The merger of Lovells and Hogan has won plaudits and raised expectations. Georgina Stanley assesses the challenges the new firm faces in living up to its huge promise

If the outlook of any major strategic move can be gauged from the general reaction of rivals, the prospects for the impending union between Lovells and Hogan & Hartson could not look brighter.

For while the cynical City legal community typically pours buckets of derision and faint praise over major moves by rivals, the upcoming merger has won a remarkable degree of support from observers.

The attraction of the merger is obvious – in only three months the rebranded Hogan Lovells will become a top 10 global law firm with combined revenues of $1.8bn (£1.1bn), around 3,000 lawyers and 566 equity partners – not a bad result for two firms that have struggled to fulfil their ambitions in an increasingly globalised market for high-end legal services.

As Lovells managing partner David Harris comments: "No firm will have the same range of capability that we will. Having the scale and quality of practice and the breadth of coverage in key areas will give us a competitive advantage and a unique proposition."

For Lovells, used to the knives being out over the last decade, the positive notices have made a welcome if unexpected change. But though both firms – neither of which could generally have been regarded as pace-setters in their respective markets – deserve credit for achieving the kind of transatlantic union that seemed nearly impossible, neither can rest on their laurels.

With a deadline of 1 May to merge practice groups, industry sectors, management teams and brands, the two firms have their work cut out if they are to be operating as a single firm in little more than three months. Given the mixed record the legal industry has had at turning promising international tie-ups into successful realities, the pair are all too aware of the challenge they face if they are to make the most ambitious merger the global legal market has seen for at least five years deliver.

Harris says the firm has a window of maybe a year to make this deal deliver if Hogan Lovells has a hope of living up to the transformational hype. The question many rivals will be asking themselves now is to what extent the firms can seize this opportunity.

Long road to a fast deal

While to outside observers the deal appears to have been conducted at lightning speed, it was more than two-and-a-half years ago that Lovells began on the journey that led to this moment. Given that Lovells at the time was struggling to keep pace with some of its City rivals that were riding the transactional boom, the initial omens could have been better.

Litigation partner Patrick Sherrington, who in recent years had primarily managed Lovells' relationships in the US, was tasked with working alongside Harris and other members of the US strategy committee to take a closer look at the US market.

Initially, this was as much about gauging the trends and attitudes in the US, though the case for a transatlantic merger was obviously one of the issues being considered. As early as 2008 the discussions were increasingly focused on Hogan & Hartson, the top 25 US practice based in Washington DC. Sherrington knew Hogan through Hogan chairman Warren Gorrell who sat on the same industry body, the Pacific Rim Advisory Council, and the firms' finances, market positions and cultures looked comparable.

Though the discussions remained low key, Lovells' team were devoting more time and serious thought to the debate.

The deal could even have been scuppered by a closely-fought managing partner election in 2008, which saw Harris put the US issue on hold while he campaigned for re-election. (Harris, in November 2008, secured victory in a vote against continental European managing partner Harald Seisler).

Once the financial years of both firms were out of the way, the discussions, led by Harris and Sherrington from Lovells and Gorrell and tax partner Prentiss Feagles from Hogan, began to build momentum in the spring of 2009.

In the early summer, Harris decided to formally bring in senior partner John Young as the voice of the firm's supervisory partnership council and the partnership as a whole.

Harris comments: "Over the last 18 months or so we have been considering more closely the changes taking place in the market, many of which have been accelerated by the downturn. The importance of scale globally is becoming increasingly evident, as is the need for full service capability in the US, and you can't build and achieve critical mass by other means."

Given that Young had been previously somewhat sceptical about US mergers, winning him over was no foregone conclusion, but it was determined that the chances of convincing Lovells' partnership would be harder if they delayed consulting beyond the executive team.

By June a decision had been taken in principle that it was worth committing enough resources to put the firm in the position to give detailed proposals to the partnership in November.

Lovells also engaged US consultant Zeughauser Group to give a second opinion. Zeughauser's involvement was on three levels: reviewing the US market, considering the US firms that would be compatible with Lovells and assessing the compatibility of Hogan specifically. (Neither Lovells nor Hogan used their respective external advisers – Zeughauser and Deloitte for tax issues for Lovells and PricewaterhouseCoopers and Jomati for Hogan – for initiating talks or finalising negotiations).

As it happened, Legal Week broke news of the talks on 8 October, three weeks before the executives of both firms decided to recommend the deal in principle. With an initial positive reaction to the deal, both firms gave the talks a warm response at partner conferences in November.

Despite the challenge of putting together such a large deal and the fact that it would require major reform of Lovells' lockstep partnership model, the deal was widely expected to be voted through by the time it was put to a formal vote in December (Hogan needed a two-thirds vote in support, Lovells third-quarters).

The reasoning behind the merger is echoed from partners at both firms: both realised that with the legal market changing and clients seeking more global coverage, building the kind of international presence they sought in London and New York respectively would be impossible without a merger.

Though the two firms have shied away from the DLA Piper comparison, it is privately acknowledged that the 2004 union that created DLA had helped boost the firm's brand and market position. For Lovells the timing also looked right as a revival in its financial performance relative to peers and its counter-cyclical strengths left it better placed than many rivals to secure such a deal in a tough commercial market.

Gorrell (pictured) outlines the thinking during the talks: "We were not pursuing a merger as part of our strategy. We are very happy with our position in the US but at the same time our mission is to be a leading international firm. As we sought to build more high-end capabilities globally, we realised it would be hard to achieve our goal gradually.

"None of the UK-based firms have anything like the brand recognition of Hogan in the US, so it's easy to see that this gives Lovells something that none of the other UK-based firms have. Lovells is very similar to Hogan; they have a diverse practice, are at the high-end, are known for being user friendly and have a strong commitment to pro bono. Put it all together and it's a very powerful offering no other firm will have. That's why we're all so excited."

It helped that, by all accounts, the case was made well to both firms' partnerships. While some, like Harris and Sherrington, were instinctively well disposed to a US deal, Lovells had plenty of partners who needed to be won over by the concept of a US union. Hogan, likewise, was previously regarded as an unlikely candidate for a mega-merger, with the firm having eschewed such moves in favour of lateral hires and manageable takeovers.

Speak to most partners within the firms and their belief in the deal is clear to the point of cultish. One Hogan partner described the union as "phenomenal" no fewer than three times in one sentence.

As Young comments: "There's a huge amount of goodwill within the firm from the partners. What appealed about Hogan included the collegiate mentality and that we genuinely get on with each other."

Even those who may have traditionally shied away from such a move seem to have been converted by the strength of the combination.

Andrew Skipper, Lovells' corporate head, concedes that instinctively he was not pro-merger, however, he now says: "I'm surprised I'm as enthusiastic as I am. The things most European firms worry about, like culture and remuneration, are things that are very dear to me, but I'm a complete convert."

From the perspective of the Lovells partnership, it helped that the merger with Hogan provided the opportunity to deal with longstanding dissatisfaction over partner remuneration. The firm has fought a number of battles to change its lockstep and allow management greater powers to adjust partner pay based on performance. Despite the changes already made, feeling was mounting within the firm that it had not gone far enough and that there needed to be more effective ways to reward and attract top-quartile performers.

As Harris comments: "I have been a proponent of change in terms of our remuneration structure for some time. I always felt we needed a bonus element to provide a more balanced remuneration system."

Young adds: "We've had gradual changes to the lockstep over the last five years and there would have been further changes. Changing the remuneration structure was expected by the partnership."

Practice makes pretty near perfect

Judging the union in terms of practice and geography, the benefits are also clear from both sides, with Hogan Lovells managing to balance complimentary practices with minimal overlap in the global network.

The firms only overlap in 11 cities worldwide. Lovells gains that all-important US coverage through a network of national offices as well as a base in Geneva, Berlin, Abu Dhabi and Caracas – providing a crucial gateway to Latin America, an area partners at both firms earmark for growth. Hogan, meanwhile, gains a 750-lawyer London base that can go head-to-head with all but the magic circle firms in their marquee practices areas.

The combined firm will also be one of the strongest players across Europe, with Lovells bringing its well-regarded and energetic continental network to the deal as well as a major presence in Asia.

The deal is particularly attractive from a litigation perspective, creating as it does a genuinely world-class practice. Both firms have strong disputes practices, generating nearly a third of their respective revenues. Combined, the litigation practice will have some 250 partners and 940 fee earners, bringing together clients such as Barclays, Lloyds and British American Tobacco on Lovells' side with the likes of IBM, Bristol-Myers Squibb and United Healthcare from Hogan.

Indeed, Sherrington and his Hogan counterpart Steve Immelt are practically falling over themselves with excitement at the combination. As Sherrington says: "We are merging two leading litigation firms on either side of the Atlantic, marking it out as a unique firm because of a breadth of practice that's pretty well unmatched."

Intellectual property (IP) is another strength for the firms, which will count nearly 400 fee earners in the combined group.

Significantly for Lovells, the merger also gives the firm access to Hogan's highly-regarded government regulation practice and a whole host of Washington links expected to prove increasingly important given the huge policy commitments of the Obama administration and the current push to overhaul market regulation in the wake of the financial crisis.

Hogan will also benefit from Lovells' finance practice, which has often not received enough credit in the City as an effective upper mid-market player. The US firm currently houses finance within its corporate group. However, it will be an independent practice at the merged firm, with some 130 partners covering banking, project finance, public finance and business restructuring and insolvency.

But it is not all perfect on the practice front. Many observers question what the deal will deliver in terms of corporate, even if Lovells' M&A practice has regained some pace after a poor period from 2003 to 2006.

Despite the protests of partners within the US firm in particular, neither Lovells nor Hogan is renowned for M&A in London and New York, though Hogan has a stronger corporate footprint on a national US level.

Stuart Stein, corporate partner and head of Hogan's financial services and corporate governance groups, comments: "Our respective strengths will create a powerful combination. We will have a global law firm of the highest quality lawyers that will include a leading US corporate practice."

The bottom line, which some Lovells partners privately concede, is that the firm is still punching a little under its weight on corporate given its scale, global reach and history. It also seem apparent that corporate lawyers at both firms, while generally supportive of the deals, see less immediate benefit to their practice than some other teams.

Skipper adds: "It gives us the starting point from which to attract a stronger client base – it's a platform for us to become a leading global corporate firm. It won't happen overnight, but it gives us the right start."

Another obvious medium-term area to build upon is the firm's presence in New York, where the combined firm will have around 200 lawyers. In addition, the firm will want to use its sizeable investing power to back more expansion into Asia and launches in Latin America.

Are two heads better than one?

If practice, culture and geography look to be clearly in the union's favour, it is less certain how well the dual management structure, which will see two chief executives and chairs, will work in practice.

A notoriously difficult structure to make work, the challenge will be to push through the quick decisions needed to gain the most from the merger in its early stages. The balance the firm must strike is genuinely integrated leadership. That will be no mean feat, as most firms that have tried it have ended up either continuing as two separate firms under the same brand or, at the other extreme, slowing decision-making to a crawl under an unwieldy one-firm structure that attempts to grind out consensus without the institutional culture to deliver it.

There is also the issue that the two firms have, over the last decade, been shaped by very different experiences. Lovells has had to compete head-on with larger and more profitable rivals in one of the world's two primary global legal markets. In contrast, Hogan has been a top-tier player in a large and very significant US market, but one that has not been exposed to the level of entrants or competition as seen in London or New York.

As such, Lovells has suffered more than its fair share of pain and criticism, including its turbulent partnership restructuring of 2005. This experience has created a brutally realistic self-image at the firm, suggesting the firm will be ready and willing to seize the opportunity to make this union affect real change. It may be challenging for Hogan to get into that mindset.

There will also be a great deal of attention on how Harris and Gorrell will work together. Gorrell, a highly-respected corporate real estate lawyer who still handles some client work, has been the dominant force within his firm for years. In contrast, Lovells' leadership has been identified with a more consensual, team-based style. If this core relationship works, the odds of success will improve substantially.

Harris (pictured) is confident the deal will work, arguing that Hogan has in recent years increasingly taken the view that it needs to become more competitive if it is to position itself in the global market. Harris also expects that the co-chief executives will avoid splitting their brief on geographic lines to reinforce the one-firm ethos.

So far the two firms' model for the merger is widely seen as striking a workable balance between genuine integration (aligning remuneration and unifying the two primary LLPs in the US and UK/international) while avoiding the energy-sapping problems of going for full financial integration on day one.

But there is no doubt that making the deal work – becoming a true top 10 global practice in quality as well as size – will require seizing this opportunity to its full.

There also remains a sizeable integration project to get through. With only three months to go the firm is still to confirm its full management line-up. At press time it was still finalising details of the implementation committee that will oversee areas such as client development and integration of practices, people and offices.

As Harris says: "We recognise that the implementation will be challenging. There's a huge amount of work in the planning stage to ensure that we market the proposition of the combined firm clearly to clients and we co-ordinate our approach effectively, not to mention the raft of organisational and operational issues in bringing the firms together."

The two firms have achieved an impressive feat in securing an eye-catching deal at such speed. The bad news is that this is only the beginning if the firm has a hope of emulating the few transformational deals the legal market has seen. Both sides must be ready to give ground and face awkward truths about their weaknesses, a process that will sorely test the current reserves of goodwill.

Gorrell and Harris – and their respective partnerships – claim they are up for this challenge. This will certainly be put to the test.

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Sidebar – the combined firm and integration plans

Management

Co-chief executives David Harris and Warren Gorrell (respectively currently managing partner of Lovells and chairman of Hogan & Hartson), are expected to serve four-year terms from 1 May. Lovells senior partner John Young will work with Hogan corporate and project finance partner Claudette Christian as co-chairs of the combined firm.

The governance of the combined firm echoes Lovells' current model of a defined executive team and a supervisory board providing oversight and representing the views of the partnerships.

The new executive body will be called the international management committee, with Harris and Gorrell at the helm. It is expected to consist of practice group heads and regional managing partners and will be primarily responsible for setting strategy, operational oversight and putting recommendations to the supervisory body.

The board will consist of 12 members under the leadership of Young and Christian. Though modelled on Lovells' partnership council, the board will also have a supervisory role over management and affairs of the firm in addition to partner matters. The new oversight body will make recommendations to the partnership on matters such as internal promotions and hires. However, all of its recommendations will be based on recommendations from the management committee.

Integration

The firms are currently finalising the membership of a new implementation committee to handle projects that need to take place in order to get the two firms operating as one by 1 May.

It includes distinct working groups such as a premises committee already in the process of looking at those cities (some 11 worldwide) where both firms have premises, to decide which offices will be used. Along with decisions on the leadership of practice areas and individual offices, these decisions are expected to be made by 1 May.

Structure

The merged firm will operate through two primary distinct limited liability partnerships (LLPs), one in the US and one for all international offices, most likely with a Swiss verein acting as an umbrella body for firmwide governance and cost-sharing.

Remuneration

The model means both firms will maintain two partnership entities and there will be no direct profit-sharing. However, remuneration will be aligned, with Lovells' modified lockstep moving towards Hogan's 'contribution-based model' for partner pay, with little regard for years of service. This means that 85% of profits will be allocated on a points-based system covering both financial and non-financial contribution. While this part of partners' remuneration will be reviewed every two years, partners will also be eligible for an annual bonus.

Fifteen percent of profits will go into a bonus pool intended to recognise short-term contribution over a 12-month period. The range of points within the core ladder will be expanded from Lovells' current 2:1 model. Despite differences between Hogan's merit-focused model and Lovells' system, the firms stress that around 80% of Hogan's partners are within the parameters of the UK firm's lockstep, though the US firm has a significant number of 'outliers' paid significantly more than plateau Lovells partners, who earned £736,000 in 2008-09. Changes for Lovells partners will be phased in over four years, with the lockstep to remain in place for two years until the new points are decided. The bonus could be allocated from the end of 2010-11.

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Sidebar – market response to Hogan Lovells

"I am very surprised that it has taken five years for two firms to do the same thing that we did. It confirms our strategy but leaves them five years behind."
Nigel Knowles, joint chief executive, DLA Piper

"It is a very good deal and one that makes sense for both firms. I don't think that it is a game-changing or transformational move, but it will no doubt make many other firms ask themselves serious questions about their strategies."
Paul Maher, London chairman, Greenberg Traurig Maher

"It's an exciting and bold move for both firms. They will have to expand their business. I suspect convincing institutional clients who are sophisticated users of their legal services on a global basis to use a corresponding office as the new place to go will be the challenge."
Dennis Brock, litigation partner, Clifford Chance

"The merger will not change the day-to-day dealings we have with Lovells. What I do think is key to the success of this is going to be Hogan making sense of Lovells' UK client base who have operations in the US and Lovells working with Hogan clients in the UK. If that goes together seamlessly then it will be a roaring success."
Andrew Garard, group legal director, ITV

"They have done well to get through so many legal and partnership complexities and push through their deal quickly."
Simon Bromwich, managing partner, Ashurst

"Culturally, Lovells has been looking to something significant in the US for a while, so mentally, they are ready for the change. It is a great combination of two firms that share the same values."
Marc Bartel, law firm practice managing partner, Heidrick & Struggles

"This is potentially a transformational deal – it is not just about a UK/US tie-up but could create a very serious global law firm. It has certainly got people thinking and forced them to advance their plans."
Tony Williams, co-founder of consultancy Jomati

For more analysis, see Editor's comment: Fortune favours the brave