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Allen & Overy's $3.4bn merger with Shearman & Sterling

By Rafi Glass, Yana Zharkova, James Searle, Guy Collins, Ruiting Yi, and Marcin Wolniewicz (Durham University) & Leo Fridjhon, Abraham Vongkhamdy, Hanchen Li, Derek Fong, and Xinyue Zhang (Columbia University)


Photo: Tingey (Unsplash)

 

Overview of the deal


Acquirer: Allen & Overy

Target: Shearman & Sterling

Total Transaction Size: $3.4 Billion

Closed date: Q2 2024

Target advisor: Davis Polk & Wardwell LLP (legal)

Acquirer advisor: Lazard (financial), Simpson Thacher & Bartlett LLP (legal)


On the 21st of May 2023, law firms Allen & Overy and Shearman & Sterling agreed to merge to create a truly global law firm, built out of two of the world’s financial capitals. The combined firms will have nearly 4,000 lawyers and will constitute the first international firm to work with both English and American law. The combined name will be Allen Overy Shearman Sterling or A&O Shearman. Partners voted almost unanimously to approve the merger, forming a company which will rank amongst the highest revenue generating global law firms.


The synergies of the merger are very clear, combining over 250 years of legal expertise into one major firm. This merger will see Shearman & Sterling expand their client base, while the larger Allen & Overy considers this an opportunity to break into the American market, historically a difficult task for UK-based law firms. Both client bases will now have access to a wider variety of offerings across the world, helping them better capitalise on global market trends and opportunities.


“This is an enormous coup for A&O and hugely significant for the transatlantic legal market. Whether it achieves A&O’s key objective – deeper penetration of the lucrative US legal services market and achieving the capacity to compete with the US headquartered global law firms – remains to be seen.” – Zulon Begum, Partner (CM Murray LLP)

Company Details (Acquirer - Allen & Overy)


Allen & Overy is a London-based Magic Circle law firm, founded in 1930. By revenue, it is the UK’s second largest law firm. It operates in over 40 countries worldwide. It also works with over 450 relationship firms, with an equally large range of practice areas spanning from Islamic finance to artificial intelligence. In 2021 Allen & Overy had 23 FTSE 100 clients.


Founded in: 1930, headquartered in London, United Kingdom

CEO: Sally Dewar

Number of employees: 5,400

Revenue: $2.54 Billion (Pound to dollar 1:1.22 as of 11/11/23)

Profit per Equity Partner: $2.2 Million (Pound to dollar 1:1.22 as of 11/11/23)


Company Details (Target - Shearman & Sterling)


Shearman & Sterling was founded in 1873 in the US, initially focusing on litigation and transaction matters. Following the Second World War, it expanded into Europe, and since then has established a presence in every serviceable continent. It operates in 26 different practice areas, serving blue-chip clients such as Sony and the Republic of Lithuania.


Founded in: 1873, headquartered in New York City, New York, USA

CEO: Adam Hakki

Number of employees: 1,350

Revenue: $907 Million

Profit per Equity Partner: $2.48 Million



Projections and Assumptions


Short-term consequences


Allen & Overy’s merger with Shearman & Sterling will form a global legal practice with $3.5 billion in revenue. This will make the combined entity the third largest integrated law firm in the world by gross revenue. A&O Shearman will have 800 partners and 3,950 lawyers across 48 offices in 29 countries. Both firms have confirmed that they will be consolidating offices in places where they both have a presence. In the short term, this consolidation process may involve removing redundant roles and merging litigation teams to facilitate smoother operations.

To navigate the firms’ different profit structures, A&O Shearman, the combined entity, will operate a so-called modified lockstep pay model based on performance and time served in order to retain star performers. This is similar to the system already in place at both firms, and therefore, the profit structures should not prove challenging to integrate.


A key strategic reason for this merger is to increase both firms' operations in London and New York, allowing for the effective exploitation of economies of scale and a reduction in per unit costs. The expansion into the US has long been one of Allen & Overy’s strategic priorities, and the merger provides an opportunity to supercharge the firm's ability to serve clients in the US market. A&O Shearman will generate 30% of its revenue from the US, 30% from the UK, and 40% from the rest of the world.


Long-term Upsides


The merger will unite two law firms’ expertise by combining A&O's specialisation in banking & finance, M&A, and employment law with Shearman’s background in commercial law and securities litigation, creating a ‘one-stop shop’ for clients globally. A&O Shearman will have more resources to explore new markets and trends such as the energy transition and life sciences. Shearman’s established US presence will grant A&O critical market expansion in America, while Shearman will achieve a scalable international network with A&O's extensive global coverage. This will enable the merged firm to become “the only [law firm] fluent in US law, English law and the laws of the world’s most dynamic markets in equal measure”. A&O Shearman will rank in the top tier for US securities and project finance, with the majority of its UK services ranked as Tier One.


The merger will enrich the firms’ client portfolio and enhance legal databases for case analysis and strategy making. Combining A&O’s AI, Harvey, with Shearman’s case data will increase efficiency and augment Harvey’s learning.


A&O Shearman will become the third-largest law firm globally, with revenues nearing $3.5 billion including over $1 billion from US operations. The merger increases revenue and global reach, sustaining the companies' growth trajectories, posing unique opportunities to grab larger market share in the legal industry which is set to consolidate. The two entities have planned to consolidate their offices, creating chances for better collaboration and reduction in operational costs.


Risks and Uncertainties


Although both A&O and Shearman have agreed to move towards a more lockstep, seniority-based compensation structure, it is yet to be seen how younger partners who bring in significant dealflow personally will be fairly compensated. Furthermore, although A&O Shearman post-merger will immediately become the third-largest law firm by revenue, their revenue per lawyer (RPL), a key metric in determining a law firm’s overall health and profitability, will be significantly lower than their elite competitors. Compared to their immediate rivals, it is estimated that RPL will be lower by approximately $1.1 million.


A&O's key strategic goal in this merger, which is to break into the US legal market by merging with Shearman, is also tenuous. The combined firm will rank low in select, high-ticket legal markets in the US: A&O Shearman will place third in M&A, and not be ranked at all for private equity. Prevailing macroeconomic conditions, especially higher-for-longer rates, makes corporate restructuring a more lucrative business, but A&O Shearman will only place 5th in the US in this market. These factors could severely challenge A&O’s ability to maintain high revenue streams in the long-term.


Historically, almost all transatlantic law firm mergers have failed: the difference in UK-US work culture is simply too great for firms to reconcile. It is yet to be seen whether A&O Shearman is able to overcome this challenge and reverse this trend of execution failure in transatlantic legal M&A.


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