What seems to be a growing US merger ‘tidal wave’ – predicted by Denton Wilde Sapte chief executive Howard Morris in a recent issue of The Lawyer (Read it here) – is being, in part, facilitated by the use of the Swiss verein, a highly flexible limited liability structure, which facilitates separate profit pools, among other things, in multinational partnerships.
Both SNR Denton and Hogan-Lovells, the two most recent mergers, have set up as vereins. The two new vereins – and there are thought to be more in the wings – do, on the face of it, look pretty attractive to two merger partners who, beneath the headline figures, might not be that similar.
The verein is useful because it effectively parks the issue of the major profits-gaps between US and UK firms, and also facilitates a degree of autonomous local management, which is helpful in maintaining post-merger integrity. It also – crucially – insulates the stronger partner against aberrant profit dips on the part of the weaker partner.
The verein has been successfully used by accountants for some years and its longest legal incarnation to date is Baker & McKenzie; DLA Piper has been operating in this fashion since its establishment as a global force in 2005.
But while the verein looks great, on the face of it, is it a sustainable structure in the long term for the types of firm opting for it now? I think not.
I can see that the US sides of these mergers may want to retain the verein in order to insulate themselves against problems in UK profitability, but I think the whole entity – and the UK part in particular – will want to push to abandon the verein in favour of a ‘one firm’ solution as soon as possible.
From a competitive point of view, it manifestly does not create the ‘one firm’ offering of the Magic Circle and top US firms, or indeed the UK national firms rapidly expanding their international network. Does this matter? I tend to think it might.
Leaving aside for a moment the potential internal ructions caused by partners on one side of the Atlantic perhaps earning double that of their colleagues on the other for doing essentially the same job, there is the question of client perception and experience.
To begin with, clients may have difficulty in understanding precisely how the verein operates in terms of liability and supervision, a nervousness competitors are bound to capitalise on, and the very lightness of the structure inevitably raises questions about how culturally homogenous the organisation will be.
I do think these issues of connectedness and culture will be relevant to clients. Don’t get me wrong, I don’t think that clients will necessarily articulate it, but I think they will, via their buying habits, tend towards one-firm partnerships when the chips are down ie on their big deals.
The thing is, vereins can’t have it both ways: if the management is light and locally autonomous, and client ownership remains firmly within the borders drawn by profits – as it is likely to do in organisations dominated by the US remuneration model – managing transactions across the verein’s profit-borders will be more difficult than in a ‘one-firm’ organisation.
For most transactions, this is unlikely to be an issue, but for the top-level international M&A these new verein have to start working on in order to justify their mergers, they will, competitively-speaking, start out on the back foot vs the Magic Circle and top US firms.
The management-lite approach of a verein structure can sometimes look quite complex from a client point of view. Lawyers are, naturally, quite reluctant to try to manage relationships across borders and there are often huge difficulties in cross-border supervision, even in ‘one-firm’ partnerships. The easiest way around this is via simple referral to another office within the network, and the transfer of the direct-to-client relationship relating to that part of the work.
While this is no doubt the best way to do this from a law firm point of view, it can result in the client effectively having to manage two (or more) distinct relationships, getting various bills from different parts of the same organisation.
Now, this is not exactly the end of the world, and is balanced in most cases for clients by not having to go and find lawyers on the ground in obscure jurisdictions all by themselves, and gives at least some kind of basic assurance of a certain level of quality.
But like huge restaurant chains, quality is often variable and, in the words of one GC at a major international company used to managing a series of multi-jurisdictional (verein) relationships: “it’s a necessary evil”.
In a ‘one-firm’ partnership, the partner holding the client relationship potentially has much more real power to supervise, manage and deliver a single point of contact to the client, than the partner in a verein.
I just can’t see a massive client paying top-level fees for anything less than top-level, integrated service on the big deals that really matter. And frankly, if the Magic Circle and top US international firms don’t make a serious play of this in competition with the vereins, I’d be very surprised.
The one huge advantage with current vereins of standing – Baker & McKenzie and DLA Piper – is their sheer coverage: Bakers has 67 offices in 39 countries, DLA has 68 offices in 30 countries.
But neither firm – comprehensive international networks that they are – would pretend that they are top drawer ‘Premier League’ corporate law firms.
Baker & McKenzie, for instance, has had three decades (perhaps only one decade of internet-connectedness, which may be a relevant factor) to turn its verein into the ultimate one-stop shop. It has been very successful in some regards but has not managed to achieve great prominence in corporate, in the UK at least. In fact the last edition of the Legal 500 has it in the 6th tier for ‘Upper mid-market and premium [corporate M&A] deals’ (http://www.legal500.com/c/london/corporate-and-commercial/manda-upper-mid-market-and-premium-deals-250m-) while Chambers is marginally more generous, putting the firm in the 5th tier for (http://www.chambersandpartners.com/UK/Editorial/34392) ‘high-end cross-border deals’.
While it’s a fairly exclusive list, that still puts 17 other firms ahead of Bakers in the UK.
In English Premier League terms (2009-10), that makes them Burnley.
DLA Piper comes another four (or more) firms and one tier below in Legal 500, while Chambers doesn’t even rate the firm for high-end cross-border deals.
The results for Hogan-Lovells and SNR Denton next year and the year after will be telling. Hogan-Lovells this year benefits from Lovells’ decent corporate reputation in the UK, placing the firm in Band 3 (joint 7th) in Chambers and 4th tier in Legal 500 (joint 8th, a whisker behind Ashurst). Denton Wilde Sapte, in contrast, trails in the 7th tier (joint 23rd, ironically the same place as DLA Piper) and is unrated in Chambers.
Lovells will have to hope that the Hogan merger is the key at last, for this is a game the firm has been playing for at least the last 20 years without notable advancement in its position relative to its UK-based competitors.
In 1991, the Legal 500 placed the firm 6th in Corporate Finance; by 1999, the firm had dropped to 7th; by 2002, when ‘White Durrant’ had been consigned to the dustbin of history, the firm had coasted to, er, 7th, from where it drifted to 8th by 2005, recovering slightly in the latter part of the decade.
No, in order to convince commentators, and the market in general, that the merger has been a success, the merged firm has to win international M&A it would not have got otherwise.
There is also one other point which should make any UK law firm currently thinking of entering into such an arrangement pause for thought.
Current law firm vereins of standing – Baker & McKenzie and DLA Piper essentially – are notable in that the London office is either the most powerful or the most profitable office or both giving the London office a significant amount of standing in each entity.
But in the newly-minted Transatlantic couples – Hogan-Lovells and SNR Denton – the London office is much larger than anything else which has yet been involved in one of these link-ups and yet is, by some key financial measures, the junior partner.
Failure to merge the profit pools of these essentially ‘bipolar’ firms ignores the one major benefit of marrying-up, the ability to benefit from the higher profitability of the more powerful partner when aiming to recruit lateral partners and teams, and to recruit better associates by paying more for them.
By remaining a verein, the London office will not only not benefit from the greater profits of the more powerful US office(s), but will become a secondary link in the chain, without any evidence whatever of whether being part of a larger firm will bring it the better quality ie the higher profitability work these new mergers demand and which the UK firms need to keep pace with local rivals.
Hogan-Lovells seems to have recognised this need to harmonise US and UK parts of the business right from the outset.
Lovells is the largest UK firm yet to have merged with a larger US partner and notwithstanding the potential freedoms offered by the verein it has already modified its remuneration structure to bring it more into line with Hogans’ famously transparent and meritocratic model, presumably to drive profitability up to Hogan levels.
While regularising profits might be great from an internal, Transatlantic point of view, clients don’t care. They care that their law firms are successful, yes, but they care much more that the service is delivered in the smoothest possible way. They don’t want a “necessary evil”.
Firms trying to play at the top table while remaining a verein will pay the price. The major accountants may do it, yes, but then accountants don’t have any ‘one firm’ competition to pit themselves against (and in any event, accountancy is not, and never will be, law, and the similarities flatter to deceive more often than not).
I’ll go as far as to say that if these newly-merged firms try to have their cake and eat it by trying to remain vereins in the longer term, the patisserie they’ll be tucking into will be Humble Pie.
And if I’m wrong, I’ll eat a whole one myself.