There are two reasons, each dispositive in its own right, that an elite transatlantic law firm merger isn’t going to happen: the elite US firms have sufficient presence in London not to want one, and the UK firms have insufficient profitability to afford one. Might a UK firm merge with a US player below the elite? Possibly, but the practice synergy is much weaker, and the viable US firms would not have the prestige to be compelling to the elite UK firm’s partners. If this latter didn’t scuttle the combination, it would sabotage the integration.
Let’s start with the U.S. elite. To define this group, we looked at the firms with Band 1 Chambers USA Nationwide rankings in either of corporate law’s two most prestigious practices: corporate/M&A and capital markets. This identified the eight firms shown in Table 1; the table also shows these firms’ U.K. rankings for the comparable practices. Six of the eight firms have ranked practices in the U.K. For these, merging with a U.K. firm is a less compelling way to bolster these practices than organic growth and lateral acquisition. The two U.S. firms that don’t have a ranked London presence, Cravath and Wachtell, are unlikely to want a London merger partner. As high-end specialists, their business models require they be independent of any one London firm so that they can act as U.S. counsel on mega matters to a myriad of London firms. Hence, there’s no compelling logic for an elite U.S. firm to find a London merger partner.
If we define the U.K. elite in an analogous manner, i.e. firms with Band 1 Chambers U.K. rankings for the same two practice areas (allowing that, unlike in the U.S., London capital markets rankings are in separate debt and equity components), we get the four firms shown, along with their U.S. rankings, at the bottom of Table 1. Unlike their U.S. counterparts, these firms do not have ranked U.S. practices (after many years of trying for some).
Three of these U.K. firms (Clifford Chance, Freshfields, and Linklaters) have broad global footprints. It is easy to imagine that they would value a stronger U.S. (particularly New York) presence and see a transatlantic merger as a means to achieve this: it would give them a share of the high-priced U.S. market, albeit at the cost of some referral business from New York firms. For the fourth firm, Slaughter and May, the assessment is probably different: unlike the others, it has remained largely U.K.-focused. Its positioning in London is analogous to that of Cravath and Wachtell in New York – high-end specialists, available to act as U.K. (and European) counsel on mega matters to all U.S. firms.
So, could the London troika of Clifford Chance, Freshfields and Linklaters find an elite combination partner in New York? It’s very unlikely; even if a U.S. firm thought a combination attractive, the U.K. firms are simply not profitable enough to be viable combination partners. Figure 1 shows how the most profitable U.K. firms would rank among U.S. firms by profit per equity partner (PEP). Linklaters, Freshfields, and Clifford Chance would rank as 36th, 38th and 50th by PEP, respectively. The one U.K. firm with sufficiently strong PEP to be a viable merger partner – Slaughter and May at 11th – would be ill served strategically by a combination.
I should note that the PEP comparison here is not a spurious exchange rate artifact. Rather than a spot rate, the analysis uses the long-run equilibrium rate and applies it to both non-sterling revenues being consolidated onto the U.K. firms’ Companies House reports and to the translation of the resultant sterling-denominated profitability into dollars.
We may see an elite U.K. firm combine with a U.S. firm ranked somewhere between 30th and 50th by PEP but it’s unclear how successful this would be. The strategic logic wouldn’t be straightforward, as the U.S. firms in this profitability band don’t have sufficient strength in the flagship corporate/M&A and capital markets practices to deliver real synergy. In theory, the newly-acquired U.S. firm could be used as an at-scale platform on which to build a presence in these practices through lateral hiring; in reality, elite New York lawyers are far too prestige-aware to find a U.S. firm in this PEP band a compelling new professional home. A U.S. combination would round out the geographic presence of the London firms, but this would come at a cost in the form of reduced referrals and is of questionable incremental value to clients. And then, of course, there are the human aspects: partners at the elite U.K. firms are unlikely to be flattered by the prestige of the U.S. firms that would find them an attractive combination partner. If their disdain didn’t prevent the deal from happening, it would doom the integration.
There may have been a time when an elite U.K. firm could have merged with an elite U.S. firm but, if so, it’s in the past. There may be a time when an elite U.K. firm could merge with a below-the-elite U.S. firm but if so it’s in the distant future – it’ll take U.K. partners a long time to accept the reality of who their peer U.S. firms are.
Hugh A Simons, Ph.D., is formerly a senior partner and executive committee member at The Boston Consulting Group and chief operating officer at Ropes & Gray. He writes about law firms as part of the ALM Intelligence Fellows Program. He welcomes readers’ reactions at HASimons@Gmail.com
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