MOST of London’s “magic-circle” law firms are intrepid creatures. Over the past 20 years they have busily expanded abroad, opening offices everywhere from Antwerp to Yangon. But despite having hundreds of lawyers on the ground in America, one prize has proved elusive: laying down deep roots in the world’s most litigious market.
Allen & Overy, a top-tier London firm, would like that to change. It has reportedly been in merger talks with an American firm, O’Melveny & Myers. With O’Melveny denying any plans to merge, a union, which would create one of the world’s largest law firms by revenue, may not get off the ground. But that is unlikely to stop Allen & Overy from approaching others in its pursuit of an American alliance.
For the big British firms, America holds the key to greater profitability. Its allure in part reflects its importance on the world stage. Judgments made in America’s courts, such as those in anti-bribery cases, have ramifications beyond its borders. New York law, like the whole body of English law, is a popular choice of governing law for international business transactions. The magic-circle firms with global ambitions already tap into some of that work through their American outposts.
But they have made few inroads into the American domestic market. It is large, accounting for about half of the world’s legal-services market by revenue. And it is lucrative, partly because of the robust litigation scene. The leading American firms generate nearly twice the profits, per equity partner, of their British peers (see chart). In contrast, profits at magic-circle firms have been watered down by their expansion into emerging markets, because clients there cannot be charged as much as those in London or New York. Slaughter & May, the only magic-circle firm without global aspirations, has done correspondingly better as a result.
America is a difficult market to crack. Relationships with clients tend to be deeply embedded. And with no shortage of American competitors vying for business, the magic circle has struggled to differentiate itself from the crowd. O’Melveny may have been attractive to Allen & Overy because of its established litigation team, says Nicholas Bruch from Legal Intelligence, a research provider. Among other things, the firm is representing AT&T, a big telecoms firm, in an antitrust lawsuit brought by the Department of Justice.
The Brits are also not helped by their relatively measly pay for partners. The magic-circle firms all operate some variation of the “lockstep” model, which broadly remunerates partners on the basis of seniority. The scope for large awards tends to be limited, compared with the “eat what you kill” system followed by most American law firms, which can generate superstar salaries for partners bringing in the most business.
The few American firms to use the lockstep system have experienced partner defections recently to higher-paying practices. The British firms, with their smaller profit pool, have found attracting and retaining American talent hard.
Even so, there are some lonely hearts in America who might welcome a transatlantic romance. Legal mergers involving at least one American firm reached a record high in 2017. Singletons with neither a strong speciality nor an international footprint are feeling squeezed.
That said, the business case for uniting can collapse in the face of large differences in culture and pay. Some partners always leave after a merger. If enough depart, clients in tow, the very rationale for a union leaves with them. The last time a magic-circle firm merged with an American counterpart—Clifford Chance, with Rogers & Wells, in 2000—integration was painful and partners left. The prospect of an American alliance may set the pulse racing. But it is risky, too.