A&O Shearman: The Implications Of Making History

The Background

This particular class of transatlantic merger is not without precedent – and, interestingly, most such deals tend to meet a sour end. Just in March 2023, Shearman & Sterling abandoned merger talks with international London firm Hogan Lovells. The deal would have allowed Shearman to become a true ‘global player’; yet it transpired that the firms’ interests did not align. Ultimately, the merger would have benefitted Shearman & Sterling more in the short-term; and the long-term return of the partnership was estimated to similarly benefit Hogan Lovells.

Allen & Overy have also recently experienced a failed merger. In 2019, long-running talks between Allen & Overy and Los Angeles firm O’Melveny & Myers collapsed. Andrew Ballheimer, former managing partner at A&O, explained the primary reason for the collapse: “The strengthening of the dollar against the pound impacted valuation and interest rate cuts in the US affected pension costs on their side. That meant that we couldn’t agree a financial deal that both sides could support.”

In fact, these deals so rarely come to fruition that the A&O and Shearman merger would mark the first successful unification of an elite London firm and a US one in the past 23 years. But exactly what will this mastodonic deal include? And what does it mean for each of the two firms?

The Players

Allen & Overy

Founded: 1930, by George Allen and Thomas Overy

Based: Bishops Square, London E1

Approx. number of partners: 554

Approx. number of lawyers: 2800

Number of offices: 45

Number of countries with offices: 31

Revenue: £1.94 billion

Defining Moments:

• Advised on the first hostile takeover in the City of London;
• Arranged the first Eurobond in the 1960s;
• Introduced one of the first schemes to allow full equity partners to work part-time;
• First global law firm to open an office in Morocco;
• The only law firm to be named the most innovative in Europe by the Financial Times 3 times.

Shearman & Sterling

Founded: 1873, by John William Sterling and Thomas Shearman

Based: 599 Lexington Avenue, New York City, United States

Approx. number of partners: 200

Approx. number or lawyers: 900

Number of offices: 23

Number of countries with offices: 12

Revenue: $1.01 billion

Defining moments:

• Former senior partner Fredrick McCurdy was asked by President Eisenhower to be the United States’ lead negotiator at the 1960 Nuclear Ten Nation Committee on Disarmament;
• In 1979, Shearman & Sterling represented Citibank in intense negotiations during the Iranian Hostage Crisis, after the US government froze all Iranian assets in US banks;
• Represented the CEO of Tumblr, David Karp, in Tumblr’s $1.1 billion sale to Yahoo!

Will It Work?

Wim Dejonghe, current Senior Partner of Allen & Overy, said of the merger: “What excites me about this merger is the complementary cultures of our two firms. We have striking similarities across the board, and I believe we are going to be wonderful partners to one another on this journey.” But is that all it takes?

Post-merger integration is notoriously difficult, and A&O Shearman’s is estimated to take one year from the date the fusion is officially agreed upon. Hogan Lovells stepped away from Shearman due to incompatibility, and Allen & Overy abandoned O’Melveny & Myers due to dollar’s sudden rise, but those are hardly the only issues the firms could face once the merger is set into action. Pay systems, firm cultures, differing sets of expectations and the complexities of firm hierarchy are just a few of the many obstacles A&O Shearman are expected to surpass in order to establish themselves as a merged legal behemoth.

Nevertheless, the two firms appear confident. A&O Shearman is expected to implement a modified lockstep model, which would renumerate their lawyers based on a combination of factors, including performance and time served. Moreover, Allen & Overy had already adjusted their pay system in 2020, which allowed them to pay their top partners in the US more.

Find out more about the pros and cons of law firm mergers.

Who Gets What?

Allen & Overy is the firm leading the merger – financially, size-wise and in terms of responsibility. They are, after all, merging with a firm widely considered to have recently lost its lustre in the US market.

Questionable management choices and rapid expansion are amongst the leading factors behind Shearman & Sterling’s recent downsizing. During their peak in 2001, Shearman had 1,125 lawyers under their management – by 2022, that figure had shrunk to just 727. Unable to maintain previous levels of pay for their partners, the firm has seen over 130 of its partners leave in the past five years.

This unfortunate chain of events for the US firm leaves places Allen & Overy in an apparently much more advantageous position for the merger. A former Allen & Overy partner commented on the two firms’ power dynamic: “Shearman is a strong brand in a weak place. The strong brands in a good place have no interest in merging with the UK firms. You only get them once it’s a fixer-upper.”

The merger presents itself as a double-edged sword, even for the much more sizeable Magic Circle firm. Although the partnership will allow for bigger deals in higher places, it comes with the responsibility of extending a helping hand to Shearman. Senior partners Adam Hakki and Wim Dejonghe have recently spoken on future plans for their merged law firm, citing the tech, energy, and private money sectors as three major goals.

Ultimately, the merger is looking successful on both parts, considering Allen & Overy play their cards right – and prudently. Either way, one thing is certain – A&O Sherman is going to be big.

Want to learn more about what goes on behind law firm mergers and acquisitions? Check out our article on how are mergers and acquisitions are regulated.

By Ariana Serafinceanu