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Last May, Latham & Watkins partners got an e-mail from managing partner Robert Dell about a sensitive subject. For the previous four months, Latham and the highly regarded British firm of Ashurst Morris Crisp had been secretly moving toward a landmark event: the first union of top-tier firms across the Atlantic. Code-named “Boris,” the deal would have created the third- or fourth-largest law firm in the world, with projected revenue exceeding $850 million. But now, according to Dell’s message, Boris was dead. The prospects had looked promising. Latham, with nearly 1,000 lawyers, was eager to expand beyond the United States. The London-based Ashurst, with 600 lawyers, was looking for an entr�e into the U.S. market. Latham’s strong corporate finance group could nicely complement Ashurst’s European mergers and acquisition expertise. Profits per partner were close: Latham topped $1 million last year; Ashurst approached $900,000. And, importantly, lawyers from the two firms liked each other. But that wasn’t enough. Although they had gotten within sight of the altar — they settled on a compensation structure, resolved top management issues, and even picked a name for the new baby (Latham & Ashurst) — the two firms walked away as friends. “I feel disappointed,” says Dell, who spent half his time for four months on these discussions. “I felt throughout the whole process we had the potential to create a very special firm with some very significant competitive advantages.” This was supposed to be the year of the global merger, but instead it became the season of European unions. Competition for global supremacy is heating up, and top British firms haven’t hesitated to pursue mergers to get an upper hand. In the last year five London firms — including Freshfields, Linklaters, and Clifford Chance — have acquired major German firms. Clifford Chance, of course, also picked up New York’s Rogers & Wells in January 1999 (although the Manhattan firm was not in the same premier league as Latham). Four of the six biggest firms in the world (measured by number of lawyers) are now British. As the Latham-Ashurst courtship shows, making a commitment these days is actually harder than finding a suitable partner. White & Case, for example, saw its efforts to woo French firm Jeantet & Associes crumble last month after differences arose over management issues. Latham and Ashhurst had made it past several key hurdles and potential deal-breakers, but couldn’t smooth out the remaining sticking points. An inside look at the failed Latham-Ashurst merger shows how even a seemingly ideal match-up can easily go awry. Latham’s flirtation with Ashurst began two years ago, when the Los Angeles-based firm concluded that it needed to make an aggressive push overseas to serve its globalizing clients. In the last 10 years, the firm has ascended from solid regional player to national powerhouse. But, like many other West Coast firms, it lacks international heft — at the start of last year, fewer than 4 percent of its lawyers were abroad. “Goldman Sachs may have as many bankers in London over the next five years as they do in New York. That is a huge change,” says managing partner Dell, referring to one of the firm’s major clients. In addition, he notes, the firm’s new economy clients are globe-trotting at a tender age: “You look down the [San Francisco Bay Area] peninsula, and a company that is six months old is thinking of venturing to Malaysia.” In September 1999 Latham hired the McKinsey & Company consulting firm to help explore global strategies. “A merger was one option, but not the only one,” says Dell. Dell and his management team studied the London market and liked what they saw in Ashurst. It wasn’t one of the five elite “Magic Circle” firms, but it had a reputation for top-notch corporate work for private equity funds, such as Candover Investments and Cinven. Just as important, it was the right size. Latham didn’t want to be acquired by a bigger firm, and three of the Magic Circle firms are larger. In the fall of 1999 Dell and Latham executive committee member William Voge met for lunch in New York with Ashurst’s leaders, then-managing partner Ian Nisse, and senior partner Geoffrey Green. The men had previously shared a fine meal in Ashurst’s London dining room, complete with an impressive selection from the British firm’s wine cellar. But in the past, their get-to-know-you chats had danced around the merger issue. At this meeting, Green popped the question: Would Latham be up for serious talk of a combination? The answer was yes. By the following February, when the Ashurst brass met Dell and Voge in San Francisco (where Dell is based), the talks had become serious. One of the first issues on the table was management. Latham partners were insistent that Dell, the firm’s highly regarded 48-year-old leader, head up the new firm. “We made it very clear in the first few meetings — there will never be a combination where, at the end of the day, Bob Dell is not at the helm,” says Voge, who heads Latham’s international practice group. Latham also wanted the majority of seats on the combined firm’s executive committee. On both points, the smaller Ashhurst went along. “In principle we were comfortable with that,” says Nisse. Compensation was more difficult. Ashurst, like most British firms, uses a lockstep system where seniority determines pay. Latham, which describes its method as modified lockstep, gives a nod to seniority but distributes 15 percent of its profits through bonuses. Ashurst agreed in principle to phase in Latham’s system over three years. But when the two sides delved into the nitty-gritty of how bonuses are doled out, Ashurst balked. “We value contributions in different ways,” explains Ashurst’s Nisse. Latham emphasizes rainmaking, while Ashurst values publishing articles and law school recruiting. When they tried to calculate a few hypothetical bonuses, they couldn’t agree. Ashurst was further unsettled by the amount of discretion in Latham’s bonus system. “We don’t have written criteria,” says Voge. “The Ashurst people thought that a system that had been around several decades should have more rules.” At the same time, another financial issue was turning into a thorny problem. Like most British firms, Ashurst uses accrual accounting. Latham, like nearly all U.S. law firms, runs its books on a cash basis. Ashurst treats accounts receivable and works in progress (work done but not yet billed) as income. Latham doesn’t consider either to be income until the check is in hand. Furthermore, among U.S. law firms, Latham is among the most fiscally conservative. Partners leave a lot of money in the firm as paid-in capital, and the firm assiduously avoids debt. Ashurst partners, like those at many British firms, do not put capital into their firm. Latham had made it clear that it would not enter into a combination that diluted its partners’ income or capital. That meant that Ashurst partners would have to forgo some accrued income. In addition, either Latham partners would have to take a lot of money out of their firm and accept a more thinly capitalized institution, or Ashurst partners would have to pony up big capital contributions. In the end, neither firm was willing to do those things. By the end of May, the deal was dead. “We thought we had gotten the big issues out of the way,” says Latham’s Voge. “We didn’t realize there were big issues and bigger issues.” Dell says that in hindsight, he should have spotted major problems earlier. “If this opportunity appears again — and it might because we’re very serious about growing aggressively — we will go through a checklist of deal-killing issues and get these out of the way. We would not waste the time of partners and practice groups to see if [the deal] made sense.” Nisse concurs: “In hindsight, perhaps, we should have had more frank discussions about some of the key issues earlier.” (In September, Nisse declined to stand for reelection.) His partner, Geoffrey Green, says he thinks Latham was too unbending: “I think we, in retrospect, probably underestimated the slight lack of flexibility which Latham management had when addressing [issues like compensation].” But why should Latham have accepted a deal that wasn’t on its terms? “It’s different if firms are merging out of what I will call desperation,” says Dell. “Then they have completely different motives — this is needed to survive. But if [the two firms] are successful firms, there’s a whole different set of considerations.” Dell contends that the firm may still get into the merger game, but for now Latham is executing Plan B: lateral acquisitions. In recent months the firm has been on a hiring spree in London. Among its catches is James Chesterman, the former head of banking at Weil, Gotshal & Manges’ London post. Voge says they aim to amass 200 lawyers in London. The current head count is 65, with 20 of those added in the last few months. Dell says he’s not nervous about the wave of mergers sweeping Europe. “Just the opposite,” he says. These deals have been executed so quickly that he doubts they’ve had time to work through key issues. “They’re leaving some risk out there,” he says. “When it all surfaces, will [their partners] like it?” If not, he notes, “I suspect there will be attractive talent available.”

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