Business of Law Firms
Hogan Lovells and Shearman & Sterling eye potential merger​

By Jake Rickman​

What do you need to know this week?

The rumours are true. According to an article published by Law.com last week, Hogan Lovells and Shearman & Sterling are in negotiations, albeit in the early stages, to merge in what would probably be the biggest and most high-profile merger since the merger that created today’s Hogan Lovells in 2010.

Sometime this month, Hogan’s CEO Miguel Zaldivar travelled from Washington, DC to London to meet with Shearman’s senior leaders, following on from a December meeting among senior partners in New York.

For reference, Hogan Lovells’ revenue in FY 2021-22 is $2.6bn, which makes it the 12th largest global firm in terms of revenue and third in the UK among UK firms. Shearman & Sterling’s revenue in the same period was a little over $1bn, placing it at number 62 on the worldwide list.

We will look at the commercial basis for the potential tie-up in this week’s Business of Law Firm article.

Why is this important for your interviews?

Mergers and acquisitions among law firms are interesting creatures for reasons we have considered in the past, including issues valuing the business, senior compensation, and LLPs as a business structure. But when potential mergers appear on the horizon, they are important to watch because they reveal some of the key drivers of law firms as a business.

Market context

To start, it is worth appraising the legal market on both sides of the Atlantic to appreciate the context in which the merger talks are happening.

As has been the case for more than a decade, US firms are jockeying to corner as much of the UK market as possible, whereas UK firms are struggling to make inroads in the US at all. This makes strategic mergers a potentially effective way to quickly consolidate the transatlantic market share.

In fact, the merger between DC-based Hogan & Hartson and the UK firm Lovells in 2010 was widely hailed as one of the most successful mergers between a US and a UK firm for precisely this reason. Following the merger, the newly constituted Hogan Lovells became one of the largest firms in the world due to the synergies unlocked by the merger, which gave it a commanding presence in most of the US, the UK and Europe, the Middle East, and the Asia-Pacific region.

Presently, however, Hogan Lovells is underrepresented in the New York market, largely because Hogan & Hartson was traditionally a DC-based firm. Enter Shearman & Sterling, which is among the original “White-Shoe” NYC firms and therefore makes it one of the top NYC firms today.

The merger would also do more to disrupt the notion that Hogan Lovells is first and foremost a disputes shop (despite a steadily growing worldwide transactional reputation), given Shearman’s status as one of the elite corporate/M&A firms worldwide.

From Shearman’s perspective, while it still commands an impressive transactional reputation (especially in the NYC market) in the past few years its headcount worldwide has decreased. Particularly in London where between 2017 and 2021, it lost a net total of 30 lawyers. Tying its fortune to Hogan Lovells would therefore solidify Shearman’s presence in London and elsewhere.

The pursuit of economies of scale

According to Law.com, Sherman’s primary goal in pursuing a merger is to “create a $3 billion business” in terms of revenue as a way to optimise costs. This reflects the economies of scale that often arise following a merger between two businesses, as each of the businesses, operating as a single entity, can effectively lower expenses to a greater degree than operating by themselves.

Not accounting for any synergies that emerge in terms of increased revenue, it is likely that the value of the combined assets would mean that a successful merger between the two firms would generate more than $3bn given each firm’s current performance, thereby achieving Shearman’s goal. Based on FY 2021-22 figures, this would place the merged firm well among the top 10 firms worldwide. A compelling prospect indeed!

Next steps

When it comes to securing a deal, the devil is in the details. Aside from operational considerations, one of the most fraught matters to negotiate in a law firm merger is dealing with existing equity partnership shares and senior compensation. This has sunk deals in the past, reportedly including talks between Allen & Overy and O’Melveny & Myers in 2019.

This is to say, Hogan Lovells and Shearman & Sterling are probably some ways away from reaching a binding agreement to move ahead with the merger.