Law Firms Mergers

Law firms transnational mergers

AS THE PRACTICE OF CORPORATE LAW becomes ever more competitive and globalized, many leading American law firms are trying to maintain their edge by merging with prominent foreign firms. These mergers are seen as a way for firms to assure clients with increasingly globalized businesses that the clients’ legal needs can be satisfied in virtually any jurisdiction. For firms that lack the history or connections of the Wall Street elite, a blockbuster international merger can also be a means of bolstering credibility and adding to the perception of success.

In recent years, legal giants like Baker & McKenzie, Bingham McCutchen, Clifford Chance, Holland & Knight, DLA Piper Rudnick Gray Cary, and White & Case have merged, or at least considered merging, with foreign firms. To some observers, it seems inevitable that there will eventually be a consolidation at the top among a few colossal law firms, as there was when accounting firms went first to a Big Eight in the 1970s, then shrank to a Big Five in the 1990s, and finally became a Big Four with the post-Enron demise of Arthur Andersen.

Yet while the logic that generally guides these transnational mergers is considered solid, some of them have failed badly. Some are never even consummated: After 18 months of tortured negotiations, New York’s Fried Frank Harris Shriver & Jacobson gave up its bid to merge with Ashurst, a leading British firm. Many merged firms, having seen morale plummet and valued partners flee, wish they’d had the foresight to call off the marriage. Even those international mergers that are generally considered successful have been fraught with difficulties. Clifford Chance and Rogers & Wells pooled their resources five years ago, and the New York office saw an exodus of key partners.

Cultural differences are invariably cited as the reason for most failed mergers, and cultural compatibility is likewise cited as the reason for most successful ones. In the context of international law firm mergers, “culture” usually refers to compensation. British firms, in particular, tend to pay in “lock-step,” while United States firms typically take an eat-what-you-kill approach. At the former, lawyers who became partners at the same time, or who are slotted at a particular level of seniority, are generally paid the same; at the latter, the compensation of partners is heavily influenced by how much business they bring in, manage, or bill for. Other cultural factors—from devotion to the firm, which is measured by hours in the office, to the quality of the legal work done by the firm in the estimation of its clients and peers—are also often cited as critical to the outcome of mergers. However they define culture, most experts agree that when it comes to transnational law firm mergers, culture is destiny.

Culture is not, however, a very effective analytic tool. It is instructive that anthropology, the one academic discipline dedicated to studying different cultures, has adopted a much more refined approach to social and institutional analysis. Nowadays, anthropologists tend to focus on identifying specific patterns of behavior within groups and organizations and examining the incentives—economic, political, religious, familial— that maintain those practices and the factors that can undermine them. For example, Sally Merry, a legal anthropologist who teaches at New York University, studies how international human rights laws, and interaction between local activists and international human rights organizations, can affect gender relations within communities. Merry does not write of cultural affinities or clashes; rather, she looks at how certain practices, like discriminatory inheritance laws, came into being, what factors have sustained these practices, and how international human rights laws and activists influence them.

Law firms contemplating international mergers, and the consultants advising them, would do well to follow the lead of anthropologists and focus on issues like practices and incentives. The question is how to incorporate the anthropologist’s worldview into the polished global professional services firm. A helpful way to begin the process would be to ask what is valued in particular organizations as well as national settings. For instance, what characteristics allow individuals to gain success in societies or organizations? Identifying those attributes and determining what they tell us about an organization or society is the critical first step in taking an anthropological approach to mergers.

CONSIDER, FOR INSTANCE, lock-step versus eat-what-you-kill systems of compensation. The choice is invariably portrayed as a clash between British and American values. But this is a superficial analysis that keeps us from getting at the deeper, more revealing truth. It also happens to be wrong: While eat-what-you-kill is the prevailing approach in the U.S., some of the most elite American law firms, including Cleary Gottlieb Steen & Hamilton, Cravath Swaine & Moore, Davis Polk & Wardwell, and Wachtell, Lipton, Rosen & Katz, use lock-step compensation. Partners are paid strictly according to seniority. These firms attract choice talent and win clients because of the reputation of the firm and the quality associated with it. Few lawyers are promoted to partnership, but the high profitability that comes in part from the relatively small number of partners is an element of the attraction for clients and for talented new associates.

The anthropological approach to the compensation question seeks to understand how these contrasting pay models came about and what maintains them. Eat-what-you-kill became prevalent in the U.S. when law firm competition heated up in the 1970s and 1980s. Firms without distinguished pedigrees found that they needed star lawyers to bring in the best clients, and the best way to attract those rainmakers was to offer them compensation based on the business they generated.

But eat-what-you-kill also fits neatly with the prevailing notions of what it means to be a top lawyer in the U.S. In the American context, success isn’t just about cultivating the most desirable clients and billing the highest rates. It also means being part of a collegial enterprise where the whole is greater than the sum of the parts, and where being a lawyer of that firm signifies a tribe-like approval. It means using lawyerly success as a springboard to prominence outside the legal community—as a sometime public servant, for instance, or as a political activist. The top Washington, D.C., and New York firms abound with men and women who fit this model.

The legal culture in Britain could not be more different. At least until recently, the market for business in the United Kingdom was not characterized by much competition. Clients tended not to change law firms, and being a member of the so-called Magic Circle, as the upper echelon of British law firms is known, was generally enough to ensure prosperity. Likewise, solicitors were rewarded simply for the work they did and for their service to the firm, not for activities designed to build individual stature. In fact, achieving prominence outside the firm has never been an option for most solicitors; in the British profession, which is dividedbetween solicitors and barristers, members of the latter and more prestigious bar have tended to monopolize media attention and the high status positions in public service.

The determination of what law firms reward and why is more complicated in countries where the rule of law and the role of lawyers are less settled than in Britain or the U.S. In many places, family connections or political ties are key determinants of legal success. In India, for instance, the most successful Supreme Court advocates are invariably the sons and grandsons of leading advocates and judges, and many have gained further stature and credibility through political associations. Being a member of a politically prominent family is also crucial to lawyerly success in the Philippines, with the added requirement of strong links to the Catholic church. Likewise, Chinese family businesses in Malaysia and other Southeast Asian countries will often choose ethnic outsiders to represent them, so as to avoid drawing too much attention to their ethnicity and possibly stirring up simmering resentments.

LAW FIRM MANAGERS and the management consultants who advise them often say that their goal is to develop an entrepreneurial law firm culture that extends to all the offices of the transnational law firm. The implicit idea is that this culture will be distinctly American or British. Anthropologists, by contrast, seek to understand how people, credentials, connections, and practices are valued locally. If family connections are the glue that holds a society together, anthropologists do not instantly dismiss that society as “premodern” and in need of reform. Similarly, the dilettante lawyer who dabbles in politics, business, litigation, legal scholarship, and even the arts may appear amateurish by American or British standards, but these characteristics may define local legal eminence, as they do in much of Latin America (and did through the early part of the 20th century in the U.S.).

It is for this reason that the anthropological approach to international law firm mergers promises more success. The cultural approach inevitably involves one firm forcing its culture on another. The anthropological method, by contrast, does not seek to impose an alien set of incentives and practices on foreign firms. Quite the opposite: It seeks to understand the incentives and practices that account for success in those firms and to ensure that those attributes survive the merger. Many of those incentives and practices are apt to diminish over time; there will be a gradual change at the local level as lawyers who grew up with different measures of “quality” learn to satisfy the expectations of lawyers and clients accustomed to American or British benchmarks. But with the anthropological approach, the integration process proceeds organically, rather than coercively.

The anthropological approach to law firm mergers has never been explicitly attempted. We can, however, find some evidence of its value in the remarkable trajectory of Baker & McKenzie, a firm headquartered in Chicago that was long dismissed as a so-called franchiser of local law firms that were loosely linked. Baker, which employs 3,200 lawyers in 38 countries, is now the world’s first or second largest law firm, alternating with Clifford Chance. Baker started after World War II with very few advantages. The founding attorneys had no ties to Chicago’s major businesses, and they lacked the individual prominence that might have come, for example, from a political career. They built an international practice largely by marketing tax shelters to corporations, which drew criticism from tax scholars and the scorn of Chicago’s most respected firms.

Baker’s growth strategy was also the object of derision. It built itself into a local, regional, and ultimately national institution by absorbing smaller law firms. But the mergers were neither one-sided nor coercive. Baker did not try to impose its own criteria of excellence; rather, it embraced the values of the firms it acquired and worked to see those values maintained while integrating the firms into the Baker fold. The results speak for themselves: Baker is now fifth in global revenues among all law firms, and while it may not have the elite reputation of the leading Wall Street firms, it is, by any measure, a major international law firm—an achievement that can be credited to its anthropological approach to expansion. Baker’s strategy may not be appropriate for all firms. But any firm contemplating international growth by means of merger would do well to study its story.

Bryant Garth is the dean of Southwestern Law School. He previously served as director of the American Bar Foundation.