Go back a few years and Australia was the market every international law firm was desperate to enter, with no fewer than four of its six largest firms sealing tie-ups with overseas outfits. As the once-booming resources economy slows and the merger hype wears off, Elizabeth Broomhall looks at the impact of the deals and how the independents left behind are holding up

Law firms have a reputation for being late to the table. In the case of Australia, international entrants were perhaps more than 'sociably late' – taking the plunge into the market only at the tail-end of the energy and resources boom that the country had enjoyed for some two decades.

The Australian firms, meanwhile, had hit a brick wall in Asia. The lure of global outfits that had more established bases in the region proved too attractive to resist, helping drive a spate of tie-ups that has left only a handful of Australian independents.
Efforts had been made in the distant and not quite so distant past to negotiate deals between magic circle firms and some of Australia's 'big six'. But in the end it was legacy Norton Rose that became the first to make a play, announcing a merger with Sydney's Deacons in 2009 – a move that set the UK firm on its path towards world domination.

With a booming cross-border energy market and significant investment going into the country from Chinese investors, the appeal of Norton Rose's move was wide enough to prompt a land grab, with seemingly every month bringing rumours of another potential merger or new international contestant on the ground.

Deals ultimately proved harder to seal than discussions. It was two years before Allen & Overy (A&O) and Clifford Chance (CC) joined the party, and even then only after eschewing large mergers in favour of niche local practices. But Norton Rose has now been followed into the region by a raft of firms, while a small number are today still desperately trying to finalise their tie-ups.

Times have changed, however, and what was at the time of Norton Rose's move a booming market has slipped away as troubles in the global economy finally caught up with the continent.

Recent figures on Australia's economy are somewhat disheartening. A paper by the country's Bureau of Resources and Energy Economics released in September said that plummeting commodity prices would contribute to a 4% fall in earnings from exports of iron ore – one of Australia's biggest exports – for the 2014-15 financial year, while data compiled by Thomson Reuters noted that Australian inbound M&A deal value slumped 86% in Q2 this year – a massive decline and the sharpest since the third quarter of 1989. This downturn has largely been blamed on slowing demand from China: a KPMG report in March highlighted a 10% decrease in Chinese investment into the country between 2012 and 2013, from US$10.1bn (£6.3bn) to US$9.1bn (£5.6bn).

Evidently the change in conditions has left international firms and the remaining Australian independents scrambling to reorganise their businesses.

"The reality is that operating in Australia as an international firm is a very difficult proposition to make work," says one Sydney-based senior corporate partner, noting that Australia is predominantly a domestic legal market. "You could argue that they all came 10 years too late – energy and resources has really fallen off now. It's interesting that it's taken them so long."

Though approaches to the market differed wildly, it was the big mergers that garnered the most media attention. Among them were Ashurst's tie-up with legacy Blake Dawson and legacy Herbert Smith's combination with Freehills. Meanwhile, Mallesons, previously courted by Linklaters and CC, went for the more groundbreaking approach of merging with China's legacy King & Wood.

Spot the difference
From full financial unions at the likes of Ashurst and Herbert Smith Freehills (HSF), to vereins with varying degrees of integration at King & Wood Mallesons (KWM) and Norton Rose, almost all of the tie-ups have attracted some criticism for failing to change much beyond their names.

"For the established firms that have changed their brands I can't see that there's much difference," comments Danny Gilbert, managing partner of Gilbert + Tobin. "That's what I call 'the window dressing'. They're still the same people coming to work every day for the same clients – just under a different name. I have a great deal of respect for those firms but that's how it appears.

"Building these global firms is complex and time consuming so it's inevitably a distraction of management thinking time and resources, but what impact that's had I don't know."

Corrs Chambers Westgarth chief executive John Denton is also dubious about what the combinations have achieved. "How do you measure success? What has been the upside?" he asks. "These are the hard issues. What seemed like a strategy was probably just a business reorganisation."

Partners at Australian firms that have joined with international outfits see it rather differently, of course. They argue that the mergers have boosted revenues significantly by increasing cross-border work and global panel appointments, as well as by allowing them to follow their clients into new markets.

"What it's meant for us in Australia is that we are more exposed to opportunities of a global nature," explains John Carrington, managing partner of Ashurst in Australia. "We've had a slowdown in Australia. Conversely, in Europe and particularly in London you've had an increase in levels of activity. That would be a more challenging thing if you were purely a domestic practice."

He adds that it has been hugely beneficial to be able to work with clients in jurisdictions beyond the domestic market as they increasingly look offshore. Being unable to go with them would have been a "tremendous disadvantage", he says.
Not that the transition at Ashurst, which has been dogged for years by rumours of partner culls in its Australian practice, was entirely smooth sailing. While overall partner headcount has reduced only marginally, the number of equity partners at the firm has shrunk from 164 to 113 over the last five years. Carrington insists this shift was part of a strategy – drawn up before the firm even entered into discussions with Ashurst – to retain talent and respond to new market conditions, but he admits that there is a drive to "increase efficiency and increase focus on profitability and returns" when you seek to participate on the global stage.

He stresses that the total number of partners has only fallen by eight since 2009 – just 4% of the partnership. Critics have said that the firm effectively doubled-up on partners and practices, by selecting a firm with similar practice aspirations, but Carrington says the choice of firm has only made the Ashurst-Blake Dawson merger better.

"I think to be successful on a global basis you need to have areas of particular focus – areas you want to be famous for," he says. "It will be a rare case that that will be achieved with a broad set of practice areas."

Muddy waters
Measuring the true success of any of the combinations is made even more challenging by the fact there is little financial data available: Australian firms have historically refused to reveal profit per equity partner figures (PEP) and many now also opt to keep revenues quiet. A slight exception is HSF – an example of a merger that, according to the local market, has gone well. Though it would not reveal actual figures, the firm states that its Australian business has seen revenues climb by 5.5% since its October 2012 combination, with cross-border mandates also on the rise.

Jason Ricketts, HSF's Australia managing partner, says joining forces with Herbert Smith had exceeded both legacy firms' expectations. "The firm is getting the benefit of winning work that we might not otherwise have got," he explains. "We don't have a hand-brake on our expertise when a big transaction comes in."

Integration is still being worked through, but he suggests the move to a managed lockstep has been successful. One issue the firm is still debating is how to report its profitability level globally. "On PEP we're yet to be convinced," comments Ricketts. It may be a measure that works in other markets but, he says, "we have to understand what it means in the context of a global law firm with 175 of its partners in Australia and more than half outside of London. What does PEP mean when you're running that sort of business?"

Over at Allens there are clearly no such integration issues – its alliance with Linklaters being non-financial. But partners in the market have nonetheless expressed confusion about the arrangement. "There are several routes to success," says one Australian partner, "the challenge for firms is to work out what the right path is for them and make sure they stick to it."

Another adds: "Linklaters and Allens are great firms, but what's the reality? How is that going to work?"

Allens' chief executive partner, Michael Rose (pictured, above), argues in response that clients don't care about how different geographies come together, as long as the advice is good: "I always think it is good to be underestimated. There are so many different structures now – it clearly doesn't matter. Ours delivers and it doesn't have the governance and integration issues that some of the others have."

Still a question on everyone's lips is whether the firms will one day try to go ahead with a merger. Some speculate that Linklaters may opt out of a financial tie-up and instead hire a handful of Allens partners to run its operations down under – despite the firm's Asia managing partner telling Legal Week this year that a full combination would be "fabulous".

Rose says a merger was never the ultimate goal, but could be an option. "[What we have] works well, is quick to implement and doesn't require us to give things away. We are not in a hurry to change arrangements. We didn't enter into it as a precursor to a merger and we don't necessarily see it as something on the cards. But having said that, the legal industry is changing very fast and you never know what you might do in response to those changes."

At the other end of the scale, the KWM deal has faced very different questions. As the first and only formal combination between a PRC firm and a foreign outfit in law firm history, there is little doubt that KWM has managed to capture a large amount of work – ranking number one for deal volume in Asia-Pacific in the first half of the year, as well as top for deal value and volume in Australasia.

Nonetheless, the outfit's focus has since been on its non-Australian business. While it has already sealed a merger with legacy UK firm SJ Berwin, KWM is currently gearing up to open in Singapore, and earlier this year it set up a strategy committee to look at potential opportunities in the US.

Many were expecting a merger announcement but, given the notorious difficulties in finding a suitable American partner, the firm has decided against actively pursuing a US merger at present. Instead it is looking to build a formal 'best friends' network through relationships with around a dozen top American firms. Partners say without a US deal the firm is at risk of remaining a regional player.

"For KWM to become global it's going to have to have a very significant North American arm because at the moment a lot of people still think of it as an Australian law firm," says one partner. Others, however, think greater attention will be given to Africa, Canada and Europe – all of which are prime destinations for Chinese investment.

Going solo
On the other side of the table sit the leading independent outfits and a growing number of up-and-coming smaller firms and boutiques. Their rise has been a direct result of the combinations between the larger firms and international players, which have effectively eradicated the concept of a big six in Australia, instead creating a top tier of around nine or 10.

"There are now high-quality partners available to us," comments Johnson Winter & Slattery (JWS) managing partner Peter Slattery. "For one reason or another they are saying 'I no longer want to be a partner at firm X', and they're available. Once upon a time they weren't – you could not get that talent. And that kept the top tier up there and everyone else out. That talent has been leaking out to a whole range of firms for about five years now."

The shift is best exemplified by Gilbert + Tobin, which local partners highlight as a standout performer. Ranked sixth by Mergermarket for M&A deal volume and value in Australasia in H1 of 2014, the firm has moved beyond a technology, media and telecommunications focus, taking an aggressive approach to hiring and poaching a string of senior partners for its broader corporate and finance practices. "Watch this space, is all I can say," warns managing partner Danny Gilbert. He adds that he will continue to make top tier lateral hires as he strives to meet ambitious revenue targets, though he declined to specify what these are.

Also looking to mop up any fallout is Clayton Utz, where growth is a priority despite lawyer and partner numbers shrinking over the last five years. New chief executive partner Robert Cutler says infrastructure and regulatory are the key areas of focus, and that it is also planning to rebuild the banking team that was decimated by the 14-partner walkout to A&O in 2010. Corrs, meanwhile, hopes to build its lawyers' international experience, and plans to have around a third of them working abroad in the coming five years. It is also looking to increase the number of formal relationships it has with non-Australian firms – eyeing around 50 alliances (up from the current 33) over the same period.

Collectively, those opting to remain independent are adamant that their stance is their own choice and not a side-effect of being left on the shelf by international players now less keen on entering the market. "There may be firms in that category; we're not one of them," responds Slattery at JWS. "I've had discussions with managing partners in a small number of firms offshore. I willingly engaged in those discussions because I wanted to understand the strategy of the foreign firms… from where I sat I couldn't quite see the business rationale.

"The answer I got back was: it's not really about Australia, it's about Asia, and Australia is our platform for entering Asia. Well, that sounds good when you say it quickly, but the execution, I think, is very difficult. So we didn't hear a compelling strategy."

Perhaps if an available candidate were to emerge, some of these firms might change their minds. "The critical thing about being independent isn't about staying independent until something better comes along," counters Corrs' Denton. "We've been unequivocal because we think our best opportunity to build a position among the global elite is not to merge."

The chief deterrent to a merger echoed across the independent firms is a perceived loss of decision-making powers and control. Now more than ever they are intent on remaining in charge of their own destinies rather than being folded into a global network. But with clients globalising and cross-border deals rising, some of those at international outfits query the feasibility of the independent business model long term. "There are just different models for dealing with globalisation," argues Denton. "Focusing on connectedness and relationships is a perfectly valid and empirically tested model for engaging on a global basis."

Clayton Utz's Cutler adds: "Frankly, we are pleased we are not dealing with cultural integration issues. We have had joint bidding opportunities, so we certainly don't feel like we're being left behind."

In truth, the Australian legal market is a continuously evolving creature. The biggest firms – which at their largest neared 200 partners and 1,000 lawyers – have scaled back in size in response to more difficult conditions, but new firms still continue to enter.

Those expected to make their moves in the next year or so include Hogan Lovells, Pinsent Masons and Dentons, while Bird & Bird is on the cusp of sealing its merger with Truman Hoyle. The likes of White & Case and Reed Smith are also rumoured to have their eyes on the market, though neither chose to comment for this article. At the same time, local partners wonder whether specialist US firms will also up their game following office openings by Seyfarth Shaw and Quinn Emanuel Urquhart & Sullivan – the latter of which is considering opening in Brisbane for construction litigation in the future. Then there is the issue of PwC – the big four accounting firm – whose decision to expand and hire ex-KWM partners Tim Blue and Tony O'Malley has hit a nerve with many local partners.

Dentons global chair Joe Andrew (pictured, above) says that, for his firm and many others, Australia certainly remains a key part of projected global growth, and is a region that no major outfit can afford to ignore. "We will do a merger as soon as we find a partner that is a good match and they see the opportunity to build together," he explains. "It would be almost absurd for a global law firm not to be interested in Australia."

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Herbert Smith Freehills and Ashurst – facts and figures post-merger

Herbert Smith Freehills

• The Australian business has reported revenue growth of 5.5% since the merger
• There have been approximately 800 cross-border deals with an Australian element since the October 2012 merger
• The firm is on more than 130 global panels
• Number of legacy Freehills lawyers working outside Australia on 1 September 2011 was 10, compared with 27 in September 2014
• There are currently more than 85 client secondments

Ashurst

• Revenue growth – declined to reveal
• There were 230 Australian cross-border deals open on 1 September 2014. Since the beginning of the last financial year, the firm has advised on more than 430
• 12 bank panel appointments (representing six of the top 20 banks globally)
• Number of lawyers (including partners) working outside Australia on 1 September 2014 was 947, compared with 885 across both legacy firms on 1 September 2011
• Number of lawyers on international secondments in 2011 was eight, compared to 33 in 2014

Related:
A smaller world – Australian firms see dramatic drop in partner headcount 
The down under dilemma – what are the magic circle's plans for Australia?
Diminishing returns – Australia's top firms face tough times as partner numbers continue to shrink