The upcoming union of Denton Wilde Sapte and Sonnenschein offers two firms that have suffered their fair share of setbacks a chance to reinvent themselves for the global legal market. Sofia Lind and Alex Novarese ask if the deal can help the pair to galvanize their businesses

Ten years ago, in a very different market, the newly-merged Denton Wilde Sapte spoke openly of its ambition to swiftly secure a US merger. And why not? The combined practice had scale, vision and was made up of two City firms with proud histories. It also had a sizeable Asian network and a seven-member European alliance, Denton International. Step forward 10 years and the firm has belatedly made good on that promise, announcing on 26 May a deal to merge with top 100 US practice Sonnenschein Nath & Rosenthal.

Of course, the deal, which goes live on 30 September, did not come with the expected timing or via the route the UK firm had once plotted. As it turned out, Denton Wilde Sapte was to have enough on its plate in the five years after its birth to stop it making good on many of its initial ambitions. After 2005, the firm enjoyed a period that was more sedate – and generally more successful – but overall, the firm has struggled to keep pace with its peer group over the last decade.

Strikingly, Dentons enters this merger with revenues barely changed from its first full financial year as a merged entity in 2000-01, when fee income was £162.4m and profits per equity partner (PEP) stood at £330,700. The firm also has nothing like the international coverage or profitability that it once built into the game plan.

Dentons' new suitor has had its fair share of upheaval, likewise struggling to grow its business and substantially raise profits over the last five years. Sonnenschein has also gone through several partnership restructurings since the late 1990s.

Announcing the deal, Dentons chief executive Howard Morris did a good job of summing up the rationale: "This is a merger of equals. [Sonnenschein] is more profitable than us but we both have a problem with profitability – we both lagged our peers in profitability. We had too much of a tolerant culture and a lack of productivity. We have both restructured to become more competitive, more efficient and more productive. You don't solve these problems by merging, but it gives us a platform from which we can do other things to achieve our target as a global firm."

As such, the question for many is whether this union can deliver even if there appears to be a genuine willingness from both sides to draw a line under the past and embrace the future. Perhaps it is just as well that these are two firms with something to prove.

The deal that didn't live up to billing

Many of the issues that have dogged Dentons can be traced back to the 2000 union of Wilde Sapte and Denton Hall. Both firms had faced setbacks, with Wilde Sapte famously being jilted at the altar in 1998 by big five accounting group Arthur Andersen in what remains a defining moment for the UK legal profession.

Denton Hall, for its part, had unsuccessfully explored deals with other City firms, among them the legacy Theodore Goddard and Richards Butler (both firms that have since been absorbed by larger operations).

The wisdom of the day dictated that the firms on their own were too small to compete at their level and needed scale, especially if they were to convincingly go international. But whatever challenges they faced, Wilde Sapte still had an excellent banking practice and Denton Hall a strong client base in energy and media as well as a solid real estate offering. Having managed to keep their talks secret until a deal was done in October 1999, there were many reasons to believe the combination would be beneficial, even if a few of Wilde Sapte's top banking lawyers, among them James Johnson and Nick Syson, quit ahead of the deal rather than submitting to a two-year lock-in.

The deal certainly gave the combined practice considerable scale, creating a 200-partner firm comfortably within the UK top 15 by revenue. And, ironically, the one problem that the firm did not have is the one that 'merger of equals' tie-ups are supposed to face: turf wars between the legacy sides did not appear to be much of an issue. Lawyers at the time said there was little sense of two separate firms soon after the merger, a reflection perhaps that both sides were relieved to have finally secured a deal.

That post-merger politics were manageable was just as well, as the firm had its fair share of baggage to address. Wilde Sapte's banking team had lost considerable ground since its 1990s heyday. The finance practice was also historically underweight in the rapidly-expanding area of capital markets, a booming area that was increasingly driving rival City practices. There was also a limit to what the merger had done for the firm's mainstream corporate practice.

More worryingly, Dentons had an uneven partnership that was, by many accounts, burdened with too many underperformers. The early years post-merger saw then chief executive Virginia Glastonbury attempt to weed out a number of such partners. Accounts vary as to how many ultimately went – though some partners at the time said that 12-15 had in some form exited by the end of 2003.

Such tactics were not popular; oddly, perhaps, as it was widely conceded that the firm had some ground to make up with rivals. The tensions also illustrated that the partnership at the time was marked by political wrangling and factional behaviour, even if it did not manifest itself in terms of the legacy practices.

Dentons was then to face an extremely turbulent period during 2003 and 2004 as the boom in technology and media turned to slump. The two years saw a large redundancy round, the decision to split from its European network and shut its struggling 50-lawyer Asian network and culminated in September 2004 with a mass resignation in its TMT team for DLA. Rightly or not, Glastonbury was facing mounting criticism and an internal memo in September 2004 called for an open election for chief executive, effectively derailing her attempt to secure another term.

With Glastonbury standing down, the popular head of financial institutions Howard Morris (pictured) was elected as chief executive in December. By early 2005 Dentons had largely stabilised itself. But it had suffered some major setbacks and seen its international capability severely reduced. Much damage had been done.

One partner reflects on the union: "I don't have an explanation for it, but the Denton Hall/Wilde Sapte merger clearly didn't pan out the way people had hoped. Hopefully it will be different this time." Another partner offers a similarly realistic view: "Our reputation has suffered over the last few years, mainly due to the numbers. We are like any other business – we are not a charity. Since the merger things have been going downhill. I can't really argue with that view. This merger is not the last throw of the dice, but it is a chance to do something about it."

A period of calm

Over the years to follow Dentons would not be among the fastest-growing UK law firms. Its banking practice was not geared towards capital markets or structured products and its acquisition finance team had lost some relative position. Dentons was also never very active in private equity, meaning the firm was not best-placed to benefit from the credit-fuelled boom years.

Yet this period of newfound stability was undoubtedly welcome and had its successes. The firm increasingly tilted towards an infrastructure and energy focus, which married well with its successful Middle Eastern practice. Through this period the firm also built up its African coverage, reinforcing its position in emerging economies and giving Dentons a more distinctive profile. The firm's Paris office, its sole remaining presence in Western Europe after the break with Denton International, supported this push into Africa.

The amiable Morris was also more adept at taking the partnership with him than Glastonbury. Views remain divided over whether this period of relative calm was largely due to Dentons avoiding a necessary shift towards a more performance-driven culture, but it seemed welcome after the turbulence of the previous years. Opinions also remain split regarding Morris' willingness to take unpopular decisions; while some believe such decisions have been ducked, others see a tougher approach well concealed behind Morris' consensual style.

As boom turned to bust with the credit crunch after 2007, Dentons was also to have a better crisis than some of its peers, making less steep redundancies than many firms and avoiding a sharp dip in profits. Bucking the market, the firm's TMT practice continued to perform well, in particular in handling outsourcing work. This period also allowed its well-regarded insolvency practice to shine, with the firm securing a good run of high-profile mandates. With its international practice again growing, Dentons even felt confident enough to return to Asia, in December 2008 relaunching a small practice in Singapore.

For a firm of its size once again seriously contemplating cross-border expansion, the heavy costs of foreign growth put the prospect of a tie-up with a US practice back on the agenda to help shoulder the burden.

Never mind the recession

Despite the terrible market conditions as the recession bore down on the global economy, Dentons was by 2009 seriously looking for a US merger. Abortive discussions were held with a number of firms, among them Squire Sanders & Dempsey. (In previous years, the firm held informal talks with Pillsbury Winthrop Shaw Pittman.) Ironically, one of the names not bandied around was Sonnenschein, a firm arguably best known to the UK legal profession for pulling the plug on its London branch in 1999.

The US law firm, led by chairman Elliott Portnoy, was well into an ambitious push to upgrade its practice in the US, most notably with a high-stakes deal to absorb a 40-partner team from Thacher Proffitt & Wood, a venerable New York outfit.

Even before the Thacher Proffitt deal, which was regarded as hugely significant for Sonnenschein, the firm had embarked on a sustained and aggressive growth drive. During this period it began looking once again at foreign expansion. A match-up with Dentons seemed ideal, giving two firms a second chance to go international after earlier setbacks. The two began serious discussions last summer after recommendations from Sonnenschein's consultants, Blaqwell, and Edge, which had been retained by Dentons. The talks were led on Dentons side by Morris, chairman Martin Kitchen and deputy chairman Rory McAlpine in consultation with the firm's board.

By all accounts, Sonnenschein's chairman particularly impressed Dentons' contingent. Portnoy (pictured), a highly-successful lateral hire who joined in 2002 from Arent Fox Kinter Plotkin & Kahn to launch a DC public policy team for Sonnenschein, has been one of the prime architects of the firm's expansive strategy.

There also appeared to be a solid case for a tie-up. With only two small offices outside the US and no presence in London, there is very little overlap. The practice mix between two essentially full-service firms is reasonable if not immediately compelling.

Sonnenschein has been historically best known in the US for real estate, insurance and restructuring and enjoys a solid reputation for litigation, particularly insurance class action defence work. The firm's leading clients include Allstate, Allianz, Travelers, First American, Citigroup, JP Morgan, Barclays, Starwood Hotels, UnitedHealthcare, Sony and Hilton Hotels.

Dentons' practice is based around four industry 'pillars': financial institutions; real estate; energy, transport and infrastructure; and technology, media and telecoms. The UK firm's top clients currently include Royal Bank of Scotland, Total, Virgin, EDF, Nokia, Vodafone, Sainsbury's, FirstData, HSBC, Sumitomo and Al Jazeera, while also covering bluechip names like Barclays and Citigroup. The firms are also broadly comparable in terms of client base and the level of work they handle in their respective markets.

There appears to be particular enthusiasm for the union among the restructuring teams. Dentons restructuring partner Neil Griffiths comments: "From the point of view of the restructuring practice the news of the merger was very good because I knew these guys. They have a very serious restructuring practice led by Fruman Jacobson and with Peter Wolfson as one of its heavy hitters."

Corporate partners are also upbeat about the deal, with Dentons joint head of corporate Jeremy Cohen commenting: "One example of how the practices complement one another is that we have never had US securities lawyers before. That really helps when working on large initial public offerings where previously we have had to draft in another firm. [Sonnenschein] is a very ambitious firm and the merger is part of that. In my area we see it as a great opportunity and the sooner we get round to being fully merged, the better."

By common agreement, there is also substantial cultural common ground between partners at the coalface, perhaps surprising given that the two firms have taken such radically different stances to hiring and exiting partners.

Sonnenschein is also big enough to bring muscle to invest, with a 2009 turnover of $472.5m (£315m) and PEP of $780,000 (£520,000). This compares to Dentons' 2009-10 revenue of £167.5m and PEP of £360,000. As such, the deal creates considerable scale, forging a combined practice with revenues of around $730m (£486m) and more than 1,200 lawyers spanning 18 countries and 33 offices, putting the firm within the largest 40 global practices in the world. Aside from large US and UK practices, Dentons provides wide coverage across the Middle East, Russia and the CIS.

Dentons insolvency veteran Mark Andrews sees the case clearly: "Dentons is a good firm with a good international practice but it needs that quantum leap to take it forward as a global practice. This merger is very complementary and delivers to Dentons what it needs, not least the ability to provide internationally both UK and US law advice."

It was announced on 26 May that management of both firms were recommending a deal to combine under the name SNR Denton, which went to ratification by both partnerships in June. The structure will be familiar from the union of Lovells and Hogan & Hartson. The two firms will retain two profit centres and financial years, creating a Swiss Verein structure for umbrella management and cost-sharing.

The deal will see Portnoy and Morris named co-chief executives while Dentons' Kitchen and Sonnenschein's Joseph Andrew will become co-chairmen. In addition to the co-CEOs, the firm will have a joint board of directors, including McAlpine, Sonnenschein real estate head Jana Cohen Barbe and litigation head Michael Barr. The firm's strategy will be led by a global advisory committee, chaired by Kitchen and Andrew, which will comprise Dentons' existing nine-member executive board plus Middle East head Neil Cuthbert and Sonnenschein's 16-member policy and planning committee.

The 167-partner Dentons will abandon its 10-step modified lockstep, which currently includes a 25% discretionary merit element. It will shift to a new system from May 2011, which will mirror Sonnenschein's performance-based model, which takes little account of seniority. It is expected that this will increase the difference between top and bottom earners in the equity. Portnoy comments: "We are harmonising the systems and we believe that the new structures will allow us to increase reward to the partners based on their performance."

Dentons is expected to review partner performance over the previous three financial years in assessing where to put partners on the new model. The move will also see Sonnenschein switch from a three-tier partnership to full equity while Dentons' junior partners will be asked to contribute capital.

It is expected that the governance model will be in place for three years, after which the firm will move to a single chief executive. Morris has already indicated he is likely to stand down, raising the possibility that the influential Portnoy will lead the combined firm. Portnoy also says that the current structure could move to fuller integration.

There is also the interesting issue of brand – there has been some surprise that the larger Sonnenschein would choose to see its name disappear, replaced by SNR. Many see this as evidence of the lack of sentimentality of Sonnenschein, and Portnoy in particular. Portnoy comments: "We believe it's not simply losing our names but building on those brands. I don't think it is quite a reinvention but we are evolving in a rapidly changing world economy."

Where there's a will

The deal does raise a number of questions about how the combined entity will function. Sonnenschein has been one of the most actively managed large firms in the US over the last 12 years, going through several partnership restructurings and a huge programme of lateral hires that added dozens of partners in the last three years. Equally proactive when it comes to cutting costs, the US firm has been through a series of redundancies during the recession.

In comparison, Dentons is arguably one of the most lightly managed firms in its weight class. Some have noted that Dentons has avoided shaking up its business before seeking a merger. Given that the larger Sonnenschein has made little secret over the last 12 years of its desire to raise its profitability – a 2006 business plan set a target of raising PEP to $1.4m (£933,000), which it is still far from reaching – it seems inevitable that there will be pressure for UK partners to take concrete action to improve profitability.

As one veteran consultant comments: "There is a lot to be said for getting in shape before a merger. If you're going to go to the dance, you might want to clean yourself up and sort out your hair."

However, Morris denies there is a need to radically overhaul Dentons' business due to the merger, commenting: "We will continue to do things that are necessary in a ferociously competitive market, including carefully considering our recruitment. But this is exactly the same answer I would have given otherwise if we had not been merging."

Some cynics may wonder whether Dentons' partnership has viewed a Verein-structured tie-up as one that will allow it to avoid or defer an aggressive takeover by a larger entity. If so, they may be in for a shock, as Sonnenschein may have a relatively collegiate partnership but it is one led by proactive management. Working out how this tension will be resolved is also complicated in that Dentons has given somewhat mixed signals over the extent to which it intends to change its attitude to performance in future.

Critics have also argued that the firm will need to work on the merger's 'story', creating a more distinctive message to take to clients about what will positively define SNR Denton in comparison to, say, a Mayer Brown or a White & Case. Profitability aside, there is another aspect in which the combined firm will be far from the finished product: international coverage. Despite its scale, SNR Denton will have only a minimal presence in continental Europe and Asia. It appears that the combined firm's larger resources will be needed, with partners pledging to invest heavily abroad, in particular in Asia and Latin America.

And with its international footprint, many would expect that SNR Denton will also want to invest in London, where it remains relatively underweight in mainstream corporate and some areas of banking.

Nevertheless, there remain more positives regarding the tie-up than negatives. Most promisingly there appears to be a genuine willingness on both sides to put the past behind them and embrace change. These are two firms facing the realisation that the status quo is not hugely appealing and looking for a meaningful second act. It will also help that Portnoy has hugely impressed many of Dentons' partners.

But, of course, Dentons' partnership will have to sustain that enthusiasm through the inevitable strains of integration. The UK firm does have a tendency to duck questions over its relative underperformance, too often retreating to the justification that its problem is merely one of perception lagging reality.

Partners widely concede that the Denton Hall/Wilde Sapte union did not really work but generally profess bafflement as to why. Critics contend the reason the deal failed to deliver is simple. The union led to a halfway house in which Dentons made token gestures towards becoming the kind of firm it said it wanted to be – addressing profitability, slow growth and partner performance – without finishing the job.

If Dentons is not ready to finally complete what it started with its previous merger, this is a union that should never have been agreed. Both firms – with proud histories, quality clients and some excellent lawyers – have a chance at playing out their second act. It is hard to see any business reason why Dentons should not seize this opportunity for all it is worth. If it does not, a third act looks an unlikely prospect.

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Perpetual revolution: a short history of Sonnenschein Nath & Rosenthal

Sealing a major transatlantic merger is a big step for a law firm, but in many ways it is entirely fitting that the 672-lawyer Sonnenschein Nath & Rosenthal has been ready to take the plunge.

A Chicago-based firm established in 1906 with a strong Jewish heritage, the firm initially built its practice around property, insurance and insolvency. By the mid-1990s it was seen to be falling behind Chicago's leading practices and it embarked on a comprehensive restructuring under then chair Duane Quaini aimed at improving its competitive position. More than 30 partners were de-equitised or left between 1997 and 1999 and the firm shut its 11-lawyer London branch.

Though the process was initially turbulent, the shake-up helped the firm grow revenue and profitability substantially between 2000 and 2005 and saw it become increasingly focused on building business through laterals and acquisitions. These moves included the takeover of 60-lawyer firm RubinBaum in 2002, which saw 50 lawyers join Sonnenschein after it had already taken on the majority of New York's Cooperman Levitt Winikoff Lester & Newman the previous year. 2001 also saw the firm add a bankruptcy practice from New York's Cashman Sherman & Flynn in a lateral hire that handed it one of its most important rainmakers to date, insolvency specialist Peter Wolfson.

Sonnenschein's current managing partner Elliott Portnoy – who was the firm's youngest-ever leader when he took the helm from Quaini in 2007 aged 41 – also joined through a 2002 team move in Washington DC from Arent Fox Kintner Plotkin & Kahn alongside fellow public law partners Douglas McCormack and Mike McNamara. Portnoy, a highly productive partner who regularly billed 2,700 hours annually when in full-time practice, led what was seen as a hugely successful move into public law and a template for lateral hiring.

Interviewed for a 2007 profile of the firm by The American Lawyer, Cap Potter, the Sonnenschein partner charged with reeling in Portnoy, spoke of his quarry: "I thought, 'I don't care what promise I have to make to get this guy, I will make it'. I made every promise I had no authority to make." Only four years later Portnoy was confirmed as the successor to Quaini, who was a Sonnenschein lifer.

A new business plan at this time envisaged substantial growth – a sharp hike in profitability to a target of $1.4m (£933,000). In an unusual move, the firm assigned partner Kara Baysinger as its lateral acquisition partner, with a brief to oversee the firm's aggressive recruitment plans. The impact of this was in evidence in 2007 when the firm took on an 18-lawyer team from Kilpatrick Stockton to launch an office in Charlotte, Illinois. The year also saw the firm add offices in Silicon Valley and Dallas through lateral hires.

The firm opened its second international office in Zurich in 2008, adding to an existing Brussels arm, but the launch came as the firm began making cuts. Struggling to hit its growth targets in recent years, Sonnenschein took robust action after the global recession hit in 2008, laying off more than 150 lawyers and support staff in a series of job cuts.

Yet the firm kept investing, making its largest acquisition to date in December 2008, when it hired 100 lawyers from Thacher Proffitt & Wood, a pioneer in the mortgage-backed securities market that had been mortally wounded by the post-crunch collapse in its core market. The highly-significant deal gave Sonnenschein an established New York finance practice.

Sonnenschein's practice currently covers intellectual property and technology, international trade organisation law, corporate and securities, energy, life sciences, insurance, litigation and business regulation. The firm has 357 partners with average profit per equity partner last year standing at $780,000 (£520,000), while gross revenue was recorded at $472.5m (£315m) for 2009.

For more on the SNR Denton merger, see:

• Hogan Lovells' children and Wilde Sapte's final goodbye
• SNR Denton tie-up approved by open partner votes at both firms
• Dentons seals US merger deal with Sonnenschein to form SNR Denton