When two law firms choose to combine, the rationale is often transparent. Transatlantic “mega mergers” create a one-stop shop for large global clients. Boutique mergers, on the other hand, signal a growing focus on a particular practice area or client base. In this way, mergers are often telling events. More often than not, they reveal what the two firms’ shared strategy is and where they believe they can best compete.
The recently revealed merger talks between UK-based Eversheds and Atlanta-based Sutherland, on the other hand, create more questions than answers. Eversheds has long sought a US merger partner. A combination with Sutherland certainly ticks that box. What Eversheds intends more broadly in the US, however, remains unclear.
The Sutherland merger could be the beginning of a larger campaign to expand into the US. The combination could also signal that Eversheds intends on developing a core strength in a few key practice areas. More worrying would be a lack of strategy altogether. Many lagging firms have turned to mergers to solve underlying problems, an approach that has derisively been called “merger as a strategy.” It’s not clear that the Eversheds-Sutherland combination falls into this category. That said, the details of the combination should raise eyebrows among the two firms’ partnerships.
Two Very Different Merger Strategies Within 12 Months
Just 12 months ago, Eversheds was in merger talks with Milwaukee-based Foley & Lardner. It was widely believed that Eversheds had approached Foley with hopes that the US firm would see the rationale for a transatlantic merger. Unfortunately for Eversheds, talks broke down almost as quickly as they started, with Foley walking away from the table.
The difference between Foley and Sutherland is striking. Foley boasts a stable of nearly 900 lawyers and a broad range of corporate and commercial practice areas that are fairly well regarded. The firm also counts offices in most of the US’s key business centers, including Chicago; Washington, D.C.; Boston; Los Angeles; New York and San Francisco (see map below). Adding these locations to Eversheds’ global network would have created a combined firm that could have credibly argued that it offered clients a full service experience across the globe.
A merger with Sutherland, on the other hand, creates a significantly different combined firm. Look at Sutherland’s footprint. It has far fewer lawyers and offices. Nearly 80% of Sutherland’s 380 lawyers are in two offices, Atlanta and Washington, D.C. Beyond that, Sutherland offers Eversheds a few small offices, most notably in Houston and New York. The combined firm could claim transatlantic capabilities, but Sutherland’s lack of scale and limited network of offices would fall short of a national US offering. This weakens any claim that the combined firm, at least currently, offers clients a truly global experience. If this is Eversheds’ goal for a US merger, as it appeared to be when it approached Foley, Sutherland would not seem to fulfill that aspiration.
The Sutherland merger might best be seen through a practice area lens. Within Eversheds’ full-service offerings are well-regarded teams in energy, dispute resolution, antitrust and public sector law. Sutherland also boasts a fairly strong energy team. The combination of the two firms could potentially allow Eversheds to distinguish itself as a leading global provider of energy-related legal services. Beyond energy, Sutherland’s D.C. office could provide support to Eversheds’ antitrust, dispute resolution and public sector teams. In this way, the Sutherland merger could be seen as a maneuver to focus the two firm’s service offerings on energy and a few other key practice areas.
It’s worth noting that this practice area merger strategy has been tried before, with mixed results. In 2013, Norton Rose combined with Fulbright & Jaworski. This merger could be seen, at least in some respects, as similar to the Eversheds-Sutherland merger.
The Norton Rose Fulbright (NRF) combination involved a UK-based global firm with energy aspirations and a mid-sized US firm with a strong energy team, a few big offices, and an array of small offices. While differences exist between these two mergers, the NRF combination should serve as a cautionary tale for Eversheds and Sutherland. While NRF appears to have regained its footing, in the years directly after the merger, the firm struggled to grow, and profitability management was an enduring problem. This suggests that mergers focused on the goal of strengthening practice areas offer no guarantee of success. Eversheds and Sutherland will have to work hard to find synergies between their two offerings.
Merger as a Strategy: A Third Possibility
A third, more concerning, possibility is that both Eversheds and Sutherland each feel that a merger is necessary to boost their firm’s prospects. Eversheds has struggled to grow during the past half-decade. The firm is smaller today, in lawyer and revenue terms, than it was in 2009. Sutherland is arguably in worse financial shape. Similar to Eversheds, Sutherland has struggled to grow in recent years. The firm’s headcount, in lawyer terms, has been largely flat since 2008. Revenue has not meaningfully increased since 2011. Profitability is Sutherland’s primary concern, however. Margins have steadily decreased since 2003, from 41% to 29% today. Profits per equity partner (PPP) has been mostly flat, and even that is because of a 16% reduction in equity partners during the past five years. Profits per partner, a metric that can control for de-equitization of partners, has reduced by 23% over the period.
So it’s unclear what Eversheds hopes to get out of its merger with Sutherland. The combination could be part of a wider campaign by Eversheds to expand into the US through a series of mergers or lateral hires. If that is the case, the firm would be pursuing the same strategy as it did when it approached Foley, just through different tactics. It is also possible the failure of the Foley merger caused partners to rethink strategy and shift toward a more modest practice area approach.
The third, and least promising, possibility is that both Eversheds and Sutherland feel that a transformative merger is necessary to boost their firm’s prospects. If this is their hope, both firms’ leaderships are likely to be disappointed. The most common outcome of combining two underperforming firms is a larger underperformer.
ALM Intelligence Notes:
- ALM’s Upcoming Merger Report: in early 2017 ALM will release a report on law firm mergers which draws on our Law Firm Mergers, Acquisitions and Closures database.
- Outlook on 2017: ALM’s law firm leaders survey found that firm executives are optimistic about the coming year.
- Intelligence in Your Inbox: Subscribe to the ALM Intelligence Analysts Brief, featuring the latest thinking from our analysts, delivered straight to your inbox each week.
Nicholas Bruch is a Senior Analyst at ALM Legal Intelligence. His experience includes advising law firms and law departments in developing and developed markets on issues related to strategy, business development, market intelligence, and operations. He can be reached at NBruch@ALM.com.