Last year, when China’s King & Wood merged with Australia’s Mallesons Stephen Jaques, the buzz surrounding the deal was palpable. Both law firms’ home markets had boomed while Europe and the United States remained mired in recession. The seemingly bottomless Chinese appetite for Australian natural resource wealth appeared to be a sturdy foundation on which to form the first international law firm based in the Asia Pacific region.
But last week, when King & Wood Mallesons announced that British firm SJ Berwin was joining the union, it was to a very different world. The Chinese economy has slowed significantly this year amid widespread concerns over the health of the country’s financial system. Lower demand in China has simultaneously brought Australia’s long mining boom to an end.
With the U.K. economy still sluggish, King & Wood Mallesons now looks like a law firm bringing together three slowing markets rather than two booming ones.
Senior partners at King & Wood Mallesons and SJ Berwin declined to comment for this story, but, in a statement released last week at the press conference announcing the merger, King & Wood Mallesons China managing partner Wang Ling said: “Our clients are rapidly globalizing. This combination with SJ Berwin provides us with the strength and depth and a quality international platform to help them navigate the complexity of inbound and outbound Chinese investment around the world.”
Slowness is a relative concept when it comes to China. The country’s economy is still expected to grow 7.5 percent this year, down from 10.3 percent three years ago. That remains much higher than any other large economy, but it’s not strictly comparable. The Chinese government has consistently said it needs a high growth rate just to maintain current employment rates, as large numbers of peasant farmers join the urban workforce every year.
Meanwhile, the outlook in Australia has also worsened. While in 2012 gross domestic product grew 3.1 percent—the highest since 3.8 percent in 2007—that number has since dipped, putting Australia on track for just 2.5 percent economic growth this year. And the country’s law firms say they’ve felt the slowdown.
“The legal market in Australia is subdued, [mergers and acquisitions] and equity markets are subdued, and foreign direct investment has slowed significantly,” says Clayton Utz chief executive partner Darryl McDonough. “It’s not as strong as it was.”
The story of the merger has always been about cross-border rather than purely domestic work though. Indeed, the main rationale for King & Wood Mallesons has always been that it will be the firm best positioned to represent emerging Chinese companies on outbound transactions.
For Australian firms like the former Mallesons, there has always been concern that their large size and sophisticated practice capabilities faced limits imposed by the relatively small size of their natural client base of global Australian companies. Other Aussie firms have addressed this concern by tying up with large U.K. or U.S. firms, but Mallesons decided to cast its lot with China’s leading firm.
At the press conference last week, SJ Berwin senior partner Stephen Kon said its European clients are shifting their focus east to China and the rest of Asia, and the firm is looking to the merger to better position itself to capture that work.
“That's how we see our clients going, and that’s how we think the legal profession should be going as well,” he said, “based in Asia, which is one of the unique features of this combination.”
A major challenge for King & Wood Mallesons has been the fact that the biggest international transactions tend to be governed by U.S. or U.K. law, though. As such, large Chinese companies have tended to hire big-name American and British firms for their major outbound deals. In May, Shuanghui International Holdings Ltd. used Paul Hastings and Troutman Sanders to guide it through its proposed $7.1 billion acquisition of U.S. meat processor Smithfield Foods. And last year, Herbert Smith Freehills and Davis Polk & Wardwell advised China National Offshore Oil Corp. on its $15.1 billion purchase of Canadian oil and gas company Nexen Inc.
The dominance of U.S. law in capital markets is a major reason King & Wood Mallesons has had difficulty competing for assignments in Hong Kong, the only market where the two firms are fully merged. “There's usually Chinese, Hong Kong, and U.S. law [in Hong Kong initial public offerings],” King & Wood Mallesons Beijing capital markets partner Jin Qingjun told The Asian Lawyer earlier this year. “We can do the first two, but the client usually picks based on the last two.” The firm does still often get the local Chinese counsel role in Hong Kong initial public offerings, so it has nonetheless suffered along with other firms through the downturn that has hit the Hong Kong IPO market over the past two years.
The addition of SJ Berwin will obviously give the combined firm considerable U.K. law capability, and King & Wood Mallesons clearly hopes that will allow it to advise on more Chinese deals targeting Europe.
At the press conference in Hong Kong last week announcing the merger, Wang Ling said client demand for advice on cross-border deals between China and Europe was a major factor in the decision to tie up with SJ Berwin. Particularly over the last couple of years, she said, her firm has advised a number of Chinese clients on successful inbound deals to Europe. Last year King & Wood Mallesons acted for Shandong Heavy Industry Group on its $1 billion purchase of a 25 percent stake in German forklift maker Kion Group GmbH, as well as its $228 million acquisition of a 75 percent stake in Italian yacht maker Ferretti S.p.A.
“We can see the need from the market, from our clients,” she said. “So we believe the combined firm can provide a strong capability in that part.”
Chinese investment into Europe did see a significant jump in recent years, climbing 362 percent to $16.4 billion in 2011 from $3.5 billion the year before, according to Mergermarket figures. But that number fell to $10.5 billion in 2012, and year to date is at just $2.3 billion. That compares to $20.1 billion in investment into Canada and $11.9 billion into the United States last year. In 2013, China–U.S. deals are at $11.2 billion, and the country has already put $4.2 billion into Mozambique alone. And dozens of well-known global firms are already competing tooth and nail for that work.
One Beijing-based partner at a Chinese firm, who requested anonymity, says the current volume of Chinese overseas investment would give him pause about a merger that was meant specifically to catch that deal flow. That’s especially true when those deals are spread out across numerous markets, such as in Africa and South America, rather than being focused on one particular country or region. “Nobody can build a business off the outbound work yet,” the partner says.
Most other Chinese firms have cited the difficulty of competing for cross-border assignments as a reason to stay focused on the domestic Chinese market. Jun He Law Offices, King & Wood Mallesons’s leading rival among Beijing firms, has flatly said it’s not interested in international mergers. “We believe there is a lot more work in China to be had,” managing partner David Liu told The Asian Lawyer in a June feature about the firm, “and that it is best to leave international law to Western lawyers who do it best.”
Jun He Hong Kong partner Stephen Wozencroft says his firm has benefited as international firms have shifted referrals away from King & Wood Mallesons, which they perceive as a competitor. He expects that trend to accelerate with the SJ Berwin merger.
“King & Wood Mallesons gets the opportunity to massively improve its outbound work,” he says, “and June He gets the chance to increase its referrals from inbound work.”
Some observers say the latest merger has generated less excitement because, while King & Wood and Mallesons were both leaders in their respective markets, SJ Berwin, though well regarded, is generally ranked a notch below the firms of U.K.’s Magic Circle, such as Clifford Chance or Freshfields Bruckhaus Deringer.
Law firm consultant Peter Zeughauser thinks the merger with SJ Berwin may diminish King & Wood Mallesons’s image relative to the Magic Circle and top U.S. firms.
“SJ Berwin is not a Magic Circle firm, and it’s unclear how close to that they are,” he says.
But Zeughauser does think that King & Wood Mallesons underlying strategy of servicing Chinese clients on global deals remains a sound one, noting that the Chinese government wants to see indigenous law firms expanding internationally.
“Many of the market forces are in place for the major indigenous Chinese firms to become global players, but they are inhibited by lack of Western law capacity, uneven levels and quality of practices, and exceedingly intense price competition,” he says. “With Mallesons and Berwin, King & Wood is seeking to address the first two inhibitors. The third is tougher. They are going to have to embrace much more disciplined practice management. Mallesons will be a big contributor to that endeavor.”