Hogan & Hartson and Lovells are considering one of the riskiest maneuvers in the legal business — a trans-Atlantic merger, which in this case would create a global megafirm of more than 2,500 lawyers.

That strategy can work (see DLA Piper) or turn to brass (see Clifford Chance). If Lovells and Hogan do merge, they’ll move from large — but not supersized — players to one of the world’s 10 largest firms. Together, they would have $1.9 billion in revenues, prominent corporate and litigation groups, an insurance practice (currently Lovells’) that serves clients such as Prudential and Swiss Reinsurance Co., and Hogan’s top-tier regulatory practice and client list that includes News Corp., International Business Machines Corp. and KPMG International.

“If the integration is done right, this thing could really sing,” said Thomas Clay, an Altman Weil consultant who focuses on law firm mergers.

That’s the good news. The tougher questions are ones that partners on both sides are likely struggling with at the moment. Can they overcome the client conflicts that plague massive firms — and seem to cap growth? How will they share profits: Will they pool their money, or, like DLA, will they maintain separate profits for the international and U.S. operations? Can they reconcile Lovells’ modified lockstep salary system with Hogan’s more flexible compensation plan? And what about culture clash? Heck, how will the computer systems link up?

“These deals,” as law firm consultant Peter Zeughauser puts it, “are really tough to put together.”

MATCH GAME

For Lovells, the merger would give it a huge entree into the U.S. market — with roughly 900 lawyers, up from its current 38, according to the firm’s Web site. Hogan — already the most international of Washington’s home-grown large firms, with around 20 percent of its team outside the United States — would add large numbers in Europe: A merger would more than double the total number of lawyers Hogan has in Germany, bringing it from 60 lawyers in Berlin and Munich to more than 130 lawyers, and giving Hogan offices in Frankfurt, Düsseldorf and Hamburg. It would roughly quadruple the firm’s head count in the United Kingdom. The merged firm would also have offices in Asia and Russia, key developing markets.

News of merger talks broke on Oct. 8, when Legal Week and The National Law Journal posted online articles about the discussions. Hogan and Lovells aren’t talking publicly about a potential deal. Legal Week reported last week that the two firms are in the early stages of talks, which were initiated informally several months ago.

“We don’t comment on these types of matters,” said Hogan Chairman J. Warren Gorrell Jr. Lovells’ managing partner, David Harris, did not return a call for comment. A statement sent via e-mail from a Lovells spokesperson said, “We review our US strategy on a regular basis and we have recently been taking a closer look at market developments and the opportunities that we believe are available to us. Beyond that, we are not in a position to comment further and are not going to start naming or confirming individual firms or the nature or progress of any discussions we might be having with them.”

Several Hogan partners seemed caught off guard when news of the talks broke Oct. 8, saying they were first hearing of it when The National Law Journal called requesting their reaction. Others said they were still digesting it, signaling that word of the talks had been closely held. “I don’t know the details about it,” said W. Michael House, a partner and director of Hogan’s legislative group. “I don’t comment on things that I don’t have sufficient information to comment on.”

Consultants and recruiters who have worked on large mergers said the firms involved should rule out major client conflicts at an early stage and expect to cope with differing compensation systems. Legal Week reports that Lovells is to discuss the proposed merger at a meeting of its international executives on Oct. 28. A meeting like that signals the firm is serious about the merger, and has most likely already looked at client-conflict issues. “Once it’s public knowledge, you’ve got to move quickly to make sure that things are completed,” said Stephen Nelson, managing principal of The McCormick Group.

And there will still be other potential icebergs. “There are so many potential differences,” said Gary Miles, a recruiter at Santa Monica, Calif.-based Alan Miles & Associates. “You’ve got things like how people get into the partnership, compensation structures, even the fiscal years might be different. And then you’ve got retirement ages. Many British firms require you to retire at 55. And here in America, there have been court cases involving whether mandatory retirement ages are legal at all. There are a lot of things that have to be matched up.”

In an interview last week, before news of the merger broke, Gorrell said Hogan has a flexible compensation system and partner pay differs from office to office. “There is a wide range in how we compensate our partners. We don’t have to pay partners in smaller markets as much as we do in major markets like New York, or Washington, or London. We make sure our partners are compensated for what they do, where they do it.” On its Am Law 200 survey, Hogan & Hartson reported a 15-to-1 ratio of compensation for the firm’s highest-compensated partner to that of its lowest-compensated partner during fiscal year 2008. Lovells, meanwhile, uses a modified version of lockstep compensation, though Legal Week reports the firm has pushed toward a more performance-driven culture.

Altman Weil’s Clay said technology differences can also cause problems. “Technology has been the real bugaboo with some of these deals,” he said. “It’s going to be a big, big, important issue. We see some firms that end up a year or more later not integrating their technology the way they should, and that can really affect how the cultures come together.”

When Clifford Chance merged with New York’s Rogers & Wells and Germany’s Pünder, Volhard, Weber & Axster in January 2000, the adjustment was brutal. The firms were forced to deal with substantial conflicts that required either waivers or dropping the clients. Rogers & Wells’ top earners took major pay cuts when the firm switched to Clifford Chance’s lockstep compensation system, driving them to leave for competitors.

So how do Hogan and Lovells match up financially? Billable-hour requirements, a strong reflection of a firm’s culture, seem to be within striking distance. Legal Week puts Lovells at 1,700; Hogan requires associates to bill either 1,800 or 1,950 hours annually, depending on their track.

Both firms are suffering from the recession, and posted drops in profits per partner (PPP) for 2008, the first such drop in five years, according to the Am Law Global 100. Hogan’s 2008 PPP was $1.17 million, down 1.7 percent. Lovells reported 2008 PPP of $1.1 million, a decline of 18.1 percent.

Gross revenue at both firms has long been comparable, putting them fewer than 10 spots apart on the Am Law Global 100 list for the past five years. The 2008 gross revenue was $922.5 million at Hogan and $984.5 million at Lovells. Both firms have increased gross revenue each year for the past five years. The rate of growth in gross revenue for both has varied widely. For instance, Hogan’s growth revenue jumped 11 percent between 2004 and 2005, slowed to 7.9 percent the year after, soared back to 16.6 percent between 2006 and 2007, and climbed a more modest 4.8 percent in 2008. Lovells also showed the most growth in fiscal year 2007, with a 22.4 percent increase, but for 2008 posted a small 2.7 percent increase.

The two firms’ revenue per lawyer (RPL), though, showed a bigger spread. Hogan & Hartson’s 2008 RPL was $835,000. Lovells’ 2008 RPL was $695,000. Average the two firms, and the new firm would have had a 2008 RPL of $765,000, which means the new firm would have made money less efficiently than Hogan & Hartson does now. Zeughauser, though, said a consequence of having a global firm is higher leverage. Currently, Hogan has a leverage of 3.8, or 1,111 lawyers to 292 partners. Lovells has a leverage of 5.9, or 1,421 lawyers to 240 partners. Combine those numbers and the merged firm would have a leverage of 4.8, or 2,532 lawyers to 532 partners. Zeughauser said that higher leverage doesn’t mean the firm isn’t still more profitable than firms with higher RPL. Also, he said that if the two firms are comparable on profits per partner, that’s more meaningful. “With so many lawyers outside of Great Britain, that’s going to drive Lovells’ ” RPL down, he said. For instance, the Am Law Global 100 survey shows that DLA Piper, which has 64 percent of its lawyers based internationally, has a 2008 RPL of $590,000 if its U.S. and international operations are combined. Its international operations alone, however, post a lower RPL: $440,000.

NEW COMPETITION

Hogan’s Washington, D.C., office is the highest-grossing one in the region. The firm has jockeyed with rival Wilmer Cutler Pickering Hale and Dorr for the past few years for bragging rights as the largest office there. Hogan has posted higher profits per partner than Wilmer for the past three years, despite lower gross revenue and revenue per lawyer.

If the merger goes ahead, the firm’s new natural competitors would be firms higher up on the Am Law Global list such as Latham & Watkins (No. 7 this year), Jones Day (No. 8) and London’s so-called Magic Circle firms, a tier Lovells sits just outside.

Still, “Hogan is always going to be Hogan in D.C.,” said Anthony Pierce, the managing partner of Akin Gump Strauss Hauer & Feld‘s Washington office. “I don’t see a bunch of Lovells guys coming over here.” Eric Bernthal, managing partner of Latham & Watkins’ Washington office, said that “Washington is filled with all kinds of firms. We have a lot of firms that originated in D.C. We have a lot that came from outside Washington. And we’ve even started to get a presence of Magic Circle firms, so I don’t see this affecting Washington all that much.”

A more pressing question might be how a merger would change the firm’s culture, something partners at Hogan themselves must be wondering about.

Former Hogan partners said the century-old stalwart has tried to be family-friendly. Terri Reiskin, a litigator who left Hogan in 2006 after a push for higher billing rates became increasingly difficult for her auto industry clients, said Hogan “was a place where you didn’t make the most money in town, but you had the opportunity to do good work, but also have a personal life.” Reiskin, now a name partner in Washington-based litigation boutique Wallace King Domike & Reiskin, said the firm was made up of “very good people, good lawyers, good people, nice friendly welcoming environment.”

Until now, Hogan was known for growing through lateral recruitment, not big mergers. Current partner Janet McDavid, a former member of the firm’s executive committee who has been involved with lateral recruitment, said the firm has been careful to recruit new partners who are a good fit. “We spent time with the people,” she said, before news of the merger was announced. “That was true, for example, when we brought in the [Heller Ehrman] folks in the [San Francisco] Bay Area. … The folks that I work with, it’s just been seamless.”

William Wright, now a Los Angeles-based partner at Orrick, Herrington & Sutcliffe, left Hogan in July 2008. He said Hogan’s culture is conservative. “I always felt uncomfortable dressed as a Californian when I was in the D.C. office. It’s a bit more proper and formal there.”

One key feature of the firm is its centralized management structure, he said, adding that “every partner has a say, but Warren Gorrell has been driving the direction of the firm.”

And Gorrell has made no secret of his desire for global growth. In an interview last week before news of the merger talks broke, Gorrell said Hogan needed to grow more quickly, despite the down economy.

“We think this is a good time to be focused on expansion,” he said. “While we’re not immune to what’s going on, this is a good time to continue to build.”