K&L Gates will head into Australia in a big way when it officially merges with Aussie firm Middletons on January 1, but the market is not — and cannot be — for everyone, some analysts have said.
The merger will give K&L Gates an additional 300 lawyers across new offices in Melbourne, Sydney, Perth and Brisbane and a 400-lawyer presence across 11 offices in the Asia-Pacific region. K&L Gates leader Peter J. Kalis said Australia was an attractive market, in its broadest terms, because of its ties and familiarity to other Asian markets while at the same time being an English-speaking territory, the $550 billion in U.S. investment into Australia since 2005 and the Australian legal work being done in the wealthy country by Middletons lawyers.
The Asian market, particularly China, has been very difficult for U.K. and U.S. firms to penetrate, consultant Peter Zeughauser said. Australia has been used by firms in England and, to some extent, the United States, as a bridge to Asia.
“A lot of people see this as a way to triangulate the issue of the Chinese market … [U.S. firms] had been going to Singapore, Korea and China and even Vietnam, but the cultural differences are difficult to bridge,” Zeughauser said. “Australians are more familiar with that and they have the breadth and depth in the region and Western law expertise. So it’s a friendly neighbor kind of thing.”
Not only have a number of London’s Magic Circle firms already entered the market, but so has Chinese firm King & Wood, making official this year its combination with Australian-based Mallesons Stephen Jaques to form King & Wood Mallesons. The new firm is geared toward representing legal needs across the Asia-Pacific region.
DLA Piper and K&L Gates are the first two U.S. firms to join forces with a large Australian firm. DLA Piper officially combined with DLA Phillips Fox in 2011.
“There are a handful of opportunities in Australia,” Zeughauser said. “That’s why it made sense for DLA and K&L Gates to get on it.”
Zeughauser said there are only about five to seven opportunities in terms of larger-scale merger candidates in Australia, and two of them have already been taken by K&L Gates and DLA Piper. There are U.S. firms that are still interested in entering the Australian market. Zeughauser said there will probably be a few more mergers and then that window will close with the next step becoming alliances between Australian, Chinese and U.S. firms.
Kalis also said the market in Australia was shrinking when it came to merger opportunities.
“Let’s just say the opportunities are finite and diminishing,” Kalis said.
Kalis noted two Australian firms with about 800 attorneys each, which he said didn’t make as much sense for K&L Gates as did a 300-lawyer firm in the region. Then there are one or two other firms the size of Middletons that have made it abundantly clear they want to remain independent, Kalis said, though adding the perspective of those firms could change over time.
Kalis said his counterpart at Middletons, managing partner Nick Nichola, has described the Australian market as one that is being “hollowed out,” with large firms remaining on one end and boutique firms on the other.
Kalis said it would be difficult to open in Australia with just a few lawyers because there would be little brand recognition. But some U.S. firms have taken that approach.
Five decades ago, Baker & McKenzie launched a Melbourne office. Now, the firm has more than 50 lawyers there and more than 150 in Sydney.
Jones Day opened in Sydney in 1998 and the lawyers there practice Australian law across a full spectrum of practice areas, including cross-border transactions, litigation and employment law. Jones Day has 25 attorneys in the office.
In 2001, Sullivan & Cromwell opened in Sydney, where the firm has a specific emphasis on representing Sydney-based corporations and investment banking clients. The firm opened a Melbourne office in 1983, from which it serves clients with legal needs in both Australia and New Zealand. The firm has three lawyers based in Sydney and four in Melbourne, with a handful of other attorneys from some of the firm’s other offices handling matters in the region.
Skadden, Arps, Slate, Meagher & Flom opened a Sydney office in 1989 and has focused mainly on representing Australian and New Zealand clients on the U.S. aspects of cross-border transactions. Skadden has six attorneys in its Sydney office.
Reed Smith global managing partner Gregory B. Jordan said in October that his firm would have to start looking at entering markets like Brazil and Australia. He also said at that time that the firm wouldn’t be doing the very large-scale mergers it had done in the past, but rather would grow in smaller steps.
“At this point, we wouldn’t expect to want to have several hundred lawyers in Australia, so doing a big merger is less important for us,” Jordan told The Legal on Wednesday in an emailed statement. “We will continue to assess our clients’ needs in Australia. If that leads us to want to have a presence, then we will find the right team to help us make that happen.”
Jordan said Australia is a market of “potential interest” for Reed Smith, but Singapore, where the firm just opened, and Houston, have more of Reed Smith’s immediate attention.
“Merger is one of the ways to enter a new market such as Australia, but there are other effective approaches if the right combination is not available,” Jordan said. “It really depends on what kind of operation you want to have in the market.”
Ed Wesemann, a consultant with Edge International, said Australia is one of the most competitive markets in the world. He said the country’s corporations have long given out work through competitive bidding processes. He also noted that Australia’s population — coming in at 22.8 million, according to the Australian Bureau of Statistics — is relatively small and there are a number of lawyers competing for that work.
Wesemann said Australia’s big play nationally is its natural resources sector, while the country is also appealing to U.S. firms because of its strong ties with China and other Pacific Rim nations.
If U.S. firms don’t intend to do Australian legal work in Australia, but rather focus on work for other Asian markets, then Wesemann said he would question why those firms wouldn’t just look to open in those Asian countries. Wesemann conceded, however, that the language and cultural barriers may be a reason to open up in Australia instead.
Kalis said the U.K. firms entered Australia with a main focus on the Asia-Pacific play. There is no law firm, however, that is branding itself as one that can handle the U.S. investment into Australia, Kalis said. K&L Gates is one of the only U.S. firms that can currently offer that, he said.
“The longer that condition persists, the better for us,” Kalis said.
As to work in Australia, Kalis said it is no more competitive than any other legal market right now. He said Australia has one of the largest economies in terms of GDP in the world and a higher per capita GDP than many countries, including the United States and England. Kalis said Australia has one of the strongest and best capitalized banking systems in the world.
Zeughauser noted Australia has deep expertise in the mining industry and the Chinese are interested in mineral rights all over the world.
The abundance of English-speaking lawyers familiar with Asian markets but trained in common law was also a big plus, Kalis said.
“It is the largest population of those lawyers in the Asia-Pacific market,” Kalis said. “So over the years we fully anticipate we will be able to deploy Australian lawyers throughout the region in service to our clients.”
Kalis said the referrals have already begun. After seeing news of the merger, a company in South Carolina called Kalis on Wednesday with a tax problem it was facing in Australia. That advice on local Australian tax law could unlock the door to expand the relationship with that client for other matters, Kalis said.