With any major merger, integration is always the key test. But with its divergent cultures and language differences, this has never been more true than at King & Wood Mallesons. Elizabeth Broomhall and Pui-Guan Man look at the challenges on the horizon for the newest global law firm

July 2013. In a meeting room in King & Wood Mallesons' Hong Kong office, a group of journalists wait for an announcement about the firm's pending merger with UK outfit SJ Berwin. The press invitation had been sent out a day before voting closed – a sign the firms were confident about winning partner approval for the union.

Cheering and clapping from a room next door confirms the tie-up will go ahead; office staff having just been informed. At the press conference, management finally announces the details, with all of the partners visibly excited – not to mention relieved – after months of deliberation.

Today, four months after the merger went live on 1 November 2013, the new entity – not so catchily named King & Wood Mallesons (KWM) SJ Berwin in the UK and Europe for the time being and KWM elsewhere – is very much a reality. SJ Berwin lawyers have moved into the China/Australian firm's offices in Shanghai and Hong Kong, London-based KWM teams have switched to legacy SJ Berwin's City headquarters, global practice coordinators have been appointed in nine core areas and management bodies with representatives from China, London and Australia have already started meeting regularly.

News of the combination initially sparked a mixed reaction from competitors around the globe, with some perplexed by, and others admiring, the strategic achievement in tying together two such different firms.

There is certainly a sense of self-satisfaction within the firm at being the first mainland China outfit to achieve mergers with both Australian and London partners. But with management making it clear that further expansion is on the cards, the question is where next for KWM? And beyond the front of marketing and co-branding exercises, how integrated is this newly formed Swiss verein in reality?

All for one?

The overriding challenge for the firm is to integrate its lawyers around the world who, under the verein, sit within distinct UK, Australia, Hong Kong and mainland China partnerships with separate profit pools.

While every merger involves trying to get staff and partners to work together as one firm and ensuring that clients feel they are getting the same service around the globe, KWM has the added pressure of sizeable cultural and language differences to overcome. These are challenges some partners at rival firms both in the East and West see as potentially insurmountable.

"It's very difficult because profits per equity partner are different and culture is different. But they are so ambitious and so determined to do it, that's something we should admire," says one partner at a Chinese firm.

"If you bring two businesses together that are culturally different, you need to be able to break down the barriers so that they are able to work as one operation," suggests a partner at a rival Australian firm. "Establishing consistent standards regarding the provision of legal advice is not an easy task."

Another partner comments: "There are still issues to be resolved before the merits of the deal can be assessed. There is the question of whether Chinese institutions are prepared to pay Western rates. China is also protective of its local law, and the language barrier is another major factor. It is still very much a developing market and it is hard to figure out exactly how much work there is for international firms."

In response, the firm says it has already made integration a top priority, forming a combined business plan for 2014-15 that will be communicated to partners soon. This includes goals such as combining the business development teams and integrating IT infrastructures, with six IT projects already underway.

Meanwhile, steps have been taken to align partner pay in Hong Kong, which is the only office with a single combined profit pool operating across all legacy firms. The firm has also agreed a combined budget for integration, which will be approved by the international management committee annually with expenditure recharged to each of the legacy firms in a set proportion.

Also important to the integration process is a secondment programme, which the firm has already begun between China and Australia and intends to roll out in Europe at associate and partner level and within its back office. The plan is to increase the number of placements that have happened since the first groundbreaking merger between China's King & Wood and Australia's Mallesons Stephen Jaques in 2012, and to embed lawyers and staff in regional offices for at least three to five months. 

Additionally the firm has a cultural exchange programme between its China and Australia offices aimed at building virtual relationships among junior solicitors. Participants located in the Melbourne, Beijing, Sydney and Shanghai offices are matched with a 'buddy' in another centre based on shared interests or practice areas, and are encouraged to make friends with each other by email, phone or WeChat. The firm also has a Chinese cultural exchange committee in Australia that connects fluent Mandarin speakers. All of these schemes will be replicated in Europe.king-wood-mallesons-sj-berwin-web

"The number one [lesson we learnt from the 2012 merger] is getting people together quickly to create personal relationships," says global managing partner and chief executive Stuart Fuller. "The secondment programme is key to that but in September we also got our practice leaders together from across the firm to really work on what their business plans would be across their global practices. We have also sent more combined partner delegations on various trips in the last six months than in the preceding six months – to Europe, Asia and the US."

However, while Fuller insists internal communication – something some argue the firm needs to improve as it has historically tended to keep strategic plans guarded by only a handful of senior figures – will improve, a number of the partners Legal Week spoke to seemed largely unaware of any integration efforts to date, and felt their practices were still too domestically focused without benefitting from the global network.

But the challenges are not all internal, as the merger will force the firm to take a close look at its client relationships. First up will potentially be the loss of referral work, particularly for KWM in Europe. "The downsides [for clients] are quite clear – when you do business in Europe now you have to do work with SJ Berwin," says Ding Liang, a partner with PRC firm DeHeng. "That will close the door on [referrals from] a lot of good firms."

As relevant will be the issue of client conflicts. London-based European managing partner Rob Day says efforts are already underway to deal with this, with the firm ultimately intending to have one global team working on conflicts across the different timezones. This would essentially allow conflicts checking to take place 24 hours a day, five days a week (six if the Middle East working week is included).

rob-day-sj-berwin"We hope to get this sorted within the next couple of years," says Day (pictured). "SJ Berwin currently does not have a 24-hour system, but the team has started to spend more time discussing it together and is deciding how to allocate work."

Going global

Just as important as the internal measures needed to integrate the firm are the steps it must take to improve its external position in the market. As the creation of firms such as Norton Rose Fulbright, Dentons and Hogan Lovells demonstrate, for a law firm to truly call itself 'global' it must have the full geographical reach to match.

And in the same way that moving beyond a Sino-Australian tie-up was necessary for KWM to appeal to the international client base it sought before its union with SJ Berwin, further international expansion is still required.

George Pinkham, an Asia-based funds partner from the legacy SJ Berwin side of the firm, comments: "As industries go global, you have to go global. The aim of the merger is to tap cross-border work. I think the most synergy will be achieved on the corporate and funds side. It will also create a global platform for existing clients."

But management still needs to clear a host of hurdles if the firm is really to be viewed as global – not least the thorny US issue that has plagued the legacy UK firm.

The US and Canada remain the obvious gaps in the firm's armour. Before the SJ Berwin deal KWM was linked with firms in North America, where it currently has small representative offices in New York and California set up by the Chinese arm to service China clients in the region. But although the combination with SJ Berwin offers more pulling power in North America than either firm had alone, it has yet to be firmly linked with any names. And, arguably, with two major mergers in such rapid succession under its belt, the firm would be wise to wait a while before attempting another deal.

"US capability will be a key priority," says one partner at the firm. "I don't think you'll see the firm merging with a US firm any time soon but I believe there will be [some moves towards that market] at some point."

Fuller himself is reluctant to give much away, except to say it is on the agenda as part of a longer-term plan. "We're no different from a number of international law firms looking to [permeate] the US market," he explains. "The US is a very important capability that a global law firm needs to have. There is no timetable; it's all driven by the market and where we see the opportunities. But you've got to keep your mind open – we explore any viable opportunity that increases our global presence."

He adds that the US strategy is being driven chiefly by the firm's corporate and finance practices, hinting that this could influence where the firm looks to be present and who it puts on the ground. "If I look at our securities practice, international funds and private equity – those practices have significant US client connections or US law connections. That would inform how we would look at the market."

Elsewhere, Singapore, where the firm came close to a tie-up with WongPartnership in 2012, remains a key target market for the firm, probably via a joint venture. And, closer to home, legacy SJ Berwin has two bases in Germany following this week's closure of its Berlin office. From these, the firm will be keen to win China outbound investment work.

Targeting outbound work is an approach that former and rival partners believe makes sense given the drop in inbound activity into China and the increase in outbound work. However, it is not a strategy without risk, especially as it will push the firm into more direct competition with the swathes of international firms that have entered China in recent years in an attempt to secure the same work. 

"The success [of the new tie-up] really depends on whether the partners and the management can pick up opportunities," says a Beijing-based ex-partner. "There will probably be a short window, and the test will be whether they can utilise that period to get more work from the clients and build up client relationships. There are so many players in this market."

Top five global M&A deals worked on by SJ Berwin – 2008-13

Top five global M&A deals worked on by King & Wood Mallesons – 2008-13

The balance of power

With two major mergers forged in quick succession, the balance of power between the three legacy partnerships will play a key role as the merged firm finds its feet. And there are no illusions as to who holds the cards. While legacy SJ Berwin has equal representation on the management board, its name is set to be dropped within a year. Meanwhile, the two global leadership positions are held by partners from the Australian and Chinese practices: Fuller from legacy Mallesons and global chairman Wang Junfeng from King & Wood.

One partner says: "SJ Berwin's biggest challenge will be absorbing the fact that they are now controlled out of an Asian timezone by an Australian managing partner who has an eye on China. They probably got comfortable with the concept [of a merger] and saw the strategic vision of it, but the reality may be difficult to swallow for some of their most talented partners."

An ex-SJ Berwin partner agrees: "When you lose the name and merge with an extremely powerful presence, it is inevitable that you will lose autonomy."

However, there is also a view that the UK partners will eventually get over the name loss and realise if the firm wants to go global and win new business it will need to sacrifice its local culture for the benefit of the whole firm. Day responds: "There is a principle of equality, and we see this continuing indefinitely."

Certainly there is no denying that the union has secured SJ Berwin a foothold in significant and strategically powerful economies, with many in the market praising the UK firm for having the guts to pull off the deal.

On the other hand opinion remains divided as to whether either party will gain what they want in the long term – especially as the economy in both China and Australia has slowed down since talks began. And while SJ Berwin has achieved a world first in China through a tie-up of a scale never seen before, some argue the reason no one got in there first is because they did not want to. Critics point to logistical and cultural challenges, from the region's sensitivity to fees to a lack of clarity on outbound work volumes to the UK. They say it is these uncertainties that have prevented other firms from making similar jumps into the fray. As one rival partner comments: "I don't think there's a huge rush to do something similar. It's not so much that there's a lack of interest in tying up with a Chinese firm – more that it's a tough call."

A senior partner at a rival firm adds: "I'd say firms haven't even tried to form a tie-up in Asia. Most firms historically set up their own presences but when the region started to gain importance in the global market they became underweight there, plus there weren't enough lawyers making a push for careers in Asia, which is why Australia came into the mix instead."

Ultimately the success or failure of the combined firm will come down to the extent to which it can overcome the inherent differences between its legacy partnerships. Some argue that KWM would have been better suited to a tie-up with a magic circle firm – something legacy Mallesons previously targeted when it held talks with several firms including Linklaters and Clifford Chance.

"[SJ Berwin] certainly doesn't have the calibre that Mallesons was looking for when international mergers started to become a discussion point," says an ex-partner in Australia. "They may have taken the view that if we don't act now our choices will get slimmer. But the market reaction when they merged was 'SJ who?'"

Of course, there are some who believe SJ Berwin was a good choice. "They're aggressive, nimble, they've got the appetite to chase down the magic circle firms and they are incredibly successful in areas where they are strong," says one partner at a rival firm. "It's a better outcome than trying to merge with the magic circle firms because there you would have an expectation of control and influence, which SJ Berwin doesn't bring. It means you can shape that practice to suit the tradeflows and regional strategy."

What no one can deny are the opportunities for growth and new business. And while there remain sizeable challenges, the advantages of the union to all parties is clear, with KWM gaining established offices in target investment markets and SJ Berwin securing entry to a major growth region. As one Chinese partner sums up: "If they can achieve successful integration then this is a really good merger, because strategically they will put themselves as number one in the region. Whether they can achieve this is the big question everyone is asking."

Certainly it seems from the outside that the firm still has a long way to go before it moves away from being akin to a franchise operation in many people's minds, with a common name and undeniably ambitious expansion plans sitting on top of three disparate legacy firms.

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Combined firm managementstuart-fuller-k-w-web

International management committee (IMC)

Oversees strategy, integration and governance. Led by global chairman Wang Junfeng (China). The rest of the line-up is:

Stuart Fuller, global managing partner and chief executive partner (pictured), now based in Hong Kong
Wang Ling,
China managing partner
Wang Rongkang,
M&A partner, China
Zhang Yi,
Shanghai office managing partner, China
Stephen Minns,
co-deputy global chairman and Australia chairman
Sue Kench,
Australia managing partner
David Friedlander,
M&A partner, Australia
Stephen Kon,
co-deputy global chairman and senior partner of KWM SJ Berwin, UK
Rob Day,
Europe managing partner and managing partner of KWM SJ Berwin, UK
Maxence Bloch,
M&A partner, France
Stefan Krueger,
intellectual property and IT commercial partner, Germany

(Alternates: funds partner Jonathan Blake, UK, and disputes partner Craig Pollack, UK)

Executive committee

Responsible for operational decisions concerning the network and integration of the combined firm, and makes recommendations to the IMC. Led by Fuller. Remaining members are:

Sue Kench
Wang Ling
Rupert Li,
corporate partner, China/Hong Kong
Rob Day

Business development committee

Comprises global practice coordinators, bringing together business plans into a combined strategy for each of the largest practice teams. Aims to boost communication and drive global business development initiatives. Reports to the IMC.

Antitrust and regulatory – Simon Holmes, UK
Banking and finance – Yuen-Yee Cho, Australia
Corporate, M&A and securities – Rupert Li, Tim Bednall, Australia
Dispute resolution and litigation – Craig Pollack
Projects (energy and resources) – Handel Lee, China
Funds and private equity – Jonathan Blake
Intellectual property – Zhu Nongfan, China
Real estate – Bryan Pickup, UK
Tax – Justin Cherrington, Australia

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Opportunity knocks – history of a world first

For legacy SJ Berwin, the way partners reacted to the union with KWM could not have stood in starker contrast with the firm's failed attempts to expand into the US, which were punctuated by several protracted and ill-fated discussions.

In early 2010 the firm hit the headlines when it emerged that its management, led by then senior partner Jonathan Blake and managing partner Ralph Cohen, was sounding out a handful of US firms on merger possibilities.

Linked with names including Orrick Herrington & Sutcliffe, key referral partner Goodwin Procter and Paul Weiss Rifkind Wharton & Garrison before embarking on prolonged discussions with Proskauer Rose, KWM co-deputy global chairman Stephen Kon admits the firm received "many approaches about potentially doing something with various firms".

"We considered a number of [them] and ruled them out on the basis they did not tick all of those boxes," he adds, dismissing many of the merger talks reported by the media at the time as "much exaggerated".

"[There was] at most the occasional meeting, a couple of coffees or the occasional lunch or dinner, which we had no interest in pursuing," he says. "The one exception when we had more detailed discussions was with Proskauer, which ultimately did not tick our boxes or theirs and so we amicably and mutually decided to go our own ways."

Talks with Proskauer, which were largely angled off the firm's traditionally high-performing funds business, were called off in November 2010, primarily due to the disparity in profit per equity partner (PEP) at both firms and the ruthless action the UK firm would have had to take to raise its PEP to a suitable level.

The financial crisis had caused SJ Berwin's PEP to halve from £800,000 in 2007-08 to £410,000 in the following year, recovering slightly to £447,000 in 2009-10. In comparison, Proskauer's profitability stayed steady at around $1.4m (around £850,000 at the time). It was a disparity that left everyone at the UK firm feeling "very scared", according to one former partner.

ralph-cohenMeanwhile, Blake and Cohen (pictured), the latter of whom stepped down as managing partner during the talks, were lambasted for their lack of communication with the wider partnership as discussions between the two firms dragged on. One former partner describes the affair as a "bruising and unhappy" time for the firm. He adds: "I can only imagine people in leadership then thought 'how on earth can we talk the firm into a US merger after what happened?'"

Despite their dented egos partners and management acknowledged that, stuck in the squeezed UK mid-tier and with only a limited international presence, the firm needed to do something to survive in an increasingly global legal market.

As such, a deal with an Asian firm presented  a viable opportunity as rank and file partners were less scared by this concept than trying again with another US firm, paving the way for the first-ever tie-up between a UK firm and a leading mainland China commercial law firm.

Kon points to "compelling" statistics backing the thinking behind the move – mainly that Chinese businesses invested $12.6bn (£9.2bn) in Europe in 2012, making up a third of all Chinese outbound investments.

KWM SJ Berwin European managing partner Rob Day adds: "When we had this opportunity, the deal struck us as very compelling. It offered a genuinely different proposition in the marketplace in a way that clients really want, and that competitors would struggle to match. It would put us in a good position to help those trying to access the high-growth markets of Asia and wealthy clients looking to internationalise and gain access to European markets."

For more, see A pawn among kings – early days will be vital in shaping legacy SJ Berwin's future.

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