Business of Law Firms:
Allen & Overy to merge with Shearman & Sterling​

By Jake Rickman​

What do you need to know this week?

On Sunday evening, The Lawyer broke the news that Magic Circle firm Allen & Overy and global law firm Shearman & Sterling had reached an agreement to merge.

This comes more than two months after merger talks between Shearman and Hogan Lovells collapsed.

While the deal is subject to final negotiation and approval by the partners of both firms, as far as developments in the legal sector go, this is about as big as it gets.

A&O’s 2021-2022 revenue was reported as £1.94bn, with Shearman’s revenue during the same period hovering right around $1bn. This means that the combined entity would, according to the FT, generate approximately $3.4bn in revenue (£2.7bn).

Why is this important for your interviews?

This cuts right to the heart of the legal sector. Understanding the stakes at play here will go a long way in demonstrating to interviewers your appreciation of the commercial dynamics impacting the international legal sector. Specifically, let’s break down the business case from both parties’ perspectives.

Allen & Overy

For several years now, commentators have observed that the UK’s largest law firms, including Allen & Overy, have struggled to stay competitive compared to the more profitable US firms operating in the UK.

Much of this is attributed to the fact that US firms operating in the UK benefit from their deep ties with American clients operating internationally, which has made it easier for them to generate work abroad. Whereas the UK firms with offices in the US struggle to pick off clients from the native US firms.

Similarly, many of the US firms operating worldwide benefit from economies of scale and more efficient operations that keep their expenses lower compared to the largest UK firms. As a consequence, US firms tend to be more profitable. This has contributed to a cycle where US firms are able to poach more partners from their UK counterparts in London because they offer more competitive remuneration packages.

Allen & Overy, sensitive to the threats these market dynamics pose for the firm’s future growth ambitions, has been among the keenest of the UK firms to execute a tie-up with a US firm that commands an established client base in the US (and NYC in particular). It was on this basis that A&O was in high-profile discussions with O’Melveny & Myers a few years back, but talks fell through in 2020 due to valuation issues.

Shearman & Sterling

From Shearman’s perspective, it has failed to stay as profitable as its historic competitors in New York and elsewhere in the US. There are several reasons for this, but one of them is that it failed to chase the exponential growth in the private equity market, which began in earnest in the 2000s. While the likes of Proskauer Rose and Cravath, Swaine & Moore moved to cater private capital clients during this period, Shearman doubled down on advising traditional corporate names. In effect, it lost out on this period of rapid growth, which saw firms like Kirkland & Ellis and Latham & Watkins — ostensible leaders when it comes to advising private equity clients — become the world’s largest in terms of revenue and profitability.

As a consequence, despite its efforts to expand its international footprint, Shearman has faced sharply declining profits worldwide, which has led to several episodes where the firm has haemorrhaged partners — the most recent one being after talks with Hogan Lovells collapsed.

Therefore, the idea is that by joining forces with a firm with a larger and more established international footprint, Shearman can enjoy the resultant economies of scale while also giving A&O the benefit of its blue-chip corporate client base in the United States.

Next steps

The devil is in the details. There is nothing legally binding on either firm at this point. It remains to be seen how the deal will be structured in a way that does not prejudice either firm’s partners. Other issues include associate-level compensation, as Shearman pays their associates in London and New York quite a bit more than A&O.

In any event, we will almost certainly be returning to this development in the coming weeks and months….