that's now happening internationally."
Most of the large Australian firms see the need for some sort of international expansion. With a population of just 22 million, Australia is an awfully small country to host several firms numbering over 1,000 lawyers, and the saturation of the domestic legal market has had a predictable impact on fees. Those looking for growth have been forced to look abroad.
Deacons began looking for overseas partners early on. Then known as Sly & Weigall, the firm became Deacons in 1992 after entering into an agreement with the Hong Kong firm of the same name, a relationship that will terminate on Dec. 23, a week before the Norton Rose merger becomes effective. (San Francisco law firm Graham & James was also part of the alliance until it went out of business in 2000.) Deacons was not alone in seeking such arrangements: The 750-lawyer Australian firm now known as DLA Phillips Fox entered a similar agreement with global firm DLA Piper in 2006.
Other Australian firms chose to tackle Asia on their own. Mallesons has made a serious commitment to the China market, opening a Hong Kong office in 1989, becoming the first Australian firm to open a Beijing office in 1993, and then acquiring 30-lawyer Hong Kong firm Kwok & Yih in 2004. Minter Ellison and Allens have also established a substantial presence in Hong Kong and mainland China, with the latter also building a comprehensive network in Southeast Asia.
Mallesons' Milliner is bullish on China, which he says contributed almost 15 percent to last year's firm revenue of AU$551 million ($470.5 million), a proportion that has tripled in the past four years. In addition to a stable of Australian financial and corporate clients, the firm represented Chinalco in its Rio Tinto bid and has also represented other major Chinese state-owned enterprises, such as Hunan Valin Iron & Steel Group Co. Ltd. and Huaneng Power International Inc. "Over the last 10 years, the constant debate has been whether Australian firms can be successful outside Australia," says Milliner. "We believe so. We believe we have been."
In his view, competition in China is still relatively wide open, which benefits Australian firms. "It isn't like U.S. firms competing in London or British firms in New York," says Milliner. "It's one of the few places in the world where you have U.K. firms, U.S. firms, local firms, European firms and Aussie firms all competing on the same terms. It's the Olympic Games for law firms, in a way."
The firms are not all following the same playbook, though. Mallesons is more finance-oriented than some other Australian firms, and Milliner sees opportunity in the potential spread of Australian financial regulatory models across Asia. However, Mark Green, the head of Minter Ellison's international practice, says his firm has explicitly decided not to compete for capital markets work in Hong Kong. "Traditionally, we've seen [how] that work has gone in a very competitive way to the merchant banks' preferred lawyers at either the Magic Circle or the very strong New York firms," says Green.
Across practices, Australian firms benefit from their lower home-market cost base. Lawyers at Australian firms earn less than their American or British counterparts, even at the partner level. "Profit expectations for our partners are significantly lower than at Magic Circle or American firms," says Michael Rose, Allens' chief executive partner, who notes that leading Australian firms' profits per partner typically range from AU$1 million ($820,000) to AU$1.5 million ($1.24 million). That compares to profits per partner of $1.26 million, on average, for Am Law 100 firms in 2008.
But Allens' Rose acknowledges that moving Australian partners into an environment where international firms are willing to pay significantly more will invariably lead to some defections. He notes that some top Allens partners have decamped for the Magic Circle. Indeed, Zili Shao, a former managing partner for Allens in Hong Kong and Sydney, joined Linklaters in 2001, and this year became that firm's Asia managing partner. "There's always that tension," Rose says.
Not every Australian firm has such ambitious China plans. Though it has a Singapore office, Freehills has so far stayed out of China. Chief managing partner Gavin Bell says Australian firms' smaller domestic client base hasn't justified the move. "If you look at the reason for most of the big international firms being in China to start with, a lot of it was [about] being there to service their international clients going into China," says Bell. "Now that makes sense if you're a large American firm, because you've got an American market going into China. An Australian firm going into China only has an Australian market and only a slice of that market."
In the international arena, Freehills still primarily follows the traditional Australian model of getting work referred from U.S. and U.K. firms. But Bell acknowledges that the recent boom in Chinese investment in Australia may force a rethink. "The U.S. and U.K. firms who have relationships with those SOEs do not want to lose the transaction," he notes. "The issue for Australian firms will be [whether they can be] the dominant firm in that transaction, rather than the transaction being run by the U.S. or U.K. firm out of China and us ticking off the Australian law component of it."
Australian firms are also cultivating referral relationships with emerging Chinese firms. Freehills has a referral agreement with TransAsia Lawyers in Beijing, and Allens has a similar relationship with Shanghai's Concord & Partners. Clayton Utz, which has no offices outside of Australia, touts its membership in the Lex Mundi alliance, whose members include leading Chinese firm Jun He Law Offices. Minter Ellison has recently held talks with Deacons Hong Kong -- which has three offices in China -- to see if it can take over the expiring referral deal with Deacons Australia.
But referral deals can only get Australian firms so far, says Deacons' Boyd. In the case of the two Deacons, he explains, it was all well and good for the Hong Kong firm to follow a strategy of receiving referrals from U.S. and other global firms eager to break into China, but the Australian firm wanted to be a bigger Asia player in its own right. Recognizing the allies' divergent trajectories, Boyd decided three years ago to seek a more permanent arrangement, and looked at a few firms, including some American firms he declined to name. "I think the reason Australian firms need to be part of an international group rather than doing it ourselves is that you really need access to international clients, and a very limited number of such clients come out of this country," says Boyd.
Law firm mergers are tricky at the best of times, and combinations involving firms as large as Australia's leading names are rare for a reason. Some, like Mallesons and Allens, are lockstep -- and all have considerably lower profitability than leading U.S. and U.K. firms, making any financial integration a potential nightmare. The Norton Rose merger with Deacons avoids this issue by deferring financial integration, maintaining separate profit centers for the first few years of the merger. "I don't think we could have done it otherwise," Martyr says.
Deacons is a somewhat smaller and less prominent firm than, say, Allens or Freehills, so its merger with Norton Rose has raised eyebrows, but not pulses, in the Australian legal community. Still, it is universally agreed that a deal between Clifford Chance and Mallesons, Australia's highest-grossing firm, would have been a game-changer.
The Magic Circle firm declined to comment on its discussions with Mallesons, but Milliner says the two firms wanted to create an unparalleled global offering: "We felt that with [Clifford Chance] we could drive a very differentiated combined-firm capability in the Asian region that, combined with their other regions, would give us, at the global level, a very distinct and very unique capability."
The global recession scuttled that deal and is likely to put other cross-border firm mergers on hold. Indeed, despite the growth of Chinese investment, major Australian firms have been hit hard by the global recession and the accompanying drop-off in both domestic and international deal activity. The reliable annual attrition of up to 20 percent of associates to overseas secondments has come to a halt, leaving firms greatly overstaffed. With revenue and profits down at most firms [see "The Global 100,"], several have followed their U.S. and U.K. counterparts in announcing some combination of layoffs, salary freezes and other cost-reduction measures. "It has caused us all to pause a little bit and focus more on our domestic market," says John Carrington, the head of Blake Dawson.
The recession may help Aussie firms on some fronts, though. For one thing, now that the economy has slashed hiring and forced cutbacks at American and British firms' Asian offices, Australian firms may face less competition for talent and business. Carrington says that reviving Blake Dawson's moribund decade-old Shanghai office will be a major priority going forward.
Allens' Rose agrees that Australian firms may ultimately benefit from the crisis. "We picked up some good people last time," he says, noting that a number of U.S. firms fled the region altogether following the Asian financial crisis of the late nineties.
Meanwhile, Martyr and Boyd, who will take on the role of Norton Rose deputy chief executive, are drawing up plans for how best to deploy their combined resources. The British firm did not lack an Asian presence -- it has 130 lawyers in the region and one of the largest Singapore offices of any firm -- but Martyr feels Norton Rose's footprint in China lags behind that of other large British and American firms. He expects to address that issue by relocating a number of Deacons' lawyers to China following the merger, with more expected to rotate through Asia over time.
But the real benefits of the merger, Martyr thinks, are intangible. No other U.S. or U.K. firm has 600 lawyers in that part of the world. The addition of Deacons gives Norton Rose "gravity" in Asia, according to Martyr. It is a way for the U.K. firm to, at a stroke, reposition its brand for a future where Asia is increasingly the center of the world economy. That is, if Australia does prove to be the key to Asia.
"If Australia is irrelevant to Asia, then I've been very wrong," Martyr says.
But he doesn't think so.
Strength in Numbers: Australia's Three Biggest Firms
|Firm||Gross revenue (in millions)||Head count||Revenue per lawyer||Percent of lawyers outside home country|
|Mallesons Stephen Jaques||$470,500||907||$520,000||12%|
Source: American Lawyer research