It's the deal that no one thought would happen this soon -- a Chinese law firm merging with an international one. There's no question that it will be groundbreaking.
But will King & Wood Mallesons work?
China's King & Wood and Australia's Mallesons Stephen Jaques both have longstanding international ambitions that a deal would appear to address. Mallesons had discussed a merger with the United Kingdom's Clifford Chance before the latter decided earlier this year to launch in Australia on its own. King & Wood has steadily hired lawyers from international firms as part of an effort to bring its practice and management to Western standards.
But the business rationale for a combination between a Chinese and an Australian firm is not as straightforward as it would be for, say, one between an Australian and a British firm. Indeed, to a large and perhaps uncomfortable degree, the success or failure of King & Wood Mallesons may depend on the decisions made by another, somewhat more unpredictable player: the Chinese government.
Both firms have so far declined to comment on their plans, but, according to a source inside Mallesons Stephen Jaques, partners of the 1,000-lawyer Australian firm overwhelmingly approved the deal with China's King & Wood last week. The arrangement calls for the merger of the firm's Hong Kong office early next year, with the Beijing and Shanghai offices to combine subject to regulatory approval down the road. The firms will otherwise remain financially distinct under a Swiss Verein structure but will share the King & Wood Mallesons brand. Partners at 950-lawyer King & Wood voted on the deal last week as well, but the results have yet to be disclosed.
The Mallesons source says the firm sees the deal as a means of transforming itself into an "international firm based in Asia." An ex-Mallesons partner who was still at the firm when talks began over a year ago likewise says the firm has long had a goal of becoming a major player in Asia and originally thought a merger with a firm like Clifford Chance would be its vehicle.
"Mallesons fears being left out," says the former partner. "If they don't do something, they fear they will become essentially a local practice. It's been proven to them that the top international firms don't want to merge with them, so they've turned to what is supposed to be the top firm in China."
But the top firm in China is quite a different animal from the top firms in the United States or the U.K. The main challenge for leading Australian firms like Mallesons is that they are large and capable firms hailing from a relatively small market and they therefore have a relatively small natural client base. The goal of Australian firms' internationalization efforts, including the recent merger agreement between British firm Ashurst and Blake Dawson, has therefore been on enlarging this natural client base for work across the region. A deal with a U.K. firm would bring access to a U.K. and European client base, one with an American firm would be expected to give access to U.S. clients, and so on.
"If you run through the checklist of benefits [of King & Wood Mallesons]," says one Australian partner with an international firm, "the main one has to be access to China, Inc."
The problem is that over half of King & Wood's clients are not Chinese companies but foreign multinationals operating in China. As The Asian Lawyer reported in this January feature on King & Wood's international ambitions, a major concern is whether or not China's biggest companies, especially state-owned enterprises (SOEs), would use a more international King & Wood for cross-border work. "Whether they want to be accompanied by Chinese firms or just hire local firms [in other jurisdictions] is unclear," partner Susan Ning, head of the firm's international committee, said at the time. "We may only find out on a case-by-case basis."
Indeed, a source inside King & Wood says a major incentive for a tie-up with Mallesons was the preference that Chinese SOEs investing in Australia had shown for using the top local firms over King & Wood and its previous Australian alliance partner, the smaller Gilbert + Tobin.
"I'm not sure how linking with King & Wood helps Mallesons," says the head of a major Australian rival, who notes Mallesons has already represented top SOEs like Aluminum Corp. of China (Chinalco). "What more work is going to be available to this merged firm that's not available to them now?"
The ex-Mallesons partner says there is a strong expectation that the Chinese government will step in and make King & Wood Mallesons a national champion, ensuring that, as China's standard-bearer in the international legal profession, it gets the lion's share of outbound mergers and acquisitions for the biggest Chinese companies.
A current partner agrees that such thinking has played a major role in pushing the deal forward. "There are whispers that this has received a certain degree of blessing from the good and the great in China," he says.
Of course, as with most mergers, some won't share the vision. According to sources familiar with the situation, Mallesons Beijing office head John Shi and Nicolas Groffman, two of the firm's four partners in the Chinese capital, are both leaving to join DLA Piper.
The deal will no doubt face some further turbulence. Australian legal gossip blog Firm Spy has passionately editorialized against the deal, citing in particular the degree to which its success may depend upon the good graces of an authoritarian Chinese government. The rival firm head says it remains a major question whether the deal will affect Mallesons's law school recruitment.
There are fewer perceived problems on the King & Wood side, and the source inside the firm says the deal with Mallesons will provide access to technology, practice management and other modern law firm knowhow that King & Wood chairman Wang Junfeng has made it a priority to upgrade over the years. But King & Wood, which has grown through domestic mergers in China, also faces ongoing integration issues, and it is unclear if further internationalization will help or hinder them.
If successful, King & Wood Mallesons might only be the beginning. According to several sources, Mallesons is also now talking to Singaporean firm WongPartnership about some kind of alliance. Some think it can't stop in Asia.
"I think a China and Australia tie-up now has no real effect on the U.S. or European market," says Stephen Wozencroft, a Hong Kong partner with King & Wood's main Chinese rival Jun He Law Offices. "The merger will only be logical to both of them if they end up merging with a U.K. or U.S. firm, so the merger between Mallesons and King & Wood is not the natural end game."