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Hogan, Lovells Union Faces Many Obstacles
Culture and compensation could complicate the deal
The National Law Journal
October 12, 2009
Image: Digital Vision
Hogan & Hartson and Lovells are considering one of the riskiest maneuvers in the legal business -- a trans-Atlantic merger, which in this case would create a global megafirm of more than 2,500 lawyers.
That strategy can work (see DLA Piper) or turn to brass (see Clifford Chance). If Lovells and Hogan do merge, they'll move from large -- but not supersized -- players to one of the world's 10 largest firms. Together, they would have $1.9 billion in revenues, prominent corporate and litigation groups, an insurance practice (currently Lovells') that serves clients such as Prudential and Swiss Reinsurance Co., and Hogan's top-tier regulatory practice and client list that includes News Corp., International Business Machines Corp. and KPMG International.
"If the integration is done right, this thing could really sing," said Thomas Clay, an Altman Weil consultant who focuses on law firm mergers.
That's the good news. The tougher questions are ones that partners on both sides are likely struggling with at the moment. Can they overcome the client conflicts that plague massive firms -- and seem to cap growth? How will they share profits: Will they pool their money, or, like DLA, will they maintain separate profits for the international and U.S. operations? Can they reconcile Lovells' modified lockstep salary system with Hogan's more flexible compensation plan? And what about culture clash? Heck, how will the computer systems link up?
"These deals," as law firm consultant Peter Zeughauser puts it, "are really tough to put together."
MATCH GAME
For Lovells, the merger would give it a huge entree into the U.S. market -- with roughly 900 lawyers, up from its current 38, according to the firm's Web site. Hogan -- already the most international of Washington's home-grown large firms, with around 20 percent of its team outside the United States -- would add large numbers in Europe: A merger would more than double the total number of lawyers Hogan has in Germany, bringing it from 60 lawyers in Berlin and Munich to more than 130 lawyers, and giving Hogan offices in Frankfurt, Düsseldorf and Hamburg. It would roughly quadruple the firm's head count in the United Kingdom. The merged firm would also have offices in Asia and Russia, key developing markets.
News of merger talks broke on Oct. 8, when Legal Week and The National Law Journal posted online articles about the discussions. Hogan and Lovells aren't talking publicly about a potential deal. Legal Week reported last week that the two firms are in the early stages of talks, which were initiated informally several months ago.
"We don't comment on these types of matters," said Hogan Chairman J. Warren Gorrell Jr. Lovells' managing partner, David Harris, did not return a call for comment. A statement sent via e-mail from a Lovells spokesperson said, "We review our US strategy on a regular basis and we have recently been taking a closer look at market developments and the opportunities that we believe are available to us. Beyond that, we are not in a position to comment further and are not going to start naming or confirming individual firms or the nature or progress of any discussions we might be having with them."
Several Hogan partners seemed caught off guard when news of the talks broke Oct. 8, saying they were first hearing of it when The National Law Journal called requesting their reaction. Others said they were still digesting it, signaling that word of the talks had been closely held. "I don't know the details about it," said W. Michael House, a partner and director of Hogan's legislative group. "I don't comment on things that I don't have sufficient information to comment on."
Consultants and recruiters who have worked on large mergers said the firms involved should rule out major client conflicts at an early stage and expect to cope with differing compensation systems. Legal Week reports that Lovells is to discuss the proposed merger at a meeting of its international executives on Oct. 28. A meeting like that signals the firm is serious about the merger, and has most likely already looked at client-conflict issues. "Once it's public knowledge, you've got to move quickly to make sure that things are completed," said Stephen Nelson, managing principal of The McCormick Group.
And there will still be other potential icebergs. "There are so many potential differences," said Gary Miles, a recruiter at Santa Monica, Calif.-based Alan Miles & Associates. "You've got things like how people get into the partnership, compensation structures, even the fiscal years might be different. And then you've got retirement ages. Many British firms require you to retire at 55. And here in America, there have been court cases involving whether mandatory retirement ages are legal at all. There are a lot of things that have to be matched up."
In an interview last week, before news of the merger broke, Gorrell said Hogan has a flexible compensation system and partner pay differs from office to office. "There is a wide range in how we compensate our partners. We don't have to pay partners in smaller markets as much as we do in major markets like New York, or Washington, or London. We make sure our partners are compensated for what they do, where they do it." On its Am Law 200 survey, Hogan & Hartson reported a 15-to-1 ratio of compensation for the firm's highest-compensated partner to that of its lowest-compensated partner during fiscal year 2008. Lovells, meanwhile, uses a modified version of lockstep compensation, though Legal Week reports the firm has pushed toward a more performance-driven culture.
Altman Weil's Clay said technology differences can also cause problems. "Technology has been the real bugaboo with some of these deals," he said. "It's going to be a big, big, important issue. We see some firms that end up a year or more later not integrating their technology the way they should, and that can really affect how the cultures come together."
