Firms Push Ahead with Full Mergers Despite Aussie Slowdown
Less than two weeks ago, Ashurst voted to fully merge the partners from the former Blake Dawson into its global partnership. Though the British and Australian firms announced their tie-up two years ago and the latter adopted the former’s brand, they had held off on a financial integration.
For many years, the difficulty of integrating hundreds of Australian lawyers was a frequently cited reason for why U.K. firms would likely avoid mergers Down Under. And, indeed, most British firms that have pushed into the market in recent years have sidestepped the issue by adopting verein structures, merging with small firms, or launching standalone offices.
But Ashurst and, even before, Herbert Smith Freehills, embraced full integration. At both firms, there is a strong belief that only partners in the same profit pool will be reliably motivated to work together, rather than competing with each other. They’re holding on to that belief despite the past year’s slowdown in the formerly red-hot Australian economy.
“Everyone has an interest in growing the overall pie and no one has to worry about where the work is done,” says Mary Padbury, the Australia chairwoman for Ashurst.
Financial integration is more difficult for firms like Ashurst and Herbert Smith Freehills because their partner compensation systems have traditionally been based on lockstep models. In a pure lockstep like the former Herbert Smith, partners are paid strictly according to seniority. In a modified lockstep, as at Ashurst, part of a partner’s compensation is tied to seniority with the rest tied to various performance metrics.
Herbert Smith is currently working on combining its U.K. lockstep and the Australian side’s modified lockstep into a global modified lockstep system. A firm spokesman declined to comment on those discussions but said a new system is on track to be implemented in the next financial year.
But in any form of lockstep, higher-grossing partners can be seen as subsidizing their lower-grossing partners.
Most firms ward off such perception by building strong internal cultures and a strong sense of collegiality among partners. But that’s tougher in a merger situation. A decade ago, a lockstep that couldn’t accommodate superstar U.S. partners launched a cascade of problems for Clifford Chance’s merger with New York’s Rogers & Wells. A similar dynamic is certainly possible between broadly more profitable U.K. firms and their Aussie merger partners.
In the months leading up to and following the merger last October of Herbert Smith and Freehills, several leading London partners have walked. Litigators Ted Greeno, Simon Bushell, and Kevin Lloyd joined Quinn Emanuel Urquhart & Sullivan, Latham & Watkins, and Debevoise & Plimpton, respectively. Corporate partner Will Pearce went to Davis Polk & Wardwell, while financial regulatory practice head Martyn Hopper and partner Nikunj Kiri both moved to Linklaters.
Four former Herbert Smith partners interviewed for this story said the merger had been a factor in the departures. They say there was widespread concern that the U.K. firm partners would wind up subsidizing the Australian partners, whose rising profits were seen as the result of a skyrocketing Aussie dollar and a once-in-a-lifetime mining boom. According to The American Lawyer’s 2010 Global 100 survey, Herbert Smith had profits per partner of $1.36 million compared to Freehills’ $970,000. The following year, the last in which the two firms released separate financials, Herbert Smith sank slightly to $1.34 million while Freehills had jumped to $1.27 million.