It’s been a year since a groundbreaking merger between China’s King & Wood and Australia’s Mallesons Stephens Jaques produced a new giant with nearly 1,600 lawyers and revenues of almost $800 million. Since then, there has been plenty of speculation, in the media and at law firms, about the combined firm’s next move. Some press reports have identified Rochester-based Nixon Peabody and London’s SJ Berwin as potential merger partners.
But King & Wood Mallesons is trying to get Asia right first. "We’ve made no secret of our strategy to be a global firm based in Asia," says Wang Junfeng, one of the founding partners of King & Wood and now chairman of the combined firm. "We’re focused on integration and maximizing our footprint in the world’s economic growth zone. Asia is our front- and backyard. We’re dominant in that space, and our strategy will keep us dominant." King & Wood Mallesons doesn’t want to be the umpteenth international law firm trying to land a spot on a City of London panel or competing to defend big shareholder suits in New York. Not when it sees an opportunity to become the leading law firm of the Asian Century.
That will be harder than it sounds.
China is at the core of King & Wood Mallesons’s ambitions. Under Wang, King & Wood had long set a goal of becoming the first international Chinese law firm. Wang’s reasoning is that rising Chinese companies will increasingly look abroad to expand and invest, and they will want a "Chinese" firm to help them. To get ready, he pushed for reforms to the firm’s internal processes and hired more lawyers with international firm experience, including many Western expatriates ["Outward Bound," The Asian Lawyer, Winter 2011].
In Mallesons, Wang found an eager partner. The top Aussie firms have long faced the dilemma of being large and sophisticated firms servicing a relatively small home market. To expand their natural client base, some have allied or merged with established international firms, mainly from the United Kingdom. Five years ago, Mallesons itself had merger talks with Clifford Chance, and the past year has seen three of its top Australian competitors—Freehills, Allens, and Blake Dawson—ink deals with Herbert Smith, Linklaters, and Ashurst, respectively.
In tying up with a Chinese rather than a Western firm, Mallesons sees itself as embracing the future over the past. "We had the benefit of looking at where we thought the world was going to go over the next 50 years," says Stuart Fuller, the former executive partner of Mallesons, now the Hong Kong–based managing partner for the combined firm. "The rise of China, the rise of the region, the global capital flows, the outbound investments, the inbound investments—we thought there was a unique opportunity to create a firm that was at the center of all that and had depth in those markets."
Given that both King & Wood and Mallesons were leaders in their home markets, China-Australia deals should play to the combined firm’s strengths. Fuller says he now regards the market for such work as a "must-win." The former Mallesons had already handled major deals for such companies as Aluminum Corporation of China Limited, better known as Chinalco. Last fall King & Wood Mallesons advised Chinese wind power company Shenhua Clean Energy Holdings on its acquisition of a 75 percent stake in two wind farms in Tasmania for $87 million in cash and $208 million in assumed debt. The firm has also represented China Development Bank on financings for several projects involving Australian companies.
The broader goal, though, is to advise Chinese firms heading to other markets as well. There have been some encouraging signs. Fuller says the combined firm has already been named to the international panel at Chinese state-owned oil giant China Petroleum & Chemical Corporation, also known as Sinopec—something he doesn’t think would have happened before the merger. Partners from the former Mallesons and the former King & Wood have already worked together on 100 matters and have jointly pitched on 40 outbound China deals.
But Xu Ping, the Beijing-based cohead of the firm’s China corporate practice, says it’s clear the large state-owned enterprises (SOEs) that have done the biggest outbound deals don’t need handholding by a Chinese firm. "The top ones have done a lot of deals, and they are comfortable working with international firms and investment bankers," she says. Tony O’Malley, King & Wood Mallesons’s Australia managing partner, notes that Mallesons and other Aussie firms have frequently been left at home when major Australian corporations move into the United States or Europe. He doesn’t expect that to change soon. "What we’ve done hasn’t repositioned us in those markets," he says.
And there’s a reason why the top international law firms have heretofore all been British or American. "Certainly U.S. and U.K. law are key currencies of the global legal market and will be for the next 50 years," says O’Malley. The former Mallesons contributed a London office and U.K. law capability to the combined firm, while the King & Wood side brought New York and Palo Alto offices and many U.S.–qualified lawyers. Nonetheless, it is hard to see it becoming anyone’s first choice for major transactions in the U.S. or the U.K.
That challenge is clear in Hong Kong, the one office where the Mallesons and King & Wood sides have actually merged [see "King & Wood Mallesons in Brief"]. The firm’s senior management sees the Asian financial capital as a critical market, as evidenced by the decision to station Fuller there. But other major players in the market say they don’t see much of a threat so far. Though King & Wood Mallesons is frequently mainland China counsel on big deals, Matthew Bersani, Asia managing partner for Shearman & Sterling, says the Hong Kong team has not been competitive on major capital markets assignments. "We frankly never run into them," he says.
Beijing-based capital markets partner Jin Qingjun acknowledges that King & Wood Mallesons has had a hard time capturing big Hong Kong securities deals, in no small part because U.S. firms like Shearman, Davis Polk & Wardwell, and Simpson Thacher & Bartlett have all launched Hong Kong law practices in the past few years. The largest Hong Kong initial public offerings by Chinese companies are almost always led by U.S. lawyers because global investors demand a prospectus that meets Securities and Exchange Commission disclosure standards. "There’s usually Chinese, Hong Kong, and U.S. law," says Jin. "We can do the first two, but the client usually picks based on the last two."
Fuller concedes that challenging the elite Wall Street firms for high-profile capital markets work is probably out of reach in the near future. "Purely as a business proposition, if we added a U.S. securities law capability to our Hong Kong office, could we credibly generate the business to justify that?" he says. "It’s not a simple matter of recruiting one partner and going to investment banks and saying, ‘Now we can do your U.S. law work.’ " Fuller does think that the firm can more realistically upgrade its English law practice to a competitive level. It wouldn’t be starting from zero; many Aussie lawyers hold U.K. qualifications. Though U.S. law dominates in major securities transactions, Fuller notes that English law is more common globally in commercial transactions, including mergers and acquisitions.
Still, expanding either its U.S. or U.K. law capabilities presents special challenges for an Asian firm. International committee member Handel Lee says a major fear among the firm’s partners is that bringing in a U.S. or U.K. merger partner would result in an "unbalanced" combination. Though the firm is regularly approached by consultants proposing a combination with other firms, Lee says, King & Wood Mallesons would only consider joining with firms that are also market leaders in their respective markets. Rumored merger partner Nixon Peabody is an unlikely choice: "We absolutely have not spoken to them," Lee says. A top-tier American or British firm, however, could easily become the senior member of the coalition. "The firm’s center of gravity would inevitably shift to London or New York, because those markets are so big," Lee says.
Wang Ling, the China managing partner for King & Wood Mallesons, agrees. "When you are a small part of an international firm, that is quite different," she says. "A small part can’t have an impact on the strategy and development of the firm. And we can’t know if the other part will really understand this market."
The firm’s strategy isn’t written in stone, Lee says, but he thinks a big move in the U.S. or the U.K. is at least a few years off. Smaller markets like Canada might be a different story—although Lee says that nothing is imminent. For now, the firm’s plan for Europe and America is to try to win the lead role in deals and then hire local counsel, preferably top-flight firms that don’t have Asia offices. It’s already happening on some deals. Last year Xu had the lead role advising Shandong Heavy Industry Group on its $1 billion purchase of a 25 percent stake in German forklift maker Kion Group GmbH and its $228 million acquisition of a 75 percent stake in Italian yacht maker Ferretti S.p.A.There is one potential development, however, that would pretty much guarantee King & Wood Mallesons a major share of Chinese outbound work: the mandate of the Chinese government.
Several partners at King & Wood Mallesons say they understand there are ongoing discussions within China’s State-owned Assets Supervision and Administration Commission (SASAC), the high-level government body that oversees SOEs, about adopting regulations that would require SOEs to use a Chinese law firm on outbound transactions. The rationale would be to encourage the development of the Chinese legal profession and ensure that China has some "national champion" law firms to compete against the big U.S. and U.K. firms. In the accounting sector, China’s Ministry of Finance has already introduced rules encouraging SOEs to use domestic instead of Big Four audit firms.
The scope of any such rule—whether it would require a Chinese firm to be lead counsel or merely one of several firms on a deal—remains unclear. But given that most of China’s biggest and most well-known companies are SOEs (think Bank of China Limited, China Mobile Limited, or Sinopec), the adoption of such a rule would be extremely unwelcome by international law firms.
A rule that, in a worst-case scenario, excluded foreign firms "would be absolutely devastating," says Shearman’s Bersani. "Think about how much international firms have invested in the idea of China outbound."
There is little question that King & Wood Mallesons would be the firm best positioned to take advantage of such a rule. But Fuller says the firm isn’t counting on it: "Do you build your strategy around what government is going to do for you, or what you’re going to do for your clients?" Beijing corporate partner Harry Du says the political fallout from foreign firms and their governments would likely scuttle such a rule. Other Chinese firms, many of whom rely on referrals from foreign law firms, would be unhappy at how the rule would favor King & Wood Mallesons. "Do we really have a lot of Chinese firms that can help [Chinese companies investing abroad]? It’s really only us," Du says.
Barring a sweeping move by the government, Xu says, King & Wood Mallesons’s strategy is to gain decent market share among large SOEs and the private companies that already hire international law firms—and aim to dominate among smaller, emerging Chinese companies. "The media focuses on the megadeals," she says, "but if you look at the midmarket, there are Chinese companies that are leaders in their industry or region that are very good, very profitable companies but have very little overseas experience."
Still, many of these companies have fairly unsophisticated management structures, with no in-house lawyers and little experience using outside law firms. Price and convenience dictate their choices of counsel more than reputation and experience. King & Wood Mallesons is doing what it can to change that. The firm is currently putting together a plan targeting 50 emerging companies in Zhejiang province, a hotbed of entrepreneurial activity. The goal is to educate managers on how they should use lawyers and how they will benefit from having skilled regular outside counsel.
Getting the firm’s Australian and Chinese lawyers to work together on developing new business is one of the key integration tasks the combined firm is still wrestling with. It’s become clear that Chinese clients need to be handled differently from Australian ones. "Their style and their pace and their expectations are just different," says Xu, recalling a recent joint project for a Chinese client. The Australian team regularly emailed status reports to the client, outlining the issues ahead and highlighting key decisions that needed to be made.
"Sounds good, right? But the client was upset," she says. "They thought that [the] lawyers should take care of these things themselves and not keep bothering the client. For an international client, this is something they would expect and cause them to say the firm had done a good job. But we need to understand Chinese companies’ work style and how to make them comfortable."
Xu does think the Chinese lawyers have lots to learn from their Australian counterparts about operating a modern law firm. She notes that practice specialization is still relatively novel to Chinese lawyers. "We are not so much industry-focused," she says. "In other legal markets, the practitioners have developed more specialized industry-focused know-how and expertise. That’s something we need to develop more."
For his part, O’Malley says the Chinese partners are generally more entrepreneurial than the Australians and often have a broader view of the market in which they and their clients operate. "Our Chinese partners, in some respects, are more international than our Australian partners," he says. "That comes from being at the center of things in a very dynamic environment. Some of our Australian partners get that, some of them don’t."
As a verein, King & Wood Mallesons has separate profit pools for China, Australia, and Hong Kong. Financial integration is a stated goal of the firm, but no timeline has been set. Premerger, Mallesons was one of the more financially conservative Australian firms; it only this year moved from a full lockstep partner compensation system to a partial lockstep. That makes it more like the Chinese side, also a partial lockstep, but Fuller says the move was mainly a reaction to shifts in the Australian market. Cooperation and referrals across the verein will be taken into account in partner compensation, whether in China, Australia, or Hong Kong.
Chinese government regulations that ban foreign firms from local practice, combined with lower billing rates in China, meant that a ve­rein was the only way forward for a merger between King & Wood and Mallesons. Fuller says the firms did not agonize over it, and he dismisses the argument that only partners who share a profit pool can be motivated to work together [see "Inside the Machine"]. "I don’t believe the financial structure drives everything," he says.
It’s ultimately the clients whom King & Wood Mallesons expects to judge the success or failure of Asia’s first international law firm. And Fuller is confident that clients are ready for something new.
"A lot of law firms are quite the same," he says. "Their branding is the same, their capabilities are the same. We need to be something different."
King & Wood Mallesons By the Numbers
Total lawyers: 1,598
Gross revenues(Fiscal Year 2011): $792 million
Revenue Per Lawyer: $501,000
Total partners: 374
Structure: Verein composed of three legally and financially separate partnerships based in Australia (620 lawyers), China (789 lawyers), and
Hong Kong (189 lawyers, formed by the full merger of the legacy firms’
Hong Kong partnerships).
Offices 21, including Beijing (400 lawyers), Sydney (261 lawyers), Hong
Kong (189 lawyers), Melbourne (178 lawyers), Shanghai (173 lawyers), Perth (80 lawyers), Brisbane (72 lawyers), Shenzen (68 lawyers), and Guangzhou
(52 lawyers), among others.
• Mining company Xstrata plc—$31 billion all-share merger with commodities trading company Glencore International plc
• Glencore International plc—$6.2 billion acquisition of grain handler Viterra Inc.
• Canada Pension Plan Investment Board and Australia Prime Property Fund—$2 billion investment in Barangaroo property development
• Ministry of Finance, People’s Republic of China—RMB 23 billion sovereign bond in Hong Kong
• China Development Bank and other banks—financing for the $10 billion privatization of Alibaba.com