Herbert Smith ditches half measures with Australian merger. Suzanna Ring and Alex Novarese report

One response to the news that City thoroughbred Herbert Smith has at last sealed a major international merger sums up the mood. "The most poignant thing is what it means for the culture of Herbert Smith. This is a firm where all hell broke loose over the decision to drop '& Co' from its name," says one ex-partner, referring to a debate that ruffled feathers back in the innocent days of 1986.

Certainly, the firm's union with Australian leader Freehills, sealed on 28 June after a 10-day partners vote at both firms, is a historic moment for the 130-year-old London practice.

The merger, set to launch under the banner Herbert Smith Freehills from 1 October, will see the firm almost double in revenue and lawyer count and make its debut in the much-touted Australian market. Herbert Smith managing partner David Willis and Freehills chief executive and managing partner Gavin Bell will become joint chief executives.

Herbert Smith senior partner Jonathan Scott (pictured) will be senior partner of the combined firm, with Freehills chairman Mark Crean becoming deputy senior partner.

It is undoubtedly a bold strategic bet for Herbert Smith. The firm's conservative style is widely thought to have held it back from competing with large magic circle rivals that have more aggressively pursued international expansion.

The firm came to the decision that substantive measures were needed if it was to remain a serious contender for global elite status. That led to the creation last spring of a strategy group called Project Blue Sky and the firm's decision to push for mergers with its formal alliance partners, Gleiss Lutz and Benelux leader Stibbe.

With Gleiss and Stibbe preferring to remain independent, Herbert Smith last November announced a wholesale shake-up of its international strategy, including planned launches in Germany and the US. The firm had also already said it would look at a range of options in Australia, a market that in recent years has seen a host of City rivals launch including Norton Rose, Clifford Chance, Allen & Overy and Ashurst.

But those expecting Herbert Smith to opt for a limited office launch were to be surprised.

Initial discussions had already begun with big six Australian firm Freehills by last autumn. The Sydney-based firm, in common with many leading Australian practices, had been reviewing its strategy in light of the recent influx of foreign law firms in the region. A decision had been taken at least a year prior that Freehills should seek out a sizeable merger.

One Herbert Smith partner describes the subsequent dialogue struck up between the firms as an "opportunity just too good to miss".

The deal will see both firms come together as one financially integrated outfit with 2,800 lawyers, including 460 partners, and 20 offices worldwide. The combined entity will boast a turnover of about £800m based on Herbert Smith's 2011-12 turnover and Freehills' 2011 income. The combination hugely scales up the firms, which arguably lack the investing power to challenge top-tier City and New York rivals, creating a practice comfortably within the global top 20.

The most recent profits per equity partner (PEP) figure for Freehills is from 2010 when partners received an average payout of $970,000 (£617,700), according to The American Lawyer. This compares to Herbert Smith's PEP of £840,000 for 2011-12. However, underlying profitability between the two firms is more comparable given that Freehills maintains a lower leverage with just over four fee earners for every one of its 185 equity partners.

In terms of shared clients, both Herbert Smith and Freehills work with some of the largest financial institutions such as UBS and Australian investment house Macquarie Bank, while both also represent some of the world's largest energy companies such as BHP Billiton for Freehills and EDF Energy for Herbert Smith. Other major clients of Freehills include National Australia Bank, Commonwealth Bank of Australia and Metcash.

Among Freehills' marquee partners are Philippa Stone (corporate and equity capital markets), Tony Damian (corporate), Geoff Healy (dispute resolution) and Rebecca Maslen-Stannage (corporate and capital markets). An additional benefit to the deal is that Freehills – the second-largest practice in Australia – is widely regarded alongside King & Wood Mallesons and Linklaters' formal ally Allens as one of Australia's elite advisers for high-end corporate, banking and litigation work.

Herbert Smith is also banking on the deal to provide a lift to its Asian practice, which already generates about £81m of its revenues. The 213-lawyer network – spread across offices in Hong Kong, Tokyo, Jakarta, Shanghai, Singapore, Beijing and Bangkok – is the jewel in the crown of its foreign offering, and following the deal the combined firm will have more than 1,000 lawyers in the key Asia-Pacific region.

Outside Australia, Freehills has one office in Singapore, alongside three local associations with TransAsia in China, giving it affiliated offices in Shanghai and Beijing, Frasers Law Company in Vietnam with offices in Hanoi and Ho Chi Minh City and Soemadipradja & Taher in Indonesia.

The firm is still in discussions over what will happen to its associations in light of the merger, with TransAsia managing partner Jesse Chang commenting: "Nothing to date has changed between Freehills and our firm. We continue to have our strategic alliance in place. That may change after the merger kicks in."

One Herbert Smith partner comments: "One of the primary reasons for advocating this is that for multinational energy clients Australia is one of the most important markets. If we can add this coverage to our Asia platform then we can service them in the most important energy centres worldwide."

But key questions remain. The obvious criticism is that the deal happened because of pressure on Herbert Smith to finally 'do something'.

Says one senior partner from a rival Australian firm: "I can't help thinking Herbert Smith would have done a deal with Freehills at almost any cost – it would have been too embarrassing for the senior management if they messed this one up after earlier failures."

Another question is whether Herbert Smith, with little experience of large mergers and a governance model regarded by critics as less sophisticated than its peers, has the ability to make the deal deliver.

A positive sign has been Herbert Smith's decision to push ahead with full financial integration, rather than a dual profit-centre model, which at least suggests a willingness to push for real change.

Partners will share profits from day one of the merger; however, the firms will operate under separate remuneration structures for now, with another vote to create a single structure for the whole firm expected at a later date.

The impact of the proposed migration away from Herbert Smith's lockstep structure cannot be underestimated. The issue, which has been under debate for a decade, is a sticking point that sees partners fall into two camps.

However, with Herbert Smith already under pressure to make partner pay more flexible and Freehills running a heavily modified lockstep, a move towards a less rigid model seems inevitable.

Scott comments: "We see it as important to make sure the firm is fully integrated from day one. Lockstep is an issue Herbert Smith has looked at for some years, and together with Freehills partners we will identify a remuneration system which retains the best features of our current systems."

Not everyone is convinced of this priority, reflecting the continuing debate in the profession about the importance of structure in forging global law firms.

King & Wood Mallesons global managing partner Stuart Fuller comments: "An emphasis on structure is the wrong approach – it focuses on the firm and suggests that the priority is on partner profits and profit-sharing, rather than on client service and the platform that you bring to the clients. 

"To suggest that a single global profit pool is your leading differentiator reinforces an internal focus and does a disservice to the many leading services firms that adopt a more flexible, nimble and client-focused business model."

And even if Scott can make good on pledges that the merger will herald a more proactive management style at Herbert Smith, securing the best from the deal will also partly rest on the support from the City firm's partnership. With tensions between practice areas and offices evident in recent years, the firm will have to demonstrate hearts and minds can get behind the deal. The kind of debate Herbert Smith could once allow itself over something as simple as a name is a luxury it can no longer afford.