Business of Law Firms
Further developments in the Hogan Lovells-Shearman merger discussions​

By Jake Rickman​

What do you need to know this week?

This week, we follow up on the last Business of Law Firms article which analysed the business case behind the confirmed merger talks between Hogan Lovells and Shearman & Sterling. We will look at a new article published yesterday by Law.com that evaluates several factors disclosed to Law.com by insiders and legal sector commentators since ongoing negotiations were confirmed.

The most salient factors disclosed in the article include:
  • a de-equitisation process undertaken in 2017 that stripped “many” partners undertaken of their profit-sharing rights in the firm in an effort to nudge out older partners, but which did not have the intended effect;
  • Shearman’s “reluctance” to match partners’ pay relevant to the competition;
  • Reports by external recruiters that Shearman has recently overpaid lateral hires to bolster its recruitment efforts; and
  • Among the firm’s 25 global offices, some are not sufficiently profitable, which, at least in the case of the firm’s Asia-Pacific operations, means it is actively downsizing its presence in the region.
Why is this important for your interviews?

We revisit the talks between Shearman and Hogan Lovells for the second week in a row because, as far as such developments go, this is a big one. Therefore, it is worth watching to ensure you appreciate the business dynamics underway. With all credit due to Law.com, these factors it evaluates in its most recent article provide further context to last week’s analysis on the business case for the potential merger.

The list of factors Law.com identified in some respects may overstate the extent of Shearman’s relatively uncompetitive financial performance. Without regard to the context, it would be easy to conclude that Shearman may be financially distressed and that this is a “rescue merger”. But that is not necessarily the case.

One of the key things to bear in mind is that Shearman is being compared to its historic peers, often known as the Manhattan White Shoe firms, which include the likes of the wildly profitable Paul Weiss and Sullivan & Cromwell. While Shearman has not maintained the levels of profitability it enjoyed two decades ago, it is still recognised as having first-rate practice groups in areas like finance and traditional corporates. (And, as an aside, from the perspective of hopeful trainees in London, Shearman has one of the largest presences in London and takes on more trainees than many of its White Shoe competitors…)

As another article published by Law.com last week notes, one of the biggest factors explaining Shearman’s modest fall from grace was its failure to anticipate the explosive rise in private capital and the impact it has had on the markets over the past few decades. This largely explains Kirkland & Ellis and Latham & Watkins’ meteoric ascent to the top of the worldwide revenue tables, as they grew their revenue by shrewdly catering to private equity firms and other financial sponsors.

As a result, Shearman’s revenue generation has lagged, which has over the course of the past 20 years dragged down its profit.

As Law.com reports, Shearman is at an awkward point where it is “Large enough for strain and overhead, but too small for the offices to leverage off each other and grow an international network to profit them”. This is consistent with what insiders reported is Shearman’s principle goal: to merge with another firm and generate $3bn per year with the combined assets. The hope is that the economy of scale that comes with such a merger will reduce expenses and thereby boost profits.

It is a bold move. Let’s see how it pans out!