Ashurst wants a transatlantic merger. This is nothing new. Many partners at the London-based firm still refer to Latham & Watkins as “the one that got away,” after a proposed merger collapsed within days of completion in 2000. Less than four years later, Ashurst tried again, this time with New York’s Fried, Frank, Harris, Shriver & Jacobson. Those talks also failed, as did an approach to Magic Circle member Clifford Chance in 2000.
Now Ashurst finally has an international merger under its belt—although not with a U.S. firm. Last September, the 850-lawyer practice became the latest international entrant to pile into the superheated Australian market by announcing a tie-up with Blake Dawson—an 800-lawyer firm with revenue of around $400 million. The two firms combined their Asian operations in March with a view to a full global integration in 2014, creating a 1,700-lawyer giant with revenues of around $850 million. That’s more attorneys than Sidley Austin, and revenue comparable to those of Bingham McCutchen and Orrick, Herrington & Sutcliffe.
The Blake combination was good news for a firm that has seen uneven progress during the past decade. The failed merger attempts proved distracting and divisive: Then–managing partner Justin Spendlove quit Ashurst after the abortive Fried Frank talks to head the U.S. firm’s European operations. (Spendlove now serves as Fried Frank’s senior executive partner.) Ashurst enjoyed some of its best years during the transactional boom of the early 2000s, but its reliance on private equity, structured finance, and real estate work—accounting for a significant portion of Ashurst’s current £303 million ($490 million) revenue, partners say—meant that it was hit hard by the recession. In the 2008–09 fiscal year, just after breaking the £1 million barrier, the firm’s average profits per equity partner plummeted 35 percent, to £673,000 ($994,000). Like many firms, Ashurst then undertook a painful internal restructuring. Some 35 partners have left since early 2009. (The firm brought in 14 lateral partners and made 28 internal promotions during the last 18 months, and PPP has inched back up to £723,000, or $1.1 million.)
Having successfully pulled off the first merger in its 190-year history, the firm has now set its sights on another. A U.S. tie-up is still the long-term goal. Management is staying tight-lipped, but several current equity partners say that they expect to see action in the next two to three years—maybe sooner. Ashurst even structured its Australia deal to include a break clause that would allow the U.K. firm to walk away from Blake at any point before the vote in 2014 should it enter into discussions with an American firm that doesn’t want such a significant investment down under. Ashurst’s newly appointed managing partner James Collis calls that clause a “minor technicality,” however, adding that both firms are excited by what is “a permanent combination.”
It’s a significant change of pace, given Ashurst’s historic reputation for reluctant, rather than pioneering, international expansion. Since establishing its first foreign outpost in Tokyo just over 20 years ago, the firm has slowly built out geographically through a series of greenfield launches and considered lateral hires. In the fiscal year ended April 30, 2011, the proportion of firmwide revenue accounted for by its 18 international offices passed 40 percent for the first time, up from just 15 percent a decade ago. Yet the firm’s conservative tendencies mean that its network remains relatively lightweight compared to the leading global firms—particularly in Asia. If the Australian merger goes ahead in 2014, however, Ashurst will for the first time have more partners internationally than at its London headquarters.
“We’re going through our biggest period of change since the firm was founded in 1822,” says Collis, an English law finance partner who has spent the past eight years based in the firm’s Paris office. “Ashurst hasn’t been a purely London-centric firm for a long time—we’ve moved on a lot in the past 10 years—but this [deal] is a major step in our evolution from an international firm to one that’s truly global.”
Although Ashurst has been in the Far East for more than 20 years, it still had just 75 lawyers in the region before the additions from Blake. (London rival Herbert Smith, by comparison, has more than 225 attorneys across seven offices in Asia. Baker & McKenzie boasts 850, even excluding Australia.) And having only recently established a foothold in greater China—opening in Hong Kong in 2008 and Shanghai in 2011—senior partner Charlie Geffen admits that Ashurst has been slow to react to the opportunities presented by one of the world’s hottest emerging markets.
“We basically spent 10 years building up Europe and so far haven’t been as focused on Asia as we might have been,” Geffen says. “But it is clear that Asia is going to be important for all global law firms. It’s one of our key strategic priorities.”
Tackling Asia alone, though, was too daunting a prospect. Many of its markets—particularly Hong Kong—are already relatively mature and intensely competitive, while Ashurst also suffers from a fundamental lack of scale. It generates less than a third of the revenue of any of the four international Magic Circle firms and barely two-thirds that of Herbert Smith, which alongside Ashurst heads the U.K. chasing pack. “We initially thought, with hindsight a bit naively, that we’d be able to grow organically [in Asia] in the same way we had in Europe,” Geffen says. “We realized pretty quickly that the pace of change and the diversity of the region meant that it would just be too difficult, so we’d need to merge.”
Still, Ashurst’s decisive leap into Australia didn’t just surprise the market, it also came as a shock to the partners themselves. Management had already announced plans to accelerate its international expansion, but partners say that they were looking west, not east, expecting a revival of the firm’s long-held American ambitions. Even Geffen admits that Australia “wasn’t really on our radar.”
Ashurst and Blake weren’t strangers, however. The two firms have a relationship that stretches back for almost a decade. Ashurst’s outgoing managing partner, Simon Bromwich, who returned to full-time practice as head of litigation this May, says the pair were already operating an “informal, behind-the-scenes alliance” in Japan. Much of this was built upon Japanese conglomerate Mitsui & Co., Ltd.—a key client of Ashurst Tokyo office head John McClenahan, who bills the company as much as £5 million each year, according to a current partner with knowledge of the situation. (Ashurst declined to comment.) The two firms also share other Japanese clients, such as the Japan Bank for International Cooperation, while Ashurst’s Tokyo office has regularly taken secondees from Blake to help solve its local recruitment issues. (A local recruiter says the firm is notorious for its low associate pay rates in Japan. An Ashurst spokesperson says the firm is “comfortable that our associate pay is in line with market rates.”)
In fact, the Ashurst-Blake combination was first raised during after-work drinks between Ashurst and Blake lawyers, in Tokyo in early 2011. Geffen then took a detour from a family holiday in Australia’s Bellarine Peninsula to have lunch in Melbourne with Blake’s chairperson, Mary Padbury. (She is now head of Ashurst Australia.) And in contrast to their firm’s previous merger attempts, Ashurst partners say, the tie-up with Blake was a serenely simple affair that went from first meeting to done deal in just over six months.
“We’ve had a lot of experience in not doing mergers,” Geffen says, allowing himself a wry smile. “That has taught us some hard lessons, such as the importance of working out whether a deal is actually possible before engaging the partners.”
Having completed its due diligence in July, Ashurst’s management board convened a meeting in August of around 35 of the firm’s key partners—including all office and practice heads—to make sure they supported the deal, before briefing the wider partnership. The news was met with some initial skepticism internally, particularly from the firm’s European partners. Several of them say that they were at first concerned that the region would become “unimportant” as management’s gaze was drawn eastward. But the move was overwhelmingly supported. Following a three-week vote that attracted a 95 percent turnout among the firm’s 220 partners, the combination was approved on September 23 by a commanding 95 percent majority—not only the highest turnout but also the most significant majority of any partner vote in the firm’s history.
Geffen denies that the firm opted for a two-stage combination—forming an Asian joint venture with Blake ahead of a full merger in 2014—in order to sound out potential U.S. merger partners before committing itself to Australia. Instead, he says, it was merely a “pragmatic decision” based not only on the tax and regulatory considerations that led Norton Rose to structure its Australian combination with Deacons as a Swiss verein, but also on the challenges of bringing together two differing capital structures with disparate levels of profitability. (According to one Ashurst partner, Blake’s average equity partner compensation is about 20 percent below that of the U.K. firm. The firm declined to comment.)
The deal with Blake represents a major coup for Ashurst. Blake was widely regarded as one of Australia’s leading firms—particularly in natural resources, where it regularly acts for major names such as global mining giants BHP Billiton Limited and Rio Tinto Limited, and local oil and gas companies Woodside Petroleum Ltd. and Santos Ltd. DLA Piper and Norton Rose had already completed similar acquisitions of their own, but Ashurst’s combination with Blake was the first time one of Australia’s “Big Six” law firms had paired off with an international partner. (Others quickly followed suit. In March, Mallesons Stephen Jaques combined with Chinese leader King & Wood, while Allens entered into an alliance with Magic Circle firm Linklaters in May.)
But the marriage won’t immediately revolutionize the firm’s presence in Asia, nor will it alone grant Ashurst the “premier global” status that it so craves. (Geffen, Bromwich, and Collis each repeated the buzzword several times during meetings for this feature.) Blake has operated small outposts in both Indonesia and Shanghai for the best part of two decades, has a dedicated North Asia practice focused on Korea and Japan, and is one of the few international firms present in resource-rich Papua New Guinea, but it had just 75 lawyers outside Australia. Indeed, Padbury says that Blake’s motive for the deal was to expand beyond a domestic market that, following the recent influx of international firms, has become “extremely highly contested.”
“It became clear that the idea of ‘Fortress Australia’—being a premier firm in our home market, but not internationally—wasn’t really a viable option anymore,” Padbury says, adding that Ashurst was the first and only firm Blake approached in relation to a merger.
What the Blake combination does give both firms is greater firepower to finance growth in Asia. The deal is essentially structured as a 50-50 joint venture between Ashurst and the legacy Australian partnership, with each firm contributing equally toward any investment costs within the region. The combined management team is actively investigating the Chinese market with a view to establishing an office in Beijing—Geffen and Padbury visited the city on a fact-finding mission in April—and is looking to significantly ramp up the firm’s presence in Hong Kong and Singapore. In April, Ashurst doubled its Hong Kong office space in preparation.
Geffen says the combination is already generating results, with the practice having won more than 10 “major jobs that neither firm would have been able to handle separately.” Just days after the first stage of the combination took effect this March, Ashurst scored its first-ever Asian assignment from long-standing Australian client Qantas Airways Limited, helping to set up a joint venture with China Eastern Airlines to launch a new carrier, Jetstar Hong Kong. The firm also recently won places on three legal panels for sovereign property investor Qatari Diar after a joint pitch from partners in London, Dubai, and Singapore.
And Bromwich insists that the firm’s expanded network will add to, rather than detract from, its appeal for top New York firms, which he believes are “increasingly thinking much more globally, if perhaps a little more with their heads than their hearts.” (Given the recent events at Dewey & LeBoeuf, the fact that Ashurst remains entirely debt-free—the firm would not comment as to whether it has a revolving line of credit, however—would no doubt also prove attractive to interested suitors.)
“Unless you’re a firm like Wachtell or Cravath, those U.S. firms that don’t end up doing a U.K. merger run the risk of being left behind, and the reality is that there are fewer English than American firms that can effectively combine,” adds Bromwich. “We have critical mass in all the key European markets, and we’re now well on the way to creating something with that same credibility in Asia. Developing that yourself is not only challenging and time-consuming, it’s hugely expensive.”
Ashurst knows better than most just how expensive international offices can be. Having failed in its merger attempts with Latham and Fried Frank, the firm established its own U.S. operations in early 2009 with the hire of a 12-partner structured finance team from the now-defunct McKee Nelson. Described variously by three current and many more former London-based Ashurst partners as “an unmitigated disaster” and “an absolute money pit,” the offices in New York and Washington, D.C., have struggled to tease work from flatlined markets from the outset.
The move represented a radical U-turn in Ashurst’s U.S. strategy. Just months earlier, senior partner Geffen had publicly stated that the firm would not risk the lucrative working relationships it had developed with U.S. firms—including Davis Polk & Wardwell; Cravath, Swaine & Moore; Schulte, Roth & Zabel; Paul, Weiss, Rifkind, Wharton & Garrison; and Akin Gump Strauss Hauer & Feld—by hiring U.S.–qualified lawyers in America.
Geffen now insists that the narrow focus of the McKee practice makes it “utterly irrelevant” to its U.S. referral partners. “We’ve always been very clear that we had no intention of building some vast, full-service platform,” he says. “It’s a very specialist offering so [U.S. firms] don’t regard it as any inhibition to working together with us.” He also says that as U.S. firms move overseas, referral relationships are becoming less important anyway. Ashurst used to regularly refer work to both Debevoise & Plimpton and Kirkland & Ellis—Geffen even spent three months seconded within Kirkland’s Chicago office in 1985—but Geffen says that those relationships have “pretty much stopped” following the continued expansion of each firm’s London offices.
Ashurst’s New York managing partner, William Gray, describes the last three years as “about as difficult as I’ve experienced in my career,” despite a few high-profile assignments such as representing JPMorgan Chase & Co. on the first Maiden Lane transaction surrounding the takeover of Bear Stearns & Co. Inc. “The epicenter of the financial crisis was in credit derivatives—exactly where the majority of our work came from,” says Gray. “Entire workstreams just disappeared overnight.”
Geffen rejects assertions by one former Ashurst equity partner that his firm’s U.S. offices have lost as much as £2 million ($3.2 million) per year. Although the offices have diluted the firm’s overall profitability, Geffen says, the money New York and Washington generate—around £10 million ($16 million) annually, or just over 3 percent of firmwide revenue—is enough to cover their costs.
Gray points to successes in leveraging the McKee team’s U.S. contacts at Deutsche Bank AG, JPMorgan Chase, and Morgan Stanley to help win work from the banks globally. Ashurst has also seen returns, he says, from its decision to relocate global energy, infrastructure, and transport head Jason Radford to New York to focus on the growing U.S. public-private partnership market. And while the Eurozone crisis has meant a slow recovery in European structured products, Gray is confident that the U.S. CDO market is finally starting to show signs of life.
“We knew at the time [the McKee acquisitions were] quite a brave call and perhaps even a bit counterintuitive, given how horrendous the markets were, but we took a long-term view that at some point it would come good,” Geffen says. “That has taken a bit longer than we might like, but the signs are that things are starting to pick up.”
Ashurst’s pursuit of a U.S. merger may be about to pick up, too. Several partners and other sources close to the firm claim that the hunt for an American merger partner is already under way, and that Geffen has made tentative approaches in the past six months to both Shearman & Sterling and Sidley Austin. This was swiftly and categorically denied by both Geffen and Collis. (Sidley declined to comment. Shearman did not respond to requests to comment.)
“Any firm of our size will always be keeping a watching brief on what’s happening across the Atlantic—as management we’d be being negligent if we weren’t,” Collis says. “But it’s important to get it right.”
When the right opportunity for a U.S. merger does present itself, Ashurst will be hoping to make the third time the charm. The partners are certainly bullish. With the firm having finally got the merger monkey off its back through its surprise Australia play, the buzz around Ashurst’s Appold Street headquarters is tangible.
“It’s been a difficult few years, and like everyone else, we’ve had to make some tough decisions, but this merger has really given us a sense of our own identity and a renewed confidence,” Geffen says, checking his watch ahead of yet another dash to the airport. “We’re raring to go.”