It wasn’t particularly surprising that Tim Taylor would call Michael Payton and ask if he wanted to meet for coffee. Two of London’s most renowned insurance lawyers—and two of the most senior names at leading U.K. insurance firms Barlow Lyde & Gilbert and Clyde & Co, respectively—the pair have been working together on cases for more than two decades. So when Taylor contacted his old friend Payton in April, Payton readily agreed to catch up at the Costa Coffee below AIG’s European headquarters on Fenchurch Street. But then Taylor asked if he could bring along BLG senior partner Simon Konsta. “I thought ‘Gosh, what’s going on here?’ ” recalls Payton, who has led Clyde for 27 years.
Less than four months later, the partnerships of both firms voted to approve an audacious merger. When the combination formally takes effect in November, it will be the largest-ever merger between two U.K. firms—bigger, even, than the 1987 formation of Clifford Chance or the 2000 union to create Denton Wilde Sapte (now SNR Denton). Combined revenues of almost £310 million ($479 million) will see Clyde overtake the likes of Berwin Leighton Paisner, Simmons & Simmons, and Ashurst, placing it on the cusp of the U.K. top ten and creating the world’s biggest specialist insurance firm.
Clyde might just be the most successful law firm that you’ve never heard of. The transport, trade, and insurance specialist has been one of the United Kingdom’s most consistent performers for more than a decade, yet it maintains a low profile for a business that currently has some 700 lawyers and 27 offices across Europe, Asia, the United States, and South America.
Clyde’s overseas trailblazing alone should be enough to warrant a certain degree of recognition. The 78-year-old outfit was the first international firm to launch in both Hong Kong and the Middle East—it now boasts more than 130 lawyers on the ground in Abu Dhabi, Doha, Dubai, and Riyadh, more than any other international firm in the region—and also has well-established presences in India, Africa, and Latin America. Clyde’s Rio de Janeiro base has been running since 1988; its Caracas outpost for almost as long.
Clyde’s small yet highly profitable U.S. operation, meanwhile, saw revenue grow 37 percent in the last fiscal year—comfortably more than any member of The Am Law 100. The 200-partner firm is budgeting for an even more impressive 50 percent growth in North American revenues this year. (Read more about Clyde’s westward push to the U.S.)
Thanks to this broad international footprint and a practice that is much more heavily weighted toward litigation than a typical English firm—more than 60 percent of its workload is contentious—Clyde has powered through the recession. Since the peak of the boom in 2007, which for most firms marked the end of significant top-line growth, Clyde’s revenue has increased 57 percent, to £212 million ($328 million), making it the U.K.’s seventeenth-largest firm. Looking back to the turn of the millennium, its revenue is up by more than 240 percent . But such growth has not come at the expense of profitability. Clyde’s average profits per partner for the last fiscal year of £605,000 ($1 million)—up 21 percent from 2007—is one of the highest outside the Magic Circle.
The firm has also been keen to capitalize on opportunities arising out of the downturn. Clyde brought in 22 lateral partners in the last fiscal year. In June it became only the second international firm to pull off a Canadian merger by announcing a tie-up with Montreal-based insurance boutique Nicholl Paskell-Mede. (Fellow U.K. firm Norton Rose finalized its alliance with 450-lawyer Canadian firm Ogilvy Renault in June.)
But it was the revelation just two weeks later that Clyde was also in advanced discussions with BLG—one of London’s largest insurance firms and Clyde’s historic rival—that really made people sit up and take notice. With the specter of further transatlantic merger activity continuing to dominate the rumor mill, such a large domestic combination was unexpected. One commentator likened the deal—Clyde’s fourth merger since 2005—to Apple teaming up with Microsoft. Others half-jokingly suggested that it should be subject to merger clearance because of the perceived dominance of what Clyde’s senior partner Payton describes as “the behemoth of EC3″ (the postal code for London’s insurance district).
For all the fanfare surrounding the deal, the news was first met with skepticism. The widely held belief was that the sheer level of conflicts and overlap that would result from bringing two such seemingly similar practices together would render any move futile. Then there’s Clyde’s and BLG’s different levels of profitability—Clyde’s average profits per partner are more than 80 percent higher than its peer’s. Many also questioned why Clyde would even want to combine with a firm that, thanks to costly failed attempts to develop a mainstream corporate practice, an underweight international network, and a general lack of a coherent strategy, had been in steady decline for years. BLG was the only U.K. specialist insurance firm to see revenue fall in both the 2007 and 2010 fiscal years, and has been repeatedly rocked by the departures of several key names. More than 20 BLG partners have left since mid-2009.
BLG’s leaders were actively seeking a merger partner to remedy these problems long before approaching Clyde. “Our revenue growth over the past ten years has been pretty unflattering,” admits BLG CEO David Jabbari. “There’s also no question that we had taken our eye off the ball internationally—we hadn’t taken the bold moves required to access more profitable work. We urgently needed to recover that lost ground, and it was pretty apparent that the only way we would achieve that was through some form of merger.”
Clyde’s interest was piqued by the opportunity to inherit BLG’s market-leading offerings in professional liability and in casualty and health care—practices that it has had little exposure to in the past. Clyde CEO Peter Hasson concedes that targeting the two markets represents a change of direction for his firm, but says that Clyde needed to broaden its practice to meet the continually evolving requirements of insurance clients. Consolidation within the industry has placed a greater importance on developing institutional relationships with the major insurers, who are becoming increasingly reliant on so-called panels—short lists of preferred law firms—in an attempt to increase efficiency and drive down procurement costs.
In addition to strengthening Clyde’s position within the composite insurance market—BLG has deep institutional relationships with Zurich Financial Services AG and Allianz SE, among others—the combination with BLG will also give Clyde a significant volume claims practice. This is largely centered on a 140-lawyer Manchester team that BLG bought last July from defunct U.K. firm Halliwells for £2.5 million ($4 million). (The group is currently housed in a separate corporate structure as BLG Claims LLP.)
Historically, Clyde eschewed this generic claims handling work because the lower rates and higher leverage don’t fit its business model. Put simply: The work isn’t profitable enough.
At first glance, this differing strategic approach appears to be reflected in the relative finances of the two firms. BLG declined to disclose its most recent profits per partner (PPP) figure, but sources at the firm put the number at £329,000 ($510,000)—more than £275,000 ($425,000) per partner behind Clyde’s.
Dig a little deeper, however, and it becomes clear that the difference is exacerbated by leverage and how tightly the equity is held at each firm. Until 2009, when it overhauled its remuneration system, BLG was an all-equity partnership. Almost 70 percent of its 97 partners still have access to the equity, compared to just 57 percent at Clyde.
Clyde’s Hasson says that several of BLG’s other London practices—such as employment, and its marine, energy, and trade group—operate at broadly similar profit margins as Clyde’s business, but admits that some are “below where we’d want them to be.” The two firms’ profit per lawyer figures, which gives a much more objective indication of underlying profitability, reinforce this belief: Clyde’s lawyers generate £96,000 ($148,000) profit on average; BLG’s, £69,000 ($107,000).
Given that the merged firm will operate as a single global profit pool, transferring the BLG partners into the Clyde structure will require a certain rebalancing—both in terms of deequitizations and redundancies. As Hasson says: “To have a stable firm you can’t have a huge disparity in profit levels.”
In order to bring BLG’s leverage in line with Clyde’s, only those equity partners with at least five points on BLG’s 12-point ladder will join Clyde’s lockstep as full-equity members, Hasson says. The others will join Clyde’s “fixed-share” rank, which is effectively a salaried partner position.
Both firms declined to comment on just how many BLG equity partners will be asked to leave the firm as a result of the merger, but Hasson says that a 15 percent figure suggested to The American Lawyer by a current BLG partner was “not materially inaccurate.” Hasson also declined to say which partners or practices would be affected, but one equity partner based in Clyde’s London office said that BLG’s ten-partner corporate team, which Jabbari admits regularly operated at a loss, would bear much of the brunt.
But any impact on revenue should be minimal: While just 85 percent of BLG partners will be joining Clyde, Hasson says they are expected to bring 92 percent of the firm’s revenue—some £88 million ($136 million)—with them.
Insurance clients are renowned for taking a notoriously hard line on conflicts. One might reasonably expect, therefore, that a merger between two large insurance firms would be so beset by them as to be practically impossible. Even Clyde’s Payton admits that he hadn’t previously considered a tie-up with BLG because it had “never occurred to me to be achievable.” The surprising reality, according to both sides, is that conflicts actually haven’t been a problem.
The pair do predictably share a number of clients—ACE Limited, Chartis Insurance UK Limited, and AXA all feature in both firms’ top ten client lists—but Clyde’s Hasson says the key is that they generally work for the insurers in different areas. (Chartis declined to comment; ACE and AXA did not respond to requests to comment.)
Just five months earlier, it would have been an entirely different story. Merging the firms’ aviation practices would have generated “literally hundreds of conflicts,” according to Payton, but this hurdle was removed when BLG’s eight-partner aviation team—one of its most profitable practices and the bedrock of its four-office overseas network—quit to join London-based transport specialist Holman Fenwick Willan in March. Although a significant blow, the loss could now be viewed as a blessing in disguise: Both firms admit that the Clyde merger would not have gone ahead had the group stayed with BLG.
A senior member of Clyde’s insurance practice says that a “small number” of conflicts still exist—mostly in reinsurance and marine insurance. Clyde partner James Burns, who led the merger talks alongside Hasson and Payton and oversees the firm’s U.S. practice, says a fall in intrainsurer disputes means that the former has been of declining importance to both firms anyway.
For Clyde, the merger represents an opportunity to broaden its practice by taking on market-leading positions in both professional liability and in casualty and health care; significantly increase its revenues at a limited cost; and absorb one of its major competitors. For BLG, the tie-up is a much-needed lifeline.
The imbalance in the two firms’ positions coming into the deal has led to suggestions that it is not a true merger at all, but rather a takeover of BLG by Clyde. The naming of a new entity is always an emotive issue for both parties in any merger, so the decision to drop the BLG brand entirely—the combined firm will simply be called Clyde & Co—does seem to suggest a rather one-sided outcome. But Clyde’s Payton, visibly irritated, dismisses such talk as “ill-informed and not at all helpful.”
“I’m an old-fashioned stock market man,” Payton says. “To me, if you take somebody over, you pay for it, and we’re not paying anything. We’re merging—there’s no other word for it.”
What is clear, however, is that as the dominant party, Clyde has been able to dictate the terms of the deal. Clyde’s senior management all retain their positions within the combined firm, with Payton as senior partner and Hasson as CEO. Hasson’s opposite number at BLG, Jabbari, has been moved to a newly created COO position—responsible for knowledge management, operations, and work flow—while BLG’s senior partner Simon Konsta has had to settle with an untitled position on the board. Konsta’s is actually the only permanent elected board position assigned to BLG under the merger agreement, although an additional temporary representative will sit on the board for the first 18 months to assist in postmerger integration.
And while around 15 percent of BLG’s partners will apparently be laid off and a significant proportion of its senior partners deequitized as a result of the transaction, Clyde’s partners will be unaffected. The BLG partners who do join Clyde will also have to agree to what effectively amounts to a lock-in. Although they will be free to leave the merged firm, any who do so within the first 18 months will have to pay a financial penalty that Hasson says is designed to help cover the “significant” costs of restructuring and integrating the two businesses. (Hasson would not discuss specific figures, but says that the fine would vary depending on the individual’s seniority and would gradually decline over the 18-month period. He also declined to comment on the overall cost of the merger, but said that expenses related to IT and systems will total £5 million ($8 million).)
Jabbari, who was appointed CEO last year and only joined the firm in 2009 after serving as Allen & Overy’s head of knowledge management, acknowledges that Clyde and BLG were “not entirely equal parties” and that this was reflected in the way the deal is being structured. “It would be stupid of me to claim that the two firms had been performing equally—we were on totally different trajectories,” he says. “But it’s not about politics or wanting to lord it over anyone else, it’s about how you bring together two businesses where one is half as profitable as the other. It’s pure economics. What matters is whether the combined firm is going to be more powerful, and I think it will be.”
Having to effectively go cap in hand to your biggest rival must have been a humbling experience for BLG. Jabbari says that while the firm had already recognized the need to merge or face an uncertain future, the loss of its high-powered aviation team last spring “accelerated” the process.
Several current BLG partners say that the firm held preliminary talks with Bryan Cave in May. BLG’s outgoing aviation group shares a number of clients with the U.S. firm, such as The Boeing Company, and the firms have worked together on cases for over 15 years. Bryan Cave’s London managing partner, Rodney Page, admits that the firm has had “contacts” with several London-based firms, but would not comment on any meeting with BLG. BLG’s Jabbari also declined to comment on any meeting with Bryan Cave, but says that he held “serious discussions” with three other U.S. firms that got as far as exchanging financial and client information.
The most important question, of course, is how clients will react to the deal. With insurers’ legal panels now typically comprising just four or five firms, further consolidation in the market would not only increase the likelihood of conflicts, but also reduce competition and therefore limit a client’s ability to squeeze rates. Nick Sinfield, group claims director at Catlin Insurance Company (UK) Ltd., which has both Clyde and BLG on its legal panel, says he is unconcerned by the prospect of law firm mergers.
“In truth, [clients] are not particularly interested in the law firms themselves—what drives our choice [of who to hire] is the quality of relationships,” Sinfield says. “The merger of Clyde and BLG will not suddenly vaporize the individuals we choose to work with, so the merger is of little consequence.”
Although the addition of BLG’s prized professional liability and casualty teams will instantly “plug several gaps” in Clyde’s practice, as Hasson explains, it is far from certain that a broader practice will automatically equate to more work. According to calls made by The American Lawyer to various insurance companies, however, the early signs are that the merger has been positively received by clients. Beth Diamond, claims manager at U.K. insurer Beazley plc—one of Clyde’s largest clients—says she expects the combination to be “very productive” in terms of generating new business for the firm.
The merger has already received tacit approval from one new client. Just days after the agreement was signed, and with months still to go before the formal start date, Clyde and BLG received a joint assignment from a North American law firm facing a professional liability dispute with litigation in both the U.S. and Europe. (The firm, which Hasson declined to name, retained BLG’s London team and Clyde’s Paris office.)
Clyde’s ultimate aim is to be the world’s leading insurance firm. It’s a position that, come November, the firm can legitimately claim to have secured. Even Guy Stobart, CEO of fast-growing U.K. insurance firm Kennedys, admits that he “can’t help but admire what they’ve achieved in the last few years.” But Clyde isn’t stopping there.
Further growth in the U.S. and Canada is high on the agenda—a well-placed Clyde source says that new offices in Houston and Calgary, which would help bolster its growing international energy practice, are likely to be approved in the “not-too-distant future.”
“Nobody is holding their breath in terms of new projects while this is happening—the show goes on, immediately,” Payton says emphatically. “This isn’t the end—it’s only the beginning.”