Over at LegalWeek, the big buzz this past week was all about the results of the annual survey they conduct of US firms operating in London which showed that 47% of respondents would consider a UK merger, up from 39% a year ago and just 29% in 2005.
The story was also picked up by their sister site law.com as well as footnoted in The New York Times’ "DealBook."
So, is it a story or isn’t it?
Looking at the actual results, you see a lot of firms responding to the point-blank question "Would you consider a merger with a UK firm?" not with the presumed yes or no but coyly or demurely with "Undisclosed," "Unlikely," "Possibly," and so forth. No word from LegalWeek how these Delphic responses were tabulated.
Be that as it may, there are some indisputable realities about the world in 2007:
"CMS Cameron McKenna managing partner Dick Tyler commented: “We have had more courtesy calls from US firms in the last six to nine months than the last 18 put together. There is a critical strength you have to reach and realistically if you want to have a strong corporate practice, you need employment, pensions, etc as support.”
And:
"Abrahams Russell recruitment consultant Greg Abrahams said: “This is driven by London becoming arguably the leading financial centre in the world and the closing gap between UK and US profitability. With the dollar/sterling exchange rate as it stands, there is more demand on the US side for a merger than on the UK side.”"
This also tells a true tale of the cultural obstacles to be overcome before a hypothetical deal could happen:
"Legal snobbery remains one of the biggest hurdles facing any transatlantic merger. It was snobbery and mutual suspicion on both sides that derailed the negotiations between Ashurst and Fried Frank Harris Shriver & Jacobson a few years ago. The same cultural problems dogged the Clifford Chance(CC) tie-up with Rogers & Wells.
On this side of the Atlantic, CC was accused of aiming too low. But more than a few big billers at Rogers & Wells had precisely the same attitude towards CC – understandably, some might argue, given the magic circle firm’s virtually non-existent profile in the US at the time."
Rather than put undue stock in ex cathedra statements of open-ness towards entertaining a merger, I’d prefer to focus on what US firms are actually doing in London, and one thing they’re doing in increasing numbers if taking on trainees (those would be first-year associates, to you): 57% do so this year vs. 51% last year, and some firms with larger London presences (notably White & Case, the single largest firm there by lawyer headcount in the City) has been taking on nearly 40 per year for the past decade.
Why does this matter?
Simple: It’s a sign of a genuine and enduring commitment not just to the City—where high-value transactional work is the celebrity model everyone wants to be seen in the company of—but to building a lasting and mature practice with the full range of capabilities required to be taken seriously as a local player and not just a wealthy visitor.
There’s another dimension: Taking on trainees implies adoption of a different time-frame than the more conventional US approach of picking off lateral talent to ramp up quickly—always a two-edged sword in any event. It’s a far longer-term perspective, as it means investing in a talent-development pipeline that may not see serious results for 5, 10, or 15 years.
And that’s why it tells you something: US firms are, at long last, evidently deadly serious about being players in London in the long haul.
If you’re like me, you have to wonder why it took so long for US firms to hear this wake-up call. Those who got there early (just for example, Cleary in 1971, White & Case soon after) have established leads it will be difficult to match. I have no blinding insight into why US firms ignored the patently obvious London marketplace for so many decades, but now that they are beginning to realize that even the world’s richest domestic legal marketplace is only a one-legged stool on which to build a serious 21st-Century practice, they may be ruing their shortsightedness. At least they came by it honestly.
But this brings us back to whether the "US Ready to Merge!" soundbite is accurate, and I think not. I certainly think there’s far far less to it than the credulous might believe. Why?
I still perceive a marketplace not quite ready to "clear," or, perhaps more precisely stated, a marketplace where potential players have still-too-widely divergent perceptions of value, fit, and cultural congruence. Does this make sense? At a rational, objective, and economic level, none whatsoever. If a merger would generate all but undeniable benefits for both parties, perception should matter not. Yet we all know it does, sometimes to the point of obstinance, and a refusal to countenance even deals that, on paper, make tremendous sense.
Analogous is what we have seen in the past, and may see again, in the US residential housing market: When prices fall drastically in a particular region or metropolitan area, people who bought at the top demonstrate almost insurmountable aversion to selling their homes for less than they paid for them. Economists (and I) will tell you this makes no sense. The house is worth whatever it’s worth, and what you happened to have paid for it is utterly immaterial.
But as we can read in today’s NYT, what economists believe and how people behave are two different things. Consider this study from about 15 years ago:
"From 1989 to 1992, prices in Boston fell sharply, with condominium prices dropping as much as 40 percent. For a great many of those who bought condominiums during that period, selling could be done only at a significant loss. And, basically, many people refused to sell.
[A] study, “Loss Aversion and Seller Behavior: Evidence From the Housing Market,” [which] appeared in The Quarterly Journal of Economics in November 2001, gathered data on almost 6,000 Boston condominium listings from 1991 to 1997 and showed that for essentially identical condominiums, people who had bought at the peak and were facing a loss generally listed their properties for significantly more than those who had bought at a time when prices were lower."Properties listed above the market price just sat there. In the Boston market over all, sellers listed their properties for an average of 35 percent above the expected sale price, and less than 30 percent of the properties sold in fewer than 180 days. In other words, much of the market went into a deep freeze as many people held out for market prices that no one would reasonably pay."
Back to the US/UK law firm merger market: What is the lesson?
The lesson is that economic realities ought to trump sentimental notions such as not wanting to sell your house for less than you paid. But they don’t always. People kid themselves, and do things like putting their house on the market at a price so high that it will sit there for a year or more, ignored or rejected. If you really want to sell your house, price it at the market. You won’t have long to wait.
My suspicion is that the US/UK merger market is closer to Boston condominium-owners in 1992 than to an active, vibrant, and clear-eyed market. Lots of people may say they want to dance with the pretty girls, but they’re sitting on their hands.
