Partners at the U.K.s Herbert Smith and Australias Freehills have approved a merger that will create a 2,800-lawyer firm known as Herbert Smith Freehills.
The combination, which will become effective October 1, is the latest in a string of deals this year between Australian and international firms. In March, Mallesons Stephen Jaques entered into a tie-up with leading Chinese firm King & Wood. The same month, Blake Dawson entered into a combination with U.K. firm Ashurst and adopted the latter firms brand. In April, Allens Arthur Robinson announced an exclusive alliance with Magic Circle firm Linklaters.
However, the merger between 1,600-lawyer Herbert Smith and 1,200-lawyer Freehills will be a full financial merger between the two firms. The earlier deals, as well as Norton Roses 2010 tie-up with the former Deacons Australia, followed a Swiss Verein model in which the Australian and international partner profit pools remained distinct. Australian firms have generally had lower levels of profitability than U.K. or U.S. firms, so financial integration has been a challenge.
Freehills had gross revenues in 2010 of $471 million and profits per partner of $970,000, according to The American Lawyers' Global 100 report. Herbert Smith's gross revenues in 2010 were $718.5 million and its profits per partner were $1.36 million.
But Freehills chief executive partner Gavin Bell and managing partner Mark Rigotti have both been adamant that their firm was only interested in a full merger. Bell says only a true financial merger can see the firms integrate effectively and combine to work as one.
Sources close to the discussions say there was resistance to the idea of a full merger among some London partners who feared they could end up subsidizing lower-yielding Australian practices. Likewise, there had been concerns among some Australian partners that their practices would be sidelined in a global juggernaut focused mainly on energy and litigation, Herbert Smith's core strengths. As a result, the vote was not thought to be a sure thing. But, in the end, the firms say both their partnerships overwhelmingly approved the deal.
The merged firm will be the worlds eighth-largest by headcount, with 20 offices. Bell and Herbert Smiths London-based chief executive partner David Willis will both initially act as joint chief executive officers of the combined firm, though a transition council will be put in place to appoint a single chief executive within the next 12 months.
Growing investment in the country from rising Asian economies has been the main driver of interest in Australia by global law firms. The Australian mining and energy sectors have been particular targets for investment by large Chinese state-owned enterprises. Energy is a major practice strength for both firms
The merger with Herbert Smith will give Freehills greater access to Asian markets. Herbert Smith has offices in Beijing, Shanghai, Hong Kong, Bangkok, Tokyo, and Singapore. Freehills, which has been more hesitant about Asian expansion than many of its Australian rivals like Mallesons, only has a Singapore office outside of Australia. Freehills has so far mainly pursued Asian business through alliances with Chinas TransAsia Lawyers, Indonesias Soemadipradja & Taher, and Vietnams Frasers Law Company.
A Herbert Smith spokeman notes the U.K. firm also has an Indonesian alliance, with Jakarta-based Hiswara Bundjamin & Tandjung, an overlap that the transition council will address. He adds that the firm is planning to open offices in New York and Seoul by November, with launches in Germany and the West African nation of Guinea planned for early 2013.
In an October 2009 feature in The American Lawyer, Freehills chief executive partner Gavin Bell explained that Australian firms faced greater risks than their U.S. and the U.K. counterparts in expanding in Asia due to their smaller natural client base.
"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," Bell said. "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."