Australian lawdo the first movers have it?

Transcription

1 Global Issues Australian lawdo the first movers have it? Warren Riddell Partner, Beaton Capital January 2013

2 On 1 January 2013 the mid-sized 300 lawyer Middletons became K&L Gates. Whether the Big6 Australian law firms and Middletons peers like it or not, the game has changed again. This is the latest in a string of domestic firms taking the foreigner s coin: Deacons 500 lawyers became Norton Rose in 2010, Blake Dawson s 850 lawyers became Ashurst in 2012 (subject to some remaining conditions), and together Chang Pistilli & Simmons and Cochrane Lishman Carson Luscombe s 30 lawyers became Clifford Chance in All these mergers were structured differently and absorbed into brands that originated in London. But the Middletons fully integrated model with a very substantial US firm is a game changer. It has been a turbulent few years for Australian law firms after more than a decade of unparalleled growth and wealth generation for the partners. The changes are a case study of Michael Porter s Five Forces of industry re-structuring as some law firms proactively redefine themselves, some wait and watch, and others let the world go by. The headline forces can be summarised thus: > Market growth for most types of corporate and commercial legal services has declined substantially > Foreign law firms that once referred work to Australian firms have entered Australia, stopped the referrals and are competing domestically > Domestic law firms, that are part of an international brand, have gained brand permission to successfully compete for new clients and better talent > Client sophistication in how legal services are procured is increasing. The upshot is that the market has irrevocably shifted from a sellers to a buyers market. Australia is not alone in facing these market trends. By and large it s the same in other developed markets, and is typified by the intensifying competition to win work from transnational corporations, international capital markets and major governments. It is a global phenomenon that is driving both the consolidation of firms in domestic markets to provide the benefits of scale and the internationalisation of other firms to remain relevant to their major clients. By way of example, the chart highlights the accelerating change in the structure of the Australian market in the last decade. > Substitute legal service providers, like offshore LPOs, are taking an increasing proportion of the market 2

3 Australian lawdo the first movers have it? Warren Riddell Australian law firms - new entrants and international mergers Whilst the K&L Gates-Middletons tie-up is the talk amongst fazed Australian law firms, two other international mergers in November went largely unnoticed in Australia mergers that signal a new trend for BigLaw. US firm SNR Denton announced a double merger with Canadian law firm Fraser Milner Casgrain and French firm Salans, and Norton Rose merged with the US firm Fulbright Jaworski. These mergers signal the long awaited entry of the US into the race to globally aggregate legal services. Dentons, as it has become, is leading from its US base and its mergers put it in the top ten of global firms by number of lawyers, whilst Norton Rose has finally merged with a US firm to create competitive scale in the world s largest single market will see more US firms join the global merger movement. Beaton Capital research into law firm M&A over the past three years is summarised in the table. Some 60 mergers or acquisitions were examined and whilst the activity both originated by Australian firms and within Australia stands out, other geographies have shown comparable movement. UK firms have focused on outbound aggregation, while US firms focused on domestic consolidation. The Euro Zone (EZ) and Canada provided modest activity, with internal consolidation in China being the elephant in the room. 3

4 Table 1: Law firm M&A by geography Target geography Bidder geography AUS CAN PRC EZ HK JAP ME MEX NZ RSA UK USA Total AUS CAN PRC EZ HK JAP ME MEX NZ RSA UK USA Total Note: where the table reflects mergers of equals it includes them in both the bidder and target categories (e.g. Freehills and Herbert Smith), mergers by large firms of significantly smaller firms (e.g. K&L Gates and Middletons is reflected in only the bidder category What these figures do not show are the raids on whole practice groups or laterals that regularly take place in the legal profession; Allen & Overy s entry into Australia being a case in point. This explains why there are so few conventional acquisitions or mergers in law when compared to other professional service firms such as the accountants and consulting engineers. But it does demonstrate the talent liquidity in the market and the increasing pull of stronger brands. Ordinarily law has a very low barrier to entry, as the lateral hiring of practice groups proves, but as global brands become stronger, the impact of peripatetic partners switching firms will lessen as it has done in the Big4 accounting firms. The international law firms that entered Australia in recent times have generally continued their international expansion in 2012 through combinations of mergers and alliances. DLA Piper merged with firms in France and Mexico and established a broad alliance network across Africa, which looks like a precursor to further mergers. Norton Rose merged in Canada, which gave them access to Latin America and Kazakhstan, and set up shop in Tanzania. K&L Gates merged in Italy and set up an office in South Korea. Most other major international firms made further forays into developing markets in Asia, Africa and the Middle East. 4

5 Australian lawdo the first movers have it? Warren Riddell So how is BigLaw in the world shaping up and what does this mean for Australia? The analysis below is based on AmLaw100 data updated for the most recent mergers and alliances, such as that between the UK s Linklaters and Australia s Allens. Australia s historic Big6 firms are highlighted in blue, only two remain independent of an acknowledged global brand; Clayton Utz and Minter Ellison. New rank Firm Gross revenue US$m (most recent fiscal year) No. of lawyers 1 Linklaters Allens Alliance $2,435 3,027 2 Baker & McKenzie $2,313 4,004 3 DLA Piper $2,247 3,746 4 Skadden Arps Slate Meagher & Flom $2,165 1,832 5 Latham & Watkins $2,152 2,014 6 Clifford Chance $2,090 2,518 7 Norton Rose $1,919 3,026 8 Allen & Overy $1,898 2,330 9 Freshfields Bruckhaus Deringer $1,828 2, Kirkland & Ellis $1,750 1, Hogan Lovells $1,665 2, Jones Day $1,651 2, Sidley Austin $1,416 1, Herbert Smith Freehills $1,354 2, White & Case $1,331 1, Dentons $1,300 2, Greenberg Traurig $1,244 1, Weil Gotshal & Manges $1,230 1, K&L Gates $1,174 2, Gibson Dunn & Crutcher $1,166 1, Ashurst $928 1, King & Wood Mallesons $522 1, Clayton Utz $ Minter Ellison $ Source: AMLaw100 and Beaton Capital research (note some merger and alliance data was unavailable at the time of publication, e.g. DLA Piper in Africa) 5

6 On this basis the Linklaters-Allens alliance is the largest global law firm based on revenue, with only one other Big6 Australian firm in the top 20 Herbert Smith Freehills. From an Australian perspective the message is clear make a choice because the market is polarising into those that will have meaningful global reach and those that won t. Then ask what does this mean about the clients you wish to serve, the work you seek to undertake and the talent you want to attract. Undoubtedly these were the questions the Middletons partners asked themselves when they voted to join K&L Gates a top 20 global firm. Warren Riddell, Partner, Beaton Capital warren.riddell@beatoncapital.com P: Melbourne + Sydney + Hong Kong 6