Dusseldorf A new transatlantic law firm is emerging: The “Magic Circle” law firm Allen & Overy and the law firm Shearman & Sterling, which has a particularly strong presence in America, have declared their intention to merge and to operate as “A&O Shearman” in the future.
The merger has not yet been formally completed. After the summer break, the partners of the two companies will be asked to vote. If 75 percent of the lawyers entitled to vote vote yes, nothing stands in the way of the merger. It is very likely that the lawyers will agree to the project.
Even the pure numbers show what a heavyweight in the commercial law firm market A&O would represent. The two units are represented worldwide with 68 offices. With almost 4,000 lawyers, the new unit could achieve annual sales of more than three billion euros.
The planned merger is more than just a one-off event on the law firm market. It is a sign that the need for transatlantic cooperation in the largest business law firms is constantly increasing – and with it the pressure in the industry to expand cooperation or forge new alliances.
The top addresses go different ways to do this. With Hogan Lovells, there was already a European-American fusion before A&O Shearman. In 2010, Lovells and Hogan & Hartson had teamed up. After initial difficulties, the company has established itself. With more than 2500 lawyers, it is one of the top ten of the world’s largest law firms.
Freshfields relies on career changers
The British-German top law firm Freshfields Bruckhaus Deringer is also trying to gain a stronger foothold in the USA. However, she relies on a different strategy: In order to establish her own offices in the United States, she has recruited numerous top-class lawyers in recent years. With its aggressive growth, it was primarily able to attract well-known transaction lawyers from some elite addresses.
In addition, she significantly increased the salaries of the young lawyers. “They had to spend a lot of money for this, but the overall expansion in the USA is going really well right now,” says a well-known M&A lawyer about the competitor. He himself works for the German office of a top US law firm and is therefore following the path of his competitor with particular interest.
Since 2019, Freshfields has increased the number of its lawyers in what is by far the most important law firm market in the world by more than half to more than 300 professionals. Freshfields has locations in the financial heart of New York, the capital Washington and Silicon Valley. In the 2022 fiscal year alone, Freshfields increased US sales by almost 30 percent to almost $282 million. Revenues in Europe, on the other hand, stagnated at just under 1.3 billion pounds sterling, which is the equivalent of 1.6 billion US dollars.
It is not easy for top European law firms to compete with the established top addresses in America. The reason is simple: US companies are significantly more profitable than their competitors on the old continent. Partner hourly rates easily exceed $1,000, and there are many more large deals and capital market transactions that are particularly generously remunerated. That’s why it’s easier for Americans to acquire top-class partners for their offices in London, Paris, Frankfurt or Munich.
US law firms are more productive
When it comes to productivity, measured in terms of sales per professional, US law firms generally dominate. There is not a law firm in the entire top ten that is not headquartered in the USA. According to surveys by the industry service Juve in 2021/2022, the frontrunners were Kirkland & Ellis and King & Spalding, with each German lawyer achieving an average turnover of 1.4 million euros. The next places were followed by Latham & Watkins, Sullivan & Cromwell, Dechert and Quinn Emanuel Urquhart & Sullivan, each breaking the €1.2 million mark.
However, most US law firms also focus on the particularly lucrative business: medium-sized and large company takeovers, IPOs and financing. This is where you can make the most money. Areas of law such as construction law or public law are irrelevant. And tax or labor law are at most peripheral areas in which individual specialists work on the large transactions.
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The top German law firm Hengeler Mueller was 13th in the 2021/2022 productivity ranking as the best non-US law firm with sales per professional of almost 950,000 euros. It is pursuing a strategy of independence. “We are independent and will remain so,” says co-managing partner Bernd Wirbel.
He sees no need to merge with other European or even US law firms. Hengeler occasionally works with Best Friends. In Europe these are Bonelli Erede in Italy, Bredin Prat in France, De Brauw Blackstone Westbroek in the Netherlands, Slaughter and May in the UK and Uría Menéndez in Spain and Portugal.
Hengeler maintains US network
Hengeler also maintains excellent relations with the Americans, for example with Cravath, Swaine & Moore and Davis Polk & Wardwell. “We feel very comfortable with it. It doesn’t prevent us from being part of big, international deals,” says Wirbel. Most recently, Hengeler was involved in the sale of heating contractor Viessmann, an acquisition of Deutsche Börse and Silverlake’s entry into Software AG.
Hengeler also senses that the M&A business is rather sluggish overall. Above all, the deteriorating economy and rising financing costs mean that the ideas of potential buyers and sellers often no longer match.
Unlike the highly specialized M&A law firms, however, Hengeler can compensate for Dellen’s good market position in medium-sized deals and ongoing corporate law mandates, according to Wirbel. “We also have a strong litigation practice and more and more compliance business that is completely non-cyclical.”
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Meanwhile, another step at Hengeler has recently attracted some attention in the law firm market. The law firm has introduced the status of “salary partner”, a precursor to the classic “equity partner”. In contrast to the equity partner, a salary partner is not a shareholder, but continues to receive a fixed salary plus bonuses.
So far, the decision on the full partnership was made after six years. This path will now be extended by two years. If the step into a full partnership is not successful, work as a salary partner is possible on a permanent basis. It should also be clear that the step is being taken not least with the aim of retaining more talent in competition with international competitors. Financially strong US law firms in particular are increasingly aggressively recruiting young professionals from top addresses such as Freshfields and Hengeler.
market in motion
Even if two top law firms such as Freshfields and Hengeler are pursuing a different US strategy than Allen & Overy: The approaching merger between the British and Shearman is causing unrest in the market. Capital market expert Gernot Wagner, a qualified US attorney and partner at US law firm White & Case, says: “If there is a merger, it could be a game changer. The pressure on other units to make their clients an even better tailored offer will increase.”
This applies in particular to top British law firms such as Linklaters or Clifford Chance. Like Freshfields and Allen & Overy, they belong to the so-called Magic Circle in their home market of Great Britain and are therefore also among the biggest competitors of US law firms outside of their own country.
“The US is the most important legal market in the world and accounts for more than half of global business,” says Andreas Steck, Managing Partner for Continental Europe at Linklaters. A planned merger of the magnitude of Allen & Overy and Shearman will get the competition moving. However, when asked about Linklaters’ transatlantic growth plans, Steck only briefly comments: “Our general goal is to further expand our presence in the US market,” says the law firm manager.
Other law firms are said to have considered a merger with Shearman, but apparently Shearman was no longer attractive enough for them. It is said that the Shearman brand still has appeal. However, in recent years, many well-known lawyers have left the firm. Just a good dozen partners could advance a top law firm based in Europe in the US market. Given Shearman’s overall size, that’s not enough.
A&O wants better access to Wall Street
Market experts see another problem in the fact that high pension obligations weigh on Shearman. The fact that Allen & Overy still wants to work with the ailing Shearman is mainly due to the fact that the law firm has long been looking for better, institutionalized contacts with banks on Wall Street. From Allen & Overy’s point of view, the opportunities clearly outweigh the risks.
One competitor fears that the fact that Allen & Overy is acting as a savior to merger partner Shearman could put pressure on prices. The new unit must do everything possible to ensure full capacity utilization.
The increasing weight of the US market is likely to have further consequences: In recent years, the importance of German partners in some law firms has decreased, says the lawyer of a US law firm: “That didn’t bother anyone because profitability increased and ultimately more money flowed.” If law firms now invest more heavily in the USA in order to attract or keep lawyers there, partners from other countries could end up earning less, including in Germany.
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