“You will never merge.”
This was reputedly the parting shot made by one former Ashurst Morris Crisp partner when he left the firm.
In the ashes of the collapsed talks with top-five US firm Latham & Watkins, his words will be resonating again around the City firm’s Broadgate HQ.
Throughout the course of its proud 180-plus year history, the 105-partner firm has never merged.
Now, for the second time in as many years, it has been involved in failed talks.
In March 1998 Ashursts was forced to withdraw from negotiations with Clifford Chance when, it is understood, two senior corporate partners, believed to be Chris Ashworth and Charlie Geffen, came out against a deal.
This time, Legal Week understands, the circumstances were different: it was not Ashursts that prompted the end of the talks, but Lathams.
With Ashursts resolutely resisting being acquired, the US firm’s negotiating team of San Francisco-based national managing partner Bob Dell, and management committee member and New York partner Bill Voge were unable to sell a merger to their partners.
For the deal to go ahead it would have required Lathams’ partners to accept some significant changes.
It is understandable that they were reluctant to change a formula that has been serving them so well.
After all, the US firm had a turnover of £363m for 1999, close to three times that of Ashursts, which was in the region of £130m.
Lathams’ average profits were also higher at more than $1m (£625,000). Although Ashursts’ profits for this financial year are not yet available, for the 1998-99 financial year they were just over £400,000. It is safe to say that there was still a significant gap.
Although the disparity was not irreconcilable, it meant persuading those Lathams partners who did not stand to gain much out of the deal – and there were plenty of them – of its merits would be extremely difficult.
Legal Week understands that the negotiations did not collapse on one deal-breaking problem, but because of the cumulative effect of a number of unresolved issues. This was enough to make Lathams go cold on the deal.
As is so often the case, choosing a method of compensation was one of the rocks on which the merger foundered.
Despite reports suggesting otherwise, Lathams does not operate an ‘eat what you kill’ remuneration system.
The firm has an eight-year lockstep, which distributes 85% of the profits. The remaining 15% is then allocated using a merit-based system, measured by several criteria, including level of billings, management and business development.
The gap between Ashursts’ own system – a pure lockstep over nine years – was not that great. But, sources say the firms were reluctant to budge. Although there was enthusiasm among younger Ashursts partners for the introduction of a merit system, there were many who did not want to change.
On top of this, there are the different ways that the two firms are set up in financial and accounting terms.
As is common with most US firms, Lathams’ accounts are run on a cash basis. This basically means it only recognises as turnover what it has received in payment.
Ashursts – as the Inland Revenue in the UK requires – accounts on an accruals basis: it includes work billed but not yet paid in its turnover for the financial year. This latter sum can often be a significant amount.
The upshot of this is that the two firms’ performances can be interpreted very differently, depending on which method is used.
Both firms also have different funding methods, which are set in a way that commonly divides US and UK firms. Lathams runs itself without any debt, with funds for the business provided by capital that is put up by the partners.
Ashursts is funded by a mixture of capital and debt in the form of an overdraft at the bank.
This is the traditional way UK firms run their business and it does not mean Ashursts is significantly in debt. But these accounting and financial issues caused discomfort within Lathams as the management at both firms agreed that to work effectively, the combined practice would have to operate under the same system.
While this is not an insoluble problem – Clifford Chance and Rogers & Wells managed it with a complex system – it can certainly add to a climate of misgivings.
There was also an important gap in each firm’s perceptions of a partner’s role.
In the US, where the partner: assistant leverage is lower than the UK – typically 1:2.5 or 3 compared to 1:5 or 6 – partners bill significantly more in personal terms. Client work tends to have a higher partner input.
In top-tier City firms such as Ashursts, greater emphasis is placed on a partner bringing business in and then passing it down to the team of assistants below them.
A City partner will charge out at a higher rate but spend less time on the work.
Other concerns can be added to these different structural and cultural differences.
Pressure was undoubtedly coming from Lathams’ London office, where partners were understandably impatient for the negotiations to reach some form of conclusion, given the impact a merger would have on them.
Whether the office would, or could, have stood in the way of a deal was never tested, but their concerns would have presented Dell and Voge with a management problem.
There were also a number of outstanding management issues to resolve. No role had yet been given to Ashursts’ managing partner, Ian Nisse, although he was to have one of Ashursts’ three seats on the management board.
There were also questions about the extent to which the US would have been able to control the combined firm’s European expansion, which was to be overseen by a committee led by Ashursts’ senior partner Geoffrey Green.
And there was the question of the location of the new firm’s head office. Although Lathams is by far the bigger firm, its lawyers are more evenly spread.
Lathams’ largest office in Los Angeles has only just over 260 lawyers, barely 25% of the firm’s overall staff.
In contrast, 83 of Ashursts’ 105 partners are based in its London HQ. The City firm’s European and Asian offices are relatively small operations.
As a result, the London office would have been twice the size of any other office. Although Dell says he would have been happy for this to be the case, sources claim that it contributed to the breakdown in talks.
Finally the firms had yet to agree on a name, although Lathams & Ashursts is understood to have been the favoured option.
None of these issues seemed impossible to resolve. For example, the different approaches to accounting could have been harmonised in a phased process.
It also seems odd that the talks could have lasted so long while these fundamental issues remained unresolved. Sources close to the deal point to the good-natured relationship between the two firms’ negotiating teams as a possible reason for this.
And, as with a corporate deal or at the door of a court settlement, the reluctance to address the hard questions early is a trait that lawyers share with their clients.
The failure to use outside advisers, who might have smoothed over the obstacles, might have kept the talks going.
Earlier this year, Ashursts sought advice from Brad Hildebrandt, principal of management consultancy Hildebrandt International, on its approach to the US market, but it did not enlist his help for the discussions with Lathams.
It is impossible to know whether this would have made a difference to the success of talks which, on paper, would have created an extremely powerful combination if they had come to fruition.
The collapse of the deal could leave Ashursts’ partners ruing a missed opportunity – and it is certain to remind them of the firm’s failure to link up with Clifford Chance.
The dilemma is that Ashursts’ self-confidence – some argue arrogance – means that they will not entertain the idea of being taken over.
As managing partner Ian Nisse told Legal Week after the ending of the negotiations: “We are well prepared to make changes to take advantage of opportunities. We are not prepared to turn ourselves inside out to do something.”
This reluctance to accept a takeover is understandable.
In the last two financial years, the firm’s fee income has soared from £79m to £130m. Profits per partner have improved substantially after a period where there were management concerns that the firm was being left behind by its City rivals.
The firm’s reputation in its core competencies of corporate finance, mergers and acquisitions, private equity and acquisition finance remains deservedly high.
In May, the firm joined Slaughter and May at the top of Hemmington Scott’s table of Ftse companies’ preferred advisers.
But despite this success, the firm retains an air of vulnerability.
Management accepts the firm needs to establish a dual UK/US capability because of New York’s pre-eminent position in international finance.
Although it has, and will continue to have, good relationships with other US firms, in the long-term it needs to address this issue.
Whether it has the resources to build its own US capability is doubtful, particularly as it is finally investing seriously in building a European network.
Herbert Smith, which to some extent shares the same strategic dilemma as Ashursts, has built up a team of nearly 20 US lawyers in less than two years.
But even Herbert Smith is well behind the likes of Freshfields, Allen & Overy (A&O) and Linklaters.
Ashursts is also threatened by the lure and buying power of rival firms in the US and the UK.
In recent years, this has seen
the firm suffer some significant departures. These include lateral hires such as banking partner Stephen Mostyn-Williams and his team (now at Shearman & Sterling), energy partner Paul Griffin (now at Cadwalader Wickersham & Taft) and projects partner Ian Johnson (now at Orrick Herrington & Sutcliffe).
But there have also been departures among the ranks of those who have been at Ashursts ‘man and boy’, including Adrian Knight (who also moved to Shearman & Sterling), and Jeremy Parr and Mark Wippell (both at A&O).
With firms of the calibre and profitability of Simpson Thacher & Bartlett in the market for quality UK partners, the threat continues to be very real.
Ensuring that the setback with Lathams does not damage morale will be a key management task.
In this respect, Ashursts appears to have learned a lesson from the collapse of the talks with Clifford Chance when reports of its internal divisions were highly damaging.
This time management and insiders have been quick to claim that there had been no internal strife.
“There is no comparison with Clifford Chance,” says Nisse. One partner says the firm is united: “The plan was very clear from the start and there will be other opportunities.”
Nevertheless, the threat of top-flight partners leaving helps to concentrate the mind.
So although the firm’s success in recent years is a strong incentive not to change, there is still a strong imperative to do a deal.
Following the collapse of the proposed Lathams marriage, outsiders have criticised the firm for not having a Plan B.
But the quality of the firm means it will not be short of suitors.
Indeed, many were surprised at the choice of Lathams as a potential partner, as the firm has historically had closer links with the likes of Chicago’s Kirkland & Ellis and New York’s Willkie Farr & Gallagher.
Commendably, both Green and Nisse were quick to stress that the setback would not deflect them from achieving their strategic goal.
Nisse says: “We will not shy away from examining opportunities, but we have got to have the support of the partnership.”
If Ashursts’ partners truly want to make the final leap to the top table, then it must merge with a high-quality firm.
In terms of size and profitability, a merger of equals or a takeover in the Clifford Chance/Rogers & Wells mould is probably beyond Ashursts’ reach.
To achieve its goal, it will have to address what has been a sacred cow: its own resistance to being taken over.
Additional reporting by Saira Zaki.
