By now we’ve all read about the Norton Rose/Ogilvy Renault/Deneys Reitz three-way combined business, putting together the UK, Canada, and South Africa. According to LegalWeek, “The combined business will rank as one of the world’s top 10 firms by headcount when the three-way tie-up takes effect next June, boasting more than 2,500 lawyers in 38 offices worldwide and gross revenue of over $1bn (£626m).”
What’s missing from this picture?
The word “merger.”
That’s what we’re here to talk about, as there’s been some ink, or pixels, spilled about what to call this. You may think it’s merely semantics, but I don’t, and I’ll tell you why in a moment. But first, LegalWeek has come to the defense of its conscientiously not being a merger (emphasis mine):
In fairness to Norton Rose, it hasn’t claimed to be merging with anybody. The press release carefully avoids using the ‘M’ word, referring instead to Ogilvy and Deneys “joining” the Norton Rose Group, the City firm’s international holding company. But such talk misses the point. Even ignoring the semantics, the suggestion that a merger’s success is entirely dependent on whether money changes hands is overly simplistic and naive.
The Swiss Verein – a Swiss-law holding structure employed by Norton Rose to allow the various constituents to operate independently with limited liability – has been used successfully by law firms since Baker & McKenzie first adopted it in 2004. The change offered Baker the “benefit of a modern business framework together with a prudent approach to managing potential liabilities,” then chairman Christine Lagarde said at the time. DLA Piper also operates with separate profit pools between its US and international arms, and the group of newly minted transatlantic mergers – such as Hogan Lovells and SNR Denton – also are structured similarly.
Taking this at face value, you would imagine that any two firms structuring a deal other than as a Swiss verein must have taken leave of their senses–it seems the universally approved way of doing business, at least for the last decade or so.
I beg to differ, but before I explain why, let me just say that I’m evidently not alone: Pete Kalis, Global Chairman of K&L/Gates, opined to The Lawyer:
“There has been a recent spate of ‘Noah’s Ark’ mergers: two CEOs, two partnerships, two profit pools, two accounting systems, two operations centres, all with a single flag flying above the Ark,” said Kalis. “Apparently Noah must now accommodate them coming aboard three by three. I wonder what clients think of this since few of them, with good reason, embrace Noah’s methodology in their own organisations and since all of them expect seamless integration among their global law firms.
“A merger is when two become one, not when two become two,” added Kalis. “Language is important, and I’d suggest that the most effective language is that which aligns with the facts. [These are] simply ‘arrangements’.”
Norton Rose, I’m happy to report, riposted with vigor; normally “no comment” would seem the wisest course, although it almost never is.
Norton Rose chief executive Peter Martyr dismissed Kalis’s comments, claiming the Swiss Verein-structured deal represented considerably more than an association or a joint venture.
“This is the only way you can really do it to get two businesses together with different equity structures, currency issues and different profitabilities,” said Martyr. “You could wait until there was parity but that wouldn’t allow you to reach your strategic goals. In this deal we’re really nailed together, we behave as one.”
Martyr added that the new additions to the Norton Rose group would have “common systems, management, name, strategy, resources and one CEO”.
“The only thing we’re not doing on day one is splitting the pre-existing profit pools,” added Martyr. “This comment displays either a lack of understanding of our deal or is a person with their head in the sand.”
So: Which is it? We have something, at the very least, never before reported in the annals of Adam Smith, Esq., to wit dueling metaphors between Noah’s Ark and an ostrich.
I start with Kalis’s observation that “language is important,” a belief I devoutly endorse. But one point to Norton Rose for not claiming, at least for public consumption, that this is a merger. Nice semantics, but, I believe, a profoundly short-sighted business decision. More than one point to Kalis.
Here we get beyond words, beyond mere semantics.
Firms ambitious about offering a global platform to clients need to take that aspiration deadly seriously. LegalWeek, much as I respect their reporting, doesn’t take this far enough, saying “It’s important to remember that profits are a byproduct. Fundamentally, law firms exist for one sole purpose: to provide legal advice to clients. So long as they are receiving a fully-integrated service, clients really aren’t concerned whether a firm’s various offices are sharing fees or not.”
Their premise is unassailable: It is all about clients, and profits are very much a byproduct. The error, I submit, is in failing to connect the incentives to the behavior that delivers the client service.
Not to be oblique: If I’m a Norton Rose “alliance” partner at Ogilvys in Canada, what exactly is in it for me to refer a matter to the UK or to South Africa-and repeat the thought exercise from each of the three apexes of the triangle…
Now contrast that with a Magic Circle firm, with Latham or Skadden, with K&L/Gates, for that matter: Firms with one global profit pool and incentives-real, economic, hard-nosed compensation-driven incentives-to share clients across the network will simply behave differently in client service. Clients will tend to get the best lawyers the firm has to offer, and their work won’t be captured by the “originating” partner. (We can talk about the incentive-warping atrocities of perpetual origination credits some other day.)
Finally, let’s look more closely at Peter Martyr’s argument that “different equity structures, currency issues and different profitabilities” make it impossible to fully merge two firms on post-closing day one.
I have three words for that: Tell John Chambers.
Mr. Chambers, as most of you will recognize, is the long-serving CEO of Cisco Systems, which has made something of a core competence out of acquiring, and yes, merging into Cisco, other firms. Here’s a list from the Cisco website, which I dare you to read in full. Mr. Chambers, I imagine, would roll his eyes at the notion that equity structures, currency fluctuations, and profitability ratios would forestall a true merger.
And why does this matter?
Not because Mr. Chambers wants to build the Greater Cisco Empire, but because Cisco needs to be a one-firm firm. If a company that makes home routers (Linksys) or set-top cable boxes (Scientific Atlanta) or drop-dead simple video cameras (Flip) offers products or services that would complement Cisco’s offerings, it needs to be fully integrated, so that no one at Cisco-and we’re now all at Cisco, from day one post-closing-will have any incentive not to include the new acquisition’s offerings in Cisco’s portfolio.
Let me hasten to add that this is not a critique of Norton Rose, much less Peter Martyr; they are doing what the legal merger/acquisition market seems to be doing. But it is a critique of what our merger/acquisition market, at least on the UK/US axis, seems to be doing.
Aren’t we more capable, more ambitious, more strategically-oriented than this?
How short-term oriented must we be? If a merger is worth doing, well, then, forgive me for asking the obvious, but is it worth doing?
As a friend of mine said in an entirely different context, ruefully commenting on the sad outcome of another friend’s recent romantic escapade, “If you don’t want to marry the girl, don’t offer her a ring.”
