Shearman/A&O: legal megamerger would be more huddle than cuddle

Big law firm mergers typically seem ominous. Despite the proclamations of hope, the sense may be that neither side really wants to be there.

Shearman & Sterling of the US and Allen & Overy, a UK “Magic Circle” firm, plan to combine, creating one of the world’s largest legal businesses. It would have more than $3bn in annual revenue based on 2022 results.

Formidable though that sounds, rivals will recall that law firm tie-ups often reflect some level of desperation.

In 2022, revenue at Shearman fell 10 per cent to $900mn while net profits were down around a third, according to figures compiled by American Lawyer magazine.

Other law firms and professional services outfits have registered similar declines owing to a slump in mergers and acquisitions after a record 2021. lay-offs this year have spilled across legal practices, accounting firms and investment banks.

Fast-evolving artificial intelligence and machine learning may change how lawyers ply their craft or even reduce the need for them.

Shearman’s cachet has been slipping for years. The firm was historically a key adviser to large Wall Street banks such as Merrill Lynch. But the financial crisis reduced the role of incumbents. Private capital firms have become increasingly central to financial intermediation, Shearman and other legal mainstays had difficulty adapting. 

Law firms are rarely agile. Partners exact heavy fixed compensation including generous pensions. Shearman had long been searching for a suitor, recently holding talks with the likes of Anglo-American law firm Hogan Lovells.

A&O is hoping Shearman can be a beachhead into the lucrative US legal market. The pitch would be that the combined business could operate seamlessly around the world for multinational clients.

Law firms, however, typically prefer to grow by picking off, as needed, small teams with specific practices. Integrating whole firms is often messy. The best lawyers can simply choose to decamp elsewhere to avoid the fallout from bashing two disparate organisations and cultures together.

Each firm’s partners now must approve the deal. The perils of such collective decision-making were highlighted recently when EY partners blocked plans to split auditing and consulting.

But Shearman and A&O may need each other so much that they have to go ahead. Making their marriage work may be the price of remaining relevant for both groups of partners.