Allen & Overy and Shearman plan merger to create $3.4bn law firm

“Magic circle” law firm Allen & Overy is merging with New York’s Shearman & Sterling to form a practice with combined revenues of about $3.4bn, in one of the biggest transatlantic legal tie-ups in history.

The merger, which is subject to a vote of both firms’ partners, will create one of the largest law firms in the world by fee income and comes just months after 150-year-old Shearman abandoned merger talks with Hogan Lovells.

Allen Overy Shearman Sterling, as the newly combined firm is to be known, will have nearly 4,000 lawyers spread across 49 offices.

The proposed deal represents the first merger between a London-based magic circle firm and an American rival since Clifford Chance joined up with Rogers & Wells in 2000. It is also a big step forward in Allen & Overy’s bid to conquer the lucrative US market following the collapse of its attempt to merge with Californian firm O’Melveny & Myers four years ago, after the two sides failed to agree on a valuation.

The tie-up follows a tumultuous period for Shearman, which has lost a number of lawyers following its aborted talks with Hogan Lovells earlier this year and has been undergoing a difficult restructuring.

In a statement, Allen & Overy senior partner Wim Dejonghe said: “We think A&O Shearman will be a firm unlike any other in the world.”

Speaking to the Financial Times, Dejonghe explained that the tie-up would give both firms crucial scale in London and New York. Allen Overy Shearman Sterling will have “over $1bn in revenue in the US, 30 per cent [coming from] the UK and 40 per cent in the rest of the world, and I don’t think anyone has that,” he said.

London-based Allen & Overy — which had revenues of £1.9bn in the year to the end of April 2022 and employs about 5,800 staff globally — has long sought a leg-up into the lucrative US market, which has proved difficult for London-based firms to crack.

Meanwhile, Shearman — which has 1350 staff in total and reported revenues of $907mn in calendar year 2022 — has been seeking a way to grow and increase its profitability, having found its existing global network brought higher costs but insufficient scale.

Allen & Overy’s “number one strategic priority [has been] to get to equal depth and strength of bench in the US, and specifically New York, and this delivers us that in one go,” said Dejonghe, of number of lawyers the new firm will boast. He added that both firms had “quality but we didn’t have enough bench — we didn’t have enough in the US, and Shearman was lacking bench in the rest of the world”. 

Both firms said they were seeking to build out stronger expertise in private equity, life sciences and energy transition. Shearman will have representation across global leadership positions in the merged firm.

Adam Hakki, Shearman’s senior partner said the two firms “know each other extremely well and have explored things for years and years”, but moved closer to serious proposals through “focused discussions in recent weeks”. 

Shearman, once one of Wall Street’s most powerful advisers, had been making cutbacks in recent months due to lower demand. It was also undergoing a restructure aimed at focusing on its more profitable regions, such as the US, and profitable sectors, including private equity.

The firm has suffered from a lack of economy of scale in its network of offices, and struggled to compete with more profitable US rivals who could offer higher pay to partners. Allen & Overy faced a similar issue when seeking to grow in the US market and, in recent years, has made changes to its remuneration system that allows it to pay more to star partners.

Equity partners at Shearman took home $2.48mn in average profits last year, compared with slightly less than £2mn for partners at Allen & Overy. Both firms said their pay structures would not be difficult to knit together.

The deal is expected to be put to partners in both firms before the summer, with the aim of reaching completion within six to 12 months.