Allen & Overy lines up multi-billion dollar merger with Shearman
City lawyers brace for the end of the boom as Magic Circle links arms with US Jobs and bonuses at risk across London and New York amid slowdown in work
It was a warning sure to send a chill through the glass offices and dealroom bunkers of a thousand highly-paid legal experts.
As Allen & Overy – one of Britain’s five “magic circle” law firms – announced a $3.4bn (£2.7bn) transatlantic tie-up with New York’s Shearman & Sterling, it said that City lawyers must start to deliver “more for less”.
The deal, which needs approval from partners, is set to create one of the world’s largest law firms, employing around 4,000 lawyers across 49 offices around the world.
Wim Dejonghe, senior partner at Magic Circle law firm Allen & Overy, said these were two firms which have been “leading the way in terms of driving efficiencies”.
Shearman earlier this year announced job cuts in a bid to improve its profitability, whilst Allen & Overy has recently been working on an AI bot geared to save time for staff.
Dejonghe rebuffed talk of more cuts after the deal. “That is not the plan”, he said, adding: “This is really about growth and opportunity more than anything else.”
However, it comes at a time of widespread consternation that years of red-hot growth and surging pay may finally be coming to an end.
Such has been the demand for legal expertise that graduates joining elite firms straight out of university – and trusted to do little more than shuttle files from one room to another – can command salaries of more than £170,000.
However, many players are now bracing for what is likely to be a prolonged period of less work. Fears over the global economy have led to a slowdown in dealmaking, something which a host of firms, particularly those in the US, have been struggling to cope with.
Shearman is not alone in cutting jobs, with other US operators including Kirkland & Ellis and Goodwin Procter also trimming back associate numbers in recent months.
This has even started to trickle into London, where insiders say firms have typically been loath to have to let associates go.
US law firm Dechert earlier this month announced it was reducing jobs across the globe, including kicking off a redundancy consultation in London to align staffing levels with demand.
Allen & Overy and Shearman are determined to strike a bullish note.
Dejonghe shrugs off wider concerns over a market slowdown, saying the deal would “actually allow us to grow faster in terms of revenues”.
But, when the two firms finally get the go-ahead for the deal – expected to come in six to 12 months time – the question will be whether the global economy will look more stable.
If not, experts say executives may face pressure to find more efficiencies and address any overlap.
Charlie Harvey, a former lawyer at Magic Circle firm Slaughter and May and current director at Stephenson Executive Search, says consolidation often leads to a reassessment of how many staff are needed.
“Could some associates be let go?” he says.
“Are they going to realise there are a few too many [associates] or areas where they have to trim it down to make it manageable?”
It comes amid what experts say is an increasingly tricky market for job hunters in the law industry. Many major UK-based law firms are understood to have essentially brought in hiring freezes to now attempt to keep a lid on their costs.
Harvey says only a “few exceptional niche or replacement hires for lawyers who have recently left” were being brought into these companies.
Figures from Atlas by Codex Edge, compiled by The Lawyer, show that the number of staff moving between private practices has fallen off a cliff from 1,400 last October to 745 in March and 394 last month.
Separate data from Adzuna suggests that the number of advertised vacancies in the legal sector stood at 16,807 last month, an almost 20pc drop from the previous year.
Workers at the biggest firms, meanwhile, may find that they have a more difficult time progressing up the ladder. Opportunities to be made a partner are expected to become more competitive than ever.
How Allen Overy Shearman Sterling navigates such decisions will be watched closely.
Pay is expected to be another area of much scrutiny, amid growing pressure on law firms to stop their clients’ fees from going higher.
Dejonghe said clients which also worked with Shearman had been “very enthusiastic” over the deal.
With a merger such as this, headhunter Jon Parker says executives should be making sure the New York and London teams are brought in line with each other, to avoid grumbling over wage disparities.
“Hours have to go up for the English, or pay go down for the Americans, and neither of those are an easy sell,” he says.
Dejonghe says this is something the industry as a whole has been aligning on for the past few years. “This deal does not really change that, to be honest,” he adds.
Similarly, he says that bonuses are already an area that Allen & Overy has been navigating for years.
“We need to be able to offer competitive pay and working conditions in each of these markets [that we operate] and that is not the same in, say, Budapest as it is in New York,” he says. “Our philosophy has always been to be at the top of every single one of the markets in which we operate.”
Yet, experts say there has generally been a gap between the US and UK on this, and pressure might come to align across the board.
“The US firms generally have an ‘eat what you kill’ structure’,” explains Harvey.
“If a partner brings in lots of work and does all that work, they earn a lot of money.
“Whereas UK firms are traditionally lockstep, so you get paid depending on your seniority rather than on your performance.”
The two firms are understood to have agreed to a ‘modified lockstep model’. Any pressure later down the line to adopt a more US style of working across the firm “would have a big knock on effect on the culture”, Harvey says.
The US “is a bit more sharp-elbowed and people hoard their work a bit more because they’re more worried about their own personal performance”.
Although there may be no immediate job cuts, the chill that lawyers are feeling is unlikely to fade any time soon.