When Ogilvy Renault announced last fall that it was joining the Norton Rose Group, I went on record as saying I thought this was a watershed moment for the legal profession in Canada — that the world had finally arrived on our doorstep, more global firms were surely coming, and the law firm marketplace would never be the same. Some managing partners of Canadian firms were quoted as saying pretty much the opposite — that this was an interesting move, to be sure, but it didn’t fundamentally reshape the marketplace here.
Then, earlier this month, came a report in the British legal newspaper The Lawyer that not one but two more sets of UK-Canada law firm merger talks were underway. One was between Clyde & Co., a London-based firm with 24 offices from Riyadh to Caracas and points between, and insurance-defence firm Nicholl Paskell-Mede, a relatively young firm with offices in Montreal and Toronto. The second involved none other than the world’s biggest law firm, DLA Piper, and a large Canadian firm such as Heenan Blaikie (denied by the firm’s managing partner) or Fraser Milner Casgrain (neither confirmed nor denied by the firm’s CEO). I’m sticking with my original sentiments.
The legal trade press is always interested in merger talk, of course, and the last couple of years have seen a series of transatlantic tie-ups such as SNR Denton, Squire Sanders (Hammonds), and Hogan Lovells. Many law firms of all sizes are always a phone call or two away from proposing a merger or considering such a proposal themselves — size, as my Edge colleague Ed Wesemann points out in an article in the new Edge International Review, is something many firms reflexively pursue in the (often correct) belief it will make them more attractive to both clients and lateral hires.
The problem, of course, is that mergers are hard. They’re difficult enough to pull off in the corporate world, but they’re especially challenging in the law firm context, thanks in no small part to various cultural issues unique to our profession. There are as many examples of high-profile possible mergers that fell through (Orrick and Akin Gump, Reed Smith and Thompson & Knight, Proskauer and SJ Berwin) as there are successes, and many more such discussions never break the surface before sinking.
So I’m starting to wonder whether the immediate future trend is towards acquisitions more than mergers. Instead of two giant firms attempting to hook up (the analogy to dinosaurs mating is too good to ignore), we might start seeing more examples of very big firms expanding their presence incrementally, by picking up smaller firms or simply snatching the best lawyers and practice groups from rivals and using them to start up a local office. This is hardly a new tactic, of course, but it seems to me it’s been picking up steam lately.
Ogilvy Renault, for example, was just the 10th-biggest firm in Canada and it had a relatively small presence in oil country — but Norton Rose saw a cultural fit and that was more important. Deneys Reitz, Norton’s target in South Africa, was one of the smallest of that country’s Big Five firms. Clifford Chance, which has long had an interest in Australia, broke off merger talks with national firm Mallesons last year and instead, last month, acquired two small firms in Sydney and Perth with a total of just 14 partners to make their debut down under. Magic Circle giants Linklaters and Allen & Overy, The Lawyer reports, are making similar inquiries in Houston and may follow the lead of Latham & Watkins and Cadwalader, which set up their Houston headquarters by raiding lawyers from three established local firms.
That latter approach is one that should concern a lot of firms: it’s what the managing partner of one global giant calls “a rip-out.” Check out a firm, identify the star rainmakers and core practice groups, and make them an offer they can’t refuse. The most aggressive global firms likely don’t have a lot of interest in full-scale integration of other large entities — most such firms are too big and bloated to swallow comfortably. Many law firms, in truth, contain a lot of empty calories, and potential suitors would prefer to ingest as much protein and nutrition as possible while filling up on the least amount of starch. Rip-outs can achieve this effect, but they can be ruinous to the victimized firm.
The problem for many potential victim firms is that they won’t have a strong enough cultural gravity to resist the pull of an international giant. One of the drawbacks of making profit the foundation of your firm’s strategic purpose, as many law firms do, is that you attract people motivated primarily by money — and these people will be the first to leave when more money is thrown their way. Firms with a powerful cultural identity will still lose people to other firms — churn affects everyone — but they’ll lose fewer, and I wager that they’ll rarely lose those they want to keep. The firms I know with the strongest internal culture and clearest strategic direction are the ones that show up least often in the “Departures” section of the legal periodicals.
As for the predator firms — and I think we can reasonably call them that — they’re working not just to get bigger, but also better. Aric Press pointed out last month in The American Lawyer that a segmentation process is underway among the world’s largest law firms, by which a select few giants are separating from the pack and getting more of the very best, non-negotiable-fee work. Only seven firms, he noted, are among the 25 biggest and the 25 most profitable firms in the world, and none were the product of mergers. But each, it’s worth noting, has expanded its global footprint step by step.
So it’s quite possible that managing partners looking to get their firms involved in merger talks will be notified that their firms are in play — but it might not be via a phone call from a consultant or another managing partner inviting them to a working dinner. It might be a phone call from their own partners to report that most of the energy and infrastructure practice group is walking out the door to join a global firm.
The old saying is that there are two kinds of people: those who finish in the money, and those in whose money the others are finishing. I suspect we’re about to see that rule applied, with force, to law firms.
Jordan Furlong speaks to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.