Allen & Overy has made no secret of its intentions to make more inroads in the United States, with successive management teams speaking candidly of a desire to gain more traction in the world’s biggest legal market.
But that talk now looks as if it’s about to transform into reality, with the news that it is in merger discussions with the U.S. firm O’Melveny & Myers.
If successful, the tie-up would represent a huge step forward for Allen & Overy, and the talks are likely to have an immediate ripple effect at the top end of the legal market as rivals reconsider their own strategies in response to the news.
One London senior partner at a U.S. firm admitted the news gave him pause. “My immediate reaction was one of concern. If one of the Magic Circle can make a genuine and effective alliance and really break into America, that would be powerful,” he said. “Is this a game-changer and how should we respond?”
So far, the Magic Circle’s plan of attack in the United States has been mainly to hire in teams from domestic firms, with some breaking lockstep to do so. In 2016, A&O brought in a team of finance partners from a spread of heavyweight New York players, which arrived to much fanfare. But less than two years later, one of that team, global leveraged finance co-head, Scott Zemser, has already left for Mayer Brown.
A&O also boosted its New York presence with a three-partner finance and securities team from Paul Hastings in February of last year. But many in the market said this slow growth strategy, often scuppered when U.S. firms manage to tempt back partners, is not working.
“The model of buying teams in to add capacity to a small U.S. offering doesn’t go far enough,” said one Clifford Chance partner. “If Magic Circle firms such as A&O are looking at U.S. mergers, they are saying that they need to change their approach.”
Clifford Chance, which itself merged with New York firm Rogers & Wells in 2000, struggled with internal discord in the wake of the deal, with a string of senior U.S. partners quitting over such issues as compensation, conflicts and management structures. Although the firm’s Americas practice does now appear to be more settled, it has taken time.
“So far, Magic Circle firms’ efforts to merge or add teams has not worked out, while breaking lockstep for U.S. teams has wide implications,” a Slaughter and May partner said.
Kent Zimmermann, a consultant with law firm advisory outfit the Zeughauser Group who recently helped close three large merger deals, including the cross-border union of Bryan Cave and Berwin Leighton Paisner, said he is seeing increased interest in trans-Atlantic tie-ups from law firm leaders on both sides of the Atlantic.
“I have experienced a recent increase in interest on the part of some leaders of Magic Circle and silver circle firms in assessing the U.S. market,” said Zimmermann.
Zimmermann, who is currently in London but is not involved in the A&O and O’Melveny talks, added he was aware of U.K. firms exploring all options, including growing through lateral hires, large group acquisitions and possibly combining with another U.S. firm, if the right fit exists.
One London partner at a U.S. firm said that while the onus is now on A&O’s rivals to respond, their options are not plentiful.
“If they can pull it off, I think it will put the other Magic Circle firms under a lot of pressure,” he said. “This kind of event triggers consolidation, but it’s hard to see how it could happen with better U.S. firms.”
A&O has sifted through some of those options in recent years, holding talks about potential tie-ups with a number of U.S. firms. For example, it discussed a possible merger with Arnold & Porter—which subsequently merged with Kaye Scholer—according to two sources familiar with those negotiations.
These talks reportedly have resulted in A&O settling on O’Melveny, a firm known for its credentials in litigation, private equity and entertainment, with a client roster that includes Apollo Global Management, Chubb, Colgate Palmolive, Samsung, Lionsgate, Warner Bros and American Airlines.
The firm’s highly rated entertainment practice has acted on high-profile disputes for Disney, while Daniel Petrocelli, the Los Angeles-based chair of the firm’s trial practice committee, has been involved in a raft of headline-making cases, including defending President Donald Trump and former Enron CEO Jeffrey Skilling. Last year he also was brought in for AT&T’s defense of its $85.4 billion acquisition of Time Warner.
In London, where O’Melveny launched in 1985, the firm has a seven-partner office led by former Linklaters tax partner Jan Birtwell, while other senior London figures include two SJ Berwin alumni—former senior partner Jonathan Blake, who joined from King & Wood Mallesons last year, and investment funds partner John Daghlian—as well as European head of M&A and corporate finance Andrew Weiler, who joined from White & Case in 2015. Key clients include Coller Capital, which the firm advised on a $5.5 billion private equity fundraising in 2012.
The firm has watched its finances recover during the past three years, following a decline that halted in 2014. The firm’s revenues have still not returned to 2010 levels, or 2012, when the firm had its best year with $818.5 million in gross revenue and partner profits topped $2 million for the first time.
Within the past decade, O’Melveny has not kept pace with some of its LA-founded peers, such as Gibson, Dunn & Crutcher, Latham & Watkins and Paul Hastings. Between 2006 and 2016, O’Melveny partners saw their profits increase 20 percent. But at Gibson Dunn that increase was 87 percent, at Latham 65 percent and at Paul Hastings profits were up 62 percent during that same timeframe, according to data gleaned by ALM Intelligence.
O’Melveny has also seen a number of recent partner departures in New York, including former executive committee member and global restructuring co-chair George Davis, who left in March to become the new global co-chair of restructuring, insolvency and workouts at Latham. Richard Shutran, who joined in 2012 following the collapse of Dewey & LeBoeuf, where he served as co-chair of the firm’s corporate department and chair of its global finance practice, left this week for Winston & Strawn. At least one other U.S. partner left reportedly because of the merger.
Despite these stutters, one senior London source said news of the merger talks would “put the heebie-jeebies up the big firms and upper midmarket.” And A&O’s rivals are sure to be eyeing developments with interest—and perhaps more than a dash of concern, the source said.
“The Magic Circle firms will have to watch this closely,” said one London-based partner at a U.S. firm. “And perhaps match it for fear of being left behind.”
Additional reporting by Christine Simmons and Meghan Tribe.