Shearman/A&O: Legal mega-merger would be more of a meeting than a hug

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Mergers of large law firms often seem ominous. Despite the proclamations of hope, the feeling may be that neither party really wants to be there.

Shearman & Sterling of the US and Allen & Overy, a UK “Magic Circle” firm, plan to combine, creating one of the largest legal businesses in the world. It would have more than $3 billion in annual revenue based on 2022 results.

As formidable as it sounds, rivals will remember that law firm alliances often reflect a certain level of desperation.

In 2022, Shearman’s revenue fell 10% to $900 million, while net earnings fell by about a third, according to figures compiled by American Lawyer magazine.

Other law firms and professional services teams have posted similar declines due to a drop in mergers and acquisitions after a record 2021. Layoffs this year have spread to law practices, accounting firms and investment banks.

Rapidly evolving artificial intelligence and machine learning may change the way lawyers practice their trade or even reduce the need for it.

ShearmanThe cache has been falling for years. Historically, the firm was a key adviser to big Wall Street banks like Merrill Lynch. But the financial crisis reduced the role of incumbents. With private equity firms becoming increasingly central to financial intermediation, Shearman and other legal mainstays had a hard time adjusting.

Law firms are rarely agile. The partners demand a strong fixed compensation that includes generous pensions. Shearman had been looking for a suitor for a long time, recently holding talks with Anglo-American law firms like Hogan Lovells.

A&O he hopes Shearman can be a bridgehead in the lucrative US legal market. The argument would be that the combined business could operate seamlessly around the world for multinational clients.

However, law firms often prefer to grow by choosing, as needed, small teams with specific practices. Integrating entire companies is often complicated. The best lawyers may simply choose to move elsewhere to avoid the consequences of hitting two disparate organizations and cultures.

The partners of each firm must now approve the deal. The dangers of such collective decision-making were recently highlighted when EY partners blocked plans to split up audit and consulting.

But Shearman and A&O may need each other so badly that they have to move on. Making your marriage work can be the price of staying relevant to both sets of partners.