Herbert Smith Freehills (HSF) has made no secret of its ambition to develop within the US, and has lengthy been touted as a possible merger companion for Stateside corporations. Even so, Monday’s information (11 November) that it’s intending to mix with New York’s Kramer Levin got here as a shock to some companions inside the agency – not to mention the broader market.
Ought to the companion vote undergo early subsequent yr, the pair will unite in Might as Herbert Smith Freehills Kramer; a $2bn, 2,700-lawyer agency that can function as HSF Kramer within the US.
With US growth nonetheless a strategic precedence for a lot of UK corporations, Authorized Enterprise spoke to senior figures available in the market to gauge opinions on the deserves of the deal and predictions on how the newest transatlantic tie-up will play out.
Why Kramer Levin?
HSF has had a disputes-focused base in New York since 2012, launched on the again of a sequence of hires from legacy Chadbourne & Parke, earlier than that agency’s merger with Norton Rose. The workplace now has round 50 legal professionals, together with 17 companions, the vast majority of which concentrate on disputes.
The Kramer Levin deal will considerably broaden HSF’s US presence, including new workplaces in Washington DC and Silicon Valley, in addition to some 300 legal professionals in New York.
Because of this, the noises from inside HSF are largely constructive to this point, with one companion telling Authorized Enterprise: ‘The US is among the most vital authorized markets on the planet as we speak, and we’ve been exploring methods to attain larger scale there for a while. It has been a key precedence for us.’
‘This merger will allow us to supply broader international protection and transfer us nearer to our purpose of turning into a really international, top-tier agency. That is precisely what our purchasers need – having a robust US presence is essential.’
‘The companion buzz is absolutely constructive,’ one other HSF companion remarks, framing the merger as a logical subsequent step within the agency’s US technique. ‘We’ve been so open that we needed to do one thing within the States, and we’ve been fussy about getting a great match. Kramer are well-known in New York market and our New York workplace has a great relationship with them.’
Peer views
Snap response to the deal amongst companions at peer corporations has been blended.
‘It is a very sensible transfer,’ says one administration determine at a number one international agency, of HSF’s answer to plugging the hole in its US presence. ‘When you have a look at the narrative over the previous three or 4 years, there’s been a whole lot of discuss US corporations dominating the market and taking up others. Current offers, nevertheless, present a brand new dynamic: worldwide corporations are actually capable of persuade US corporations to totally merge. It’s a really promising shift.’
Others, nevertheless, level out that given HSF’s dimension, they might have anticipated a tie-up with a bigger agency, regardless of the inevitable challenges such a deal would have introduced.
‘I had suspected HSF would have ended up with a much bigger agency within the US, however availability probably performed an enormous position on this,’ stated one London managing companion. ‘Many US corporations are powering forward, so there’s solely a sure sort of agency open to this sort of association.’
One other regulation agency chief echoed this view: ‘If that they had approached a way more worthwhile agency, there would have been little incentive for the US agency to interact. That they had no selection however to merge with a agency that wishes to globalise, moderately than simply specializing in profitability.’
Placing the doubts extra bluntly, one sourced joked: ‘One companion at HSF stated they might replace me as soon as that they had Googled the agency’. (For the complete lowdown on the US agency, see: Attending to know Kramer Levin – a information to HSF’s merger companion)
The income puzzle
Whereas in earlier years, many transatlantic offers adopted the verein mannequin, permitting them to dodge the challenges of mixing income, HSF and Kramer intend to have a single international revenue pool from day one, following within the footsteps of different current transatlantic tie-ups corresponding to A&O Shearman and Bryan Cave Leighton Paisner.
Previous reluctance to financially combine was usually all the way down to the upper companion income at US corporations, and certainly Kramer Levin is extra worthwhile than HSF, with 2023 PEP of $2.41m (£1.87m), in comparison with HSF’s equal determine of £1.315m.
‘It’s well-known that producing income within the US is mostly simpler than in Europe or areas like Australia,’ notes one supply. ‘In previous mergers, corporations usually aimed for comparable profitability ranges to simplify integration. It implies that, when a US agency merges with a UK agency of equal profitability, the US agency is commonly perceived because the ‘inferior’ companion outdoors the US.’
The choice to push forward with monetary integration regardless of a distinction in PEP marks a turning level in how UK and US corporations are prepared to method mergers, based on companions .
‘This shift proves that some US corporations are prepared to look past short-term profitability and undertake a extra international, entrepreneurial mindset, which has historically been tough within the US market,’ one companion observes.
One key query is the extent to which HSF’s present US referral relationships will likely be affected by the deal. One former HSF companion recommended that the Kramer merger might minimise disruption to present relationships with bigger US corporations.
‘By merging with a smaller agency, they might be making an attempt to keep away from stepping on the toes of the larger corporations they depend on for referrals,’ the companion defined.
Nevertheless, others doubt this speculation, with one regulation agency chief describing an impression on US referrals as ‘unavoidable’. ‘This may inevitably have an effect. That stated, it now has a US base from which it might increase, positioning itself as one of the vital built-in, really international companies. This transfer serves as a wake-up name to US companions who could also be resisting integration for the sake of income. It highlights the urgency of pursuing extra revolutionary methods.’
Combining cultures
As with every main merger, the success of the deal will rely on how successfully each corporations combine cultures and align methods. ‘They’ve a whole lot of work forward of them—notably round attracting purchasers and making a stable enterprise rationale for why purchasers ought to interact with them,’ says one London managing companion.
One managing companion with expertise in previous transatlantic mergers notes that it will take ‘effort and time’. ‘They’ll want to make sure each corporations align culturally, that their methods mesh, and that the combination course of works easily.’
Sceptics of the deal level to the distinction between the 2 corporations as a possible downside. ‘They’re like oil and water – they’re so completely different,’ one supply bluntly remarks. ‘HSF is international, whereas Kramer Levin has a robust concentrate on high-end non-public fairness purchasers. Can they actually leverage the synergies they consider are there?’
Nevertheless, that disparity can also be cited as a possible constructive by one other recruiter. They famous that HSF being ‘the senior companion’ within the merger, as the larger agency and with its leaders set to retain their positions within the merged agency, means it might keep away from ‘the painful integration points we’ve seen with different transatlantic mergers.’
What subsequent?
With the deal following scorching on the heels of the A&O Shearman merger, consideration will inevitably concentrate on whether or not different comparable tie-ups will comply with – and whether or not HSF’s decisiveness has handed it a head begin on opponents.
In response to one recruiter, the deal offers HSF ‘a definite benefit’. ‘Folks will now be corporations like Simmons & Simmons and Ashurst, who haven’t but made comparable strikes,’ he explains.
The deal might even have a knock-on impact of encouraging different comparable US-UK tie-ups involving corporations of differing scales. ‘This might really make it simpler for different worldwide corporations to barter full mergers with mid-sized US corporations, one thing that may have been a lot more durable even 5 years in the past,’ based on one regulation agency chief. ‘Bigger US corporations may begin in search of merger candidates as properly, realising that ready is probably not of their finest curiosity.’
One other companion at high 20 international agency notes that the merger has implications past simply HSF. ‘For corporations which can be international however not totally built-in, this creates a problem. An built-in agency is mostly extra environment friendly, and now, with HSF’s instance, these semi-integrated corporations aren’t simply lagging behind in effectivity – they’re not distinctive of their international presence both.’
With extra reporting from Tom Cox and Elisha Juttla