Business of Law Firms - Revisiting the A&O and Shearman tie-up​

By Jake Rickman​

What do you need to know this week?

For this week’s Business of Law Firm series, we return yet again to the much-hyped merger announcement between Allen & Overy (A&O) and Shearman & Sterling (Shearman).

As The Lawyer notes in an article published last week, each of the firm’s management committees have together negotiated nearly all the agreement’s terms. This means it is now up to the respective partners of both firms to either accept or reject the agreement.

Last week we considered the merits of the deal. This week, it is worth looking at some of the challenges inherent to the deal, which each firm needs to sell to their respective body of partners before the deal can be consummated.

We will consider some of these challenges in the overview below.

Revenue generation concerns

In effect, partners for both firms will be banking on the assumption that the tie-up will produce synergies that create more value than either firm can produce by itself.

This is far from certain: Shearman’s revenue has plateaued in recent years, which means that the newly-merged firm will have to quickly integrate worldwide operations to change course. This will require deft leadership and the commitment of the vast majority of partners on both sides of the deal to generate synergistic growth.

Profit sharing

Somewhat separate is the profit-sharing question. Each firm will have its own private agreement in place that allocates profits to partners based on several factors including performance and length of service.

Because this is in principle a “merger of equals” (rather than an outright acquisition of one firm by the other), each firm’s partners will need to effectively welcome the other firm’s partners as their own. The long-term consequence is that, eventually, all the partners are likely to have to adapt to a new profit-sharing arrangement. Depending on factors like location, market, seniority, and performance, a new arrangement may make some partners better off and others worse off.

Historically, Shearman has been more profitable on a PEP basis than A&O, though in recent years due to Shearman’s performance difficulties, this differential has come closer to parity. As an extensive analysis of the deal published by Law.com observes, A&O may have some leverage here in convincing Shearman partners to join forces on the basis that Shearman’s fortunes may continue to deteriorate in the absence of a deal.

Location redundancies

Both A&O and Shearman largely operate in the same areas worldwide, with some exceptions: Shearman has more coverage of the North American market presently than A&O, with offices in Dallas, Houston, Austin, and Toronto. A&O has a larger global presence in certain regions.

Noting these exceptions, there is likely to be at least some material overlap with each firm’s current market positioning. Some partners may accordingly view the merger as a threat to their ability to generate future work for the firm if there are significant conflicts of interest that arise.

Cultural compatibility

As The Lawyer article mentioned above notes, there has been a tradition of partners in firms on one side of the Atlantic viewing the cultures of firms from the other side with suspicion. Historically, US firms have a reputation as being more performance-orientated, whereas UK firms are seen as more collegiate.

Accordingly, A&O partners may view Shearman’s culture as too cutthroat, with Shearman’s partners thinking A&O is too soft. Partners may therefore be resistant to integrate the two firms on this basis.

However, this is probably a rather reductive way to look at the issue of culture. For instance, office culture can be more influenced by location rather than the national origin of the firms. By this reasoning, the London offices of both firms probably have more in common with one another than differences — the same being true for NYC offices.

Why is this important for your interviews?

Not only does weighing up the merits and disadvantages of a deal give you some good talking points in an interview or application context, but it also reveals some of the fundamental commercial drivers of large law firms and their business objectives. Generalising these drivers and then considering how they relate to the firms you are interviewing with will aid your commercial awareness.