In just over a year, Norton Rose's Peter Martyr has crafted ambitious tie-ups in Australia, Canada and South Africa. Next stop, America. Chris Johnson reports

Not too long ago, Norton Rose looked like an also-ran. The London firm, known for its financial institutions practice, stumbled badly after its offices were bombed – twice – by IRA terrorists in the early 1990s. It jumped belatedly on the global bandwagon, establishing a network of European offices that did not turn a profit for half a decade. By the early 2000s, key partners were running for the exits. The magic circle, formerly Norton Rose's closest rivals, had pulled far ahead.

That was then.

In 2009 a resurgent Norton Rose jolted the market by announcing that it would combine with Deacons, one of Australia's largest law firms. Some were bemused, others impressed. Just over 12 months later, it garnered more headlines by pulling off a three-way tie-up with Canada's Ogilvy Renault and South Africa's Deneys Reitz. The moves have catapulted Norton Rose onto the global stage. Although the firms will retain separate profit pools, when the most recent union takes effect in June the combined Norton Rose Group will rank as one of the world's top 10 law firms by headcount, boasting more than 2,500 lawyers in 38 offices worldwide and gross revenues of more than £600m.

The transformation of Norton Rose is due in large part to chief executive Peter Martyr, first elected in 2002 to a rule that has become near-absolute. Determined to restore the firm to its former glory, Martyr masterminded the construction of spectacular new offices in London and implemented an industry-focused practice structure that has been copied by many firms in subsequent years. His biggest legacy is likely to be the firm's ambitious new international reach. But his greatest challenge is whether this global strategy can reverse a long trend of lagging profits.

In his first speech to the partnership in 2002, Martyr outlined a vision for Norton Rose to be one of the select global firms that he predicts will ultimately dominate the market as it consolidates. He hasn't changed his mind since then. "We believe there will be around 20 global firms doing the sort of work we do and aspire to do," Martyr comments. "We want to be at that table of global elite firms in a significant way, but we realised that it would be mathematically impossible to achieve the required growth organically, so [we] accepted that we needed to merge."

Martyr used to have a reputation as a difficult person to interview, renowned for a prickly side that his playful wit could not quite disguise. But on a gloomy Friday afternoon in winter-bound London, Martyr seems cheerful, personable, and surprisingly relaxed for someone facing the gargantuan task of integrating four firms across 16 time zones. Perhaps it is a result of now having positive news to tell, which does make speaking to the press considerably easier. But as he recounts his career as chief executive, his zeal for the firm at which he has spent his entire career is striking. Martyr is, unquestionably, Norton Rose through and through. "His blood is only red because it's the colour of our logo," jokes one senior equity partner.

His sights are now set on finding a US merger partner – a deal some Norton Rose partners expect to happen within the next 12 months. "We're now by far the biggest firm in the world not to have a US office, and also the one with the biggest footprint," Martyr says. "So long as we find a firm that shares our culture, which is our number one priority, then we're in a good position to move."

On 10 April 1992, IRA operatives parked a van outside Norton Rose's London headquarters at the Baltic Exchange building. Concealed inside: 100 pounds of Semtex, wrapped in a tonne of fertilizer to increase its destructive power. Shortly after 9pm, the bomb exploded, ripping through the offices, killing three and injuring many more. Almost exactly a year later, with the firm still recovering, Norton Rose's two new City premises were decimated by another IRA device.

The bombings, part of a wider terror campaign targeting the capital's financial district, had a devastating effect on the firm – one of the elite 'Club of Nine', the group of leading London practices that was the precursor to today's magic circle. Its lawyers were scattered among six makeshift London offices. In the days before electronic documents, email or BlackBerrys, and with the second bomb hitting days before the end of the financial year, chaos ensued.

"The bombs really set us back," Martyr recalls. "While the magic circle firms were busy expanding internationally, we were fighting for survival. We spent several years licking our wounds, and they opened up a significant gap."

Norton Rose's problems were compounded by a series of questionable strategic decisions. In 1990 the firm decided to pursue a national, rather than international, strategy, by joining the 'M5 Group' alliance of five regional UK law firms, but ended up gaining little from the network. In 1996 the struggling 450-lawyer firm brought in consultants Bain & Company, and was optimistically told that it should aim to be one of the world's five largest firms within nine years, with a strong focus on the US market.

The few tentative transatlantic merger discussions that Norton Rose instigated as a result went nowhere. By the time the firm realised the inherent flaw in the £500,000 strategy report – "[Bain] basically forgot about Europe," Martyr says – the magic circle had already established significant international networks.

Trying to make up for lost time, Norton Rose went into overdrive with a belated push into Europe. Within two years, it launched new offices in Milan, Warsaw, Frankfurt, Munich and Amsterdam. However, Norton Rose's relative lack of major corporate clients – the most recent adviser ranking published by Hemscott Group shows that Norton Rose has just three FTSE 100 clients, compared to Slaughter and May's 28 – meant that the firm struggled to adapt.

"We didn't realise our business, which was extremely transactional-focused, perhaps more so than any other firm, was only really appropriate for key financial centres," Martyr says. "The moment you stray into the less financially-dominated centres, the more important it is to have corporate and other business. We were playing to our weaknesses rather than our strengths." Only in 2006, after years of adapting and aligning the practices, did Norton Rose's international network first turn a profit.

By then, many partners had grown frustrated with the firm's strategic direction and seeming lack of ambition. Key names started leaving, such as real estate partner Jonathan Solomon, who took FTSE 250 property development and investment client Helical Bar with him to Clifford Chance in 2000 and who now heads that magic circle firm's London team. In 2001 then Norton Rose managing partner Roger Birkby held a meeting of the 'Young Spitfires' – a collection of the firm's 10 brightest junior partners – to try to convince them to stay.

It didn't work. Competition partner Trevor Soames left shortly afterward to take over Howrey's Brussels office (Soames left Howrey earlier this year with a four-partner team to join Shearman & Sterling ahead of Howrey's dissolution), while corporate partner Jonathan Coppin also went to Shearman. However, the biggest blow came when Tim Polglase's star four-partner leveraged finance team quit for Allen & Overy in 2002. Their departure stripped the firm of a market-leading (and highly profitable) position in acquisition finance, which it has never managed to reclaim.

A marine litigator by trade, Martyr (pictured) had risen swiftly through Norton Rose's ranks since joining the firm as a trainee in 1977. Less than a year after qualifying as a solicitor, he brought in trophy client John Latsis, the Greek billionaire from the Latsis shipping dynasty (and an acquaintance of Martyr's father, who met Latsis while working as a consultant in Saudi Arabia). By the time Martyr represented the wealthy Khoo family in the multibillion-dollar litigation that followed the collapse of the National Bank of Brunei, he was considered one of London's top rainmakers. In 2002 he beat banking partner Jeffery Barratt and global disputes head Peter Rees, who left for Debevoise & Plimpton in 2006, to become chief executive.

Martyr's first order of business was to reunite the London practice, which nine years after the bombs was still operating out of six different sites. Martyr hired Lord Norman Foster to design the firm's building at a new development south of the Thames. While not as iconic as Foster's best-known creation, The Gherkin, the building is nonetheless an impressive marriage of steel and glass, with an imposing full-height atrium and picture-perfect views of London Bridge. (Martyr says the firm got a "bloody good deal" on the building, but declined to be more precise.) More importantly, the new offices allowed the firm's lawyers and staff to finally put the harrowing ordeal of the bombs behind them.

Martyr also set about transforming the firm's internal structure, implementing a set of five industry-focused groups that would run across all practices and offices: financial institutions; international corporate finance; energy and infrastructure; transport; and technology. The "headlights", as they are known internally, distilled the firm's 13 existing international business groups into a more focused and concise form. "We had a lot of industry expertise, but we weren't utilising it fully," Martyr says. "Partners didn't realise the benefit to being able to talk to clients about their business rather than just presenting yourself as a specialist in a given area of law."

In June 2009, despite profits that still lagged large rivals, Martyr took the first step toward realising his vision of establishing Norton Rose as a global presence, announcing a unique combination with Australia's Deacons, one of the country's largest full-service firms. A consultant put the firm in touch with Deacons chief executive Don Boyd, who had been investigating potential mergers for over two years.

"We formed a strategic view some time back that we wanted to be an international firm, and that what we were doing wasn't necessarily going to take us there," says Boyd, now managing partner of Norton Rose Australia. "Norton Rose shared the same vision of globalisation qualities, and we clicked with Peter immediately. It was a fairly obvious choice for us."

Norton Rose initially billed the Deacons tie-up as its gateway to Asia. Despite this, Deacons Hong Kong – a joint venture that had been running since 1992, with three offices in mainland China and strong presences in Malaysia, Taiwan and Thailand – opted out in order to pursue a more local strategy. And while Deacons' offices in Melbourne, Sydney and Canberra were obviously attractive, many questioned why an international firm would want 80 lawyers based in the more isolated cities of Brisbane and Perth.

Only after the firm signed deals last November with Canada's Ogilvy Renault and South Africa's Deneys Reitz – one of that country's 'Big Five' law firms, best known for its strength in banking, mining and maritime – did it become clear that these two outposts were part of a wider mining and natural resources play. By acquiring practices in Australia, Canada and Africa, Norton Rose is now in some of the hottest jurisdictions for major global resources deals. (Martyr says that Brazil is also on the firm's radar.) The axis – a unique combination for a major international law firm – will likely prove attractive to new Chinese clients, who have been investing in those countries. (Norton Rose already acts for a number of Chinese financial institutions, including China Development Bank.)

Still, Norton Rose's choice to pair with Montreal-based Ogilvy instead of one of the more recognised mining and resources firms in Calgary – Stikeman Elliott, Blake Cassels & Graydon or Osler Hoskin & Harcourt – has left many in Canada scratching their heads. Vancouver practice Fasken Martineau Dumoulin, another leading firm in the sector, could have provided South Africa capability through its own office in Johannesburg.

Martyr says that mergers are "not like going into a shop, where you can try lots of different items to get exactly what you want," but several senior Norton Rose partners concede that unsuccessful approaches were made to "most of the top Canadian firms", including Stikeman, before the firm started negotiations with 450-lawyer Ogilvy. Martyr adds that Ogilvy's 35-partner mining and resources practice is "actually much more significant than we thought – it's just that they're not structured around it". Ogilvy managing partner John Coleman points to Rio Tinto Alcan and ArcelorMittal as two major clients in the sector. The Canadian firm's 32-partner life sciences and pharmaceuticals group, meanwhile, will spawn a sixth global headlight – although detractors again point out that Ogilvy doesn't have an office in Vancouver, a key centre for industry in Canada.

While the combinations have been generally well received by the Norton Rose partnership, not everyone is convinced. One senior equity partner said that while he agreed with Martyr's international strategy in principle, he was "underwhelmed" by the firms that have joined. Shortly after the Canada and South Africa moves were announced, employment head Peter Talibart, a Montreal native who had spent his entire career at Norton Rose and was in charge of its law firm and client relationships in Canada, resigned. (Talibart did not respond to requests for comment.) Many partners also complained that they were not properly consulted, with one relatively senior London figure saying that the combination was presented to the firm as a fait accompli.

Martyr says that each move comfortably received the required majority during the partner vote – of the 750 partners involved in the four combinations, less than 1% voted against them – and says that it was necessary to keep the number of partners aware of the negotiations to a minimum. "History has shown us the incredible importance of doing these deals in private," he argues. Martyr also dismisses suggestions that the new additions aren't of a high enough quality. "That's a typical lawyer's comment – you always think you're better than everyone else," he adds. "These are all first-class firms."

What has generated the most intense discussion in the market is the fact that the four firms will not share profits – at least, not initially. K&L Gates chairman Peter Kalis told The Lawyer that the Norton Rose deals are "Noah's Ark mergers" due to the lack of true financial integration. "A merger is when two become one, not when two become two," he said.

The four firms are joined under an international holding company called the Norton Rose Group. The group utilises a Swiss law holding structure called a verein, which allows constituent businesses to retain their existing forms and avoid the costly and messy issues of consolidating contrasting tax and accounting schemes, different fiscal calendars and incompatible partner remuneration systems. Martyr estimates that it would have cost more than £25m – over 8% of the UK firm's global revenue – to financially integrate the Australian business alone.

"All this rubbish about it not being a proper merger is extremely old-fashioned thinking and will disappear over time," Martyr retorts. "Even unitary partnerships have country differentials for pay, subsidiary LLPs, equity and salary partners and ring-fenced parts of the business. There's no difference between that and what we're doing – it's just prejudice." Norton Rose's unified management and global practice groups, which each operate with one partner in charge, make its set-up "no different to how you would run a single firm," he adds.

However, Boyd (pictured) says that Norton Rose Australia "fully intends" to integrate financially with the UK LLP within the next 18 months. "It's of absolute importance that we integrate financially," he says. "Nobody in this firm thinks differently."

Some of the London partners do. Three partners claim that the UK partnership was misled over the issue of financial integration. "When we voted on [the Deacons merger], financial integration was categorically not on the table," one says. "It seems the Australian partners were told otherwise and are now pushing quite hard for it to happen, but there's little desire among [the UK partnership] to integrate financially with a significantly less profitable firm." (The UK arm's 30% profit margin is higher than that of Norton Rose's other merger partners, according to several equity partners.)

Martyr says that financial integration will be revisited in the future, but stresses that until then, there will be absolutely no sharing of profits among the four firms under the current arrangement. Doing so would invalidate the verein and have significant tax consequences. "There are ways to collectively incentivise people without offending the tax rules," Martyr says, although he declined to comment on the details.

The next and most crucial step for the Norton Rose Group is finding a suitable US firm to join the party. Some partners believe that a move might be completed by the end of the year, but Martyr dismisses this as "far too ambitious". Any US candidate for a merger would need a "strong affinity" to the firm's headlight structure, Martyr says. Most important is the ability to support Norton Rose's key financial institutions practice, while the ideal firm would also have a credible offering in at least one of the other five headlights – probably either energy and resources or life sciences. It would also need a "competent" New York office and a culture compatible with Norton Rose's more laid-back approach. Those operating a strict eat-what-you-kill remuneration system would be immediately ruled out.

"We've got a very sophisticated business, but we're relatively laid-back and don't drive our partners too hard," Martyr says. "I'm not proud to say that, and it means we're not as profitable as we should be, but it's who we are." But the firm's sluggish profitability could present a serious hurdle to its US merger ambitions. In the early 1990s, Norton Rose's profits per equity partner (PEP) were roughly in line with that of the magic circle at £265,000. In the last completed financial year, Norton Rose's PEP was less than half the average for the magic circle: £485,000 versus £1.2m. Norton Rose would have placed 83rd on PEP in last year's Am Law 100.

That's not to say that the firm hasn't taken steps to try to manage performance more effectively. In 2004 Martyr modified the firm's strict lockstep – which runs from 100 to 200 points, last year worth around £3,000 each. Gates were inserted at 100 and 150 points, meaning that a partner's progress up the ladder could be halted if his performance did not warrant it, and management was granted powers to reduce a partner's points if necessary. Martyr also introduced a 300-point super-plateau to allow the firm to reward its top billers.

Yet the recent departure of the firm's China corporate finance head, Freeman Chan, who left for Cleary Gottlieb Steen & Hamilton in December, suggests that the firm needs to do more to satisfy rainmakers. Partners with knowledge of the situation say that his practice, which focused on initial public offering work for his Chinese corporate clients, regularly generated more than £4m in annual revenue – almost twice as much as the firm's next biggest biller – but that even as one of 20 or so partners on the 300-point plateau, Chan was still paid less than £1m.

Martyr admits that some partners would like the firm to strive for greater profitability, but quips that they are "less keen when they realise that doubling our profits would require half of them to be sacked." Some of the more ambitious individuals feel that sackings are exactly what is required. In April 2009, as other law firms were slashing jobs, Martyr implemented a novel flexible working scheme for all staff – partners included – that reduced overall working hours and allowed it to avoid making layoffs. The flex initiative saved £5m in wages during that fiscal year alone and earned Martyr public accolades, but many senior London names suggested that the firm missed an opportunity to raise profits by cutting underperforming partners at a time when its rivals were doing the same. (Partner headcount remained static throughout 2010.)

Given the lack of financial integration between the principal parts of Norton Rose Group, it is unclear how the firm will boost its profits. Martyr points to the increase in workflow that each firm hopes to receive as a result of the new network. The UK and Australian teams recently advised BP Singapore on a carbon offsetting project, while David Allgood, general counsel at key Ogilvy client Royal Bank of Canada, says that he expects Norton Rose to get a greater share of its work as a result of the merger.

However, one equity partner with access to the firm's accounts claims that in the first nine months of the current financial year, work referred from Australia has accounted for less than 0.5% of the UK LLP's revenues. Martyr concedes that this number is accurate for "direct independent referrals", but says that this figure is misleading, as it takes no account of work in progress. Including ongoing mandates, Australian referrals are likely to generate more than $10m (£6.2m) this year, he says.

Martyr, 56, will be up for re-election for a fourth term in November. He will not comment on whether he will run again – when pressed he would only say that it "depends on whether the firm wants me to" – but it seems inconceivable that he would not want to see his grand plans through to fruition. With the Norton Rose Group still in its genesis, Martyr has become, by circumstance or design, almost irreplaceable. In 2009, near the end of what should have been his second and final term as chief executive, the firm's constitution was amended to remove a two-term limit and allow him to remain in charge. All the partners interviewed for this feature expect Martyr to be elected uncontested for another term.

His greatest challenge still lies ahead. A merger with, say, Fulbright & Jaworski or a US firm of similar size would boost Norton Rose Group's revenue to over $1.7bn (£1.05bn), propelling it into the global top 10 for the first time, but size alone will not see Martyr fulfill his ambition of establishing the firm among the international elite.

Last year's global M&A adviser rankings, published by Mergermarket, reveal the size of the task at hand. Norton Rose's relatively shallow corporate client base saw it ranked 29th for M&A during 2010, handling 94 deals with an aggregate value of $75bn (£46bn). Skadden Arps Slate Meagher & Flom, which topped the list, acted on 204 deals, totalling a massive $337bn (£209bn).

"You've got to hand it to Peter for what he's achieved, but we still don't see [Norton Rose] as a competitive threat," says one magic circle managing partner, in an appraisal echoed by five senior partners at other City firms. It appears that, as exciting as Norton Rose's international trailblazing has been, it's not something over which the global elite are losing too much sleep – for now. Depending on the calibre of US firm that Martyr manages to attract, that assessment could change. "Once in a lifetime you get an opportunity to complete a paradigm shift," Martyr says. "This is ours."

———————————————————————————————————————————————–

Matchmaker, matchmaker – predictions for Norton Rose's US marriage

When quizzed on Norton Rose's US merger plans, chief executive Peter Martyr unsurprisingly refuses to name specific targets. The firm has existing referral relationships with around 25 US firms, including Sullivan & Cromwell; Paul Weiss Rifkind Wharton & Garrison; Fulbright & Jaworski; Baker Botts; Goodwin Procter; Gibson Dunn & Crutcher; Debevoise & Plimpton; Akin Gump Strauss Hauer & Feld; and boutiques such as New York funds specialist Seward & Kissel.

Of the New York-based firms, Shearman & Sterling stands out. Like Norton Rose, it is built upon a strong financial institutions bedrock, although its conservative partners would probably consider a merger a fairly radical move.

Sidley Austin would be an even better fit. Its structured finance practice means that it would also comfortably meet this financial institutions requirement, but the synergies do not stop there. Sidley also has a specialist Canadian practice that acts for clients such as the Government of Canada, automotive supplier Magna International and Canadian Pacific Railway, as well as a growing life sciences offering with a strong Chinese element under Beijing partner Yang Chen.

Akin Gump and Baker Botts, meanwhile, would both seamlessly slot into Norton Rose's growing energy and natural resources practice, while the new life sciences headlight could bring some West Coast firms into play. Here, Morrison & Foerster (MoFo) would be a strong contender, although MoFo's Asian offices might overlap too much with Norton Rose's. And Orrick Herrington & Sutcliffe's repeated desire to merge with a UK firm – it recently held talks with SJ Berwin – means that it shouldn't be ruled out.

However, the smart money, according to several partners at Norton Rose, is Fulbright & Jaworski. Four London-based equity partners say that the two firms held tentative merger discussions in 2008. Martyr denies this, but admits that he is close to Fulbright chairman Steven Pfeiffer, who used to regularly refer him litigation work when Pfeiffer worked in the firm's London office in the early 1980s.

The two firms seem well suited. Both boast considerable strength in energy – Fulbright is one of the market leaders in global oil and gas work – while the US firm also has an underrated healthcare practice that, in partner Frederick Robinson, boasts one of the industry's eminent litigators; he would be a good fit for the life sciences headlight. The combined entity would benefit from Fulbright's huge disputes resolution practice and Norton Rose's infrastructure and financial services expertise. There would also be little overlap in staffing. Ninety-five percent of Fulbright's partnership is based in the firm's 10 US offices, and Norton Rose should easily be able to accommodate the American firm's 24 City-based lawyers in its London premises.

At first glance, the two firms also appear to have broadly similar levels of profitability: Fulbright's equity partners took home $815,000 (£506,000) on average in 2009, with Norton Rose only slightly behind at £486,000. However, digging a little deeper reveals that Norton Rose is actually far less profitable. The UK's figure is boosted by the fact that its post-tax earnings are distributed among a much smaller group – fewer than 70% of Norton Rose's 275 partners are equity partners, whereas at Fulbright just 5% are salary partners. More telling is the gap between the two firms' profit margins, with Fulbright's 42% comfortably exceeding the 30% margin of Norton Rose. Martyr may say that a more laissez-faire approach to profitability is hardwired into his firm's culture, but if it wants to attract the right US candidate, that may have to change.

This article first appeared in The American Lawyer, a US affiliate title of Legal Week.