It shouldn’t take the legal industry long to get used to the idea that Herbert Smith Freehills is merging with Kramer Levin Naftalis & Frankel.

After all, Allen & Overy’s merger with Shearman & Sterling set the blueprint: an ambitious U.K.-founded firm acquiring a U.S. firm that had been struggling to keep up with rivals.

But the industry should also be used to the way these deals work now. The Herbert Smith Freehills Kramer deal follows a set path that is becoming the norm for modern-day law firm mergers.

Here are four new rules.

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Mergers v Acquisitions

A few months ago I took a risk and suggested Herbert Smith Freehills would be wise to consider a merger with U.S. firm McGuireWoods. Its deal with New York-headquartered Kramer Levin instead is probably an even better outcome. But it’s hard to describe it as a merger of equals.

The legal industry—including the legal press—use the term ‘merger’ quite loosely. Sure, both sides are agreeing to join forces, but in the corporate world few would describe a $1.6 billion revenue business combining with a sub-$500 million business as a genuine merger. It’s more of an acquisition; the revenue ratio is 3.7 to 1.

That is even more than when Allen & Overy merged with Shearman & Sterling in May with a revenue ratio of 3.2 to 1. In A&O Shearman’s case this disparity became clear when it emerged that only candidates from Allen & Overy were in line for the top two positions in the firm, though the firm went to great lengths to ensure Shearman’s Adam Hakki also had a senior title.

The same thing is happening with HSF Kramer, with HSF’s Justin D’Agostino and Rebecca Maslen-Stannage set to retain their roles as the leaders of the combined firm and the Kramer Levin leaders taking senior roles on various executive teams.

In years gone by the logic had always been that firms should aim to link up with similar types of firms. Yet it is clear that these large-small deals are more straightforward to secure. When similar sized firms combine there is so much power play involved that it becomes much harder to agree on anything.

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Announce It, Don’t Debate It

The morning after Law.com broke the news this week, one HSF partner said they were still trying to come to terms with it. In other words, some partners were taken by surprise. They may have been expecting their firm to pursue a merger, but they had no idea about these talks.

This little trick of revealing the merger to partners only once discussions have ended worked so well with A&O Shearman that it will almost certainly become standard procedure with mergers from now on. So many law firm mergers have collapsed at the discussion phase because their lawyers endlessly negotiated and pointed out flaws. That’s what lawyers do. Multiply that across hundreds of partners and it is very difficult to get a deal done.

A&O Shearman’s management approach of announcing it first shocked the industry because it cut the partners—the business owners—out of the initial decision and then said we don’t need to prove this proposition to dissenters, they need to disprove it to us. Several months later the vote went through almost unanimously.

There is no guarantee that things will be the same with HSF and Kramer Levin of course. But it is hard to imagine how partners at either firm will be able to convincingly argue that this is such a bad deal that there needs to be a mutiny.

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If You Can’t Beat ‘Em, Join ‘Em 

Both HSF and Kramer Levin had been sliding down the global rankings. That’s not a criticism of either firm, it’s just to say their rivals were growing faster. HSF’s Global 200 ranking has slipped three places since 2020 and Kramer Levin fell out of the Am Law 100.

Some would disregard the importance of this. They would argue that revenue size is less crucial than reputation, profitability and client base. And in the short term they are probably right. But there are very few law firm leaders who have not considered whether scale is necessary to compete at the top level, especially in a market where partners move more freely than ever before.

And even the proponents of organic growth will concede that it can be a problematic and expensive strategy. Mergers, meanwhile, offer immediate scale.

That’s why after A&O Shearman there was an expectation others would follow. And the immediate reaction to HSF Kramer is that even more will follow.

As the leaders of these firms attest, a merger provides newly-combined firms with an instant boost through their opportunity to cross sell.

A&O Shearman insiders say that since merging in May the firm has been busy cross-selling each legacy firm’s client base to the other.

For Herbert Smith Freehills Kramer, should the deal get voted through, the lack of geographic overlap and alignment of practice areas means there will be clear opportunities for cross-selling on day one. And the combined firm is on course to enter the Global 25.

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Profitability Need Not Be a Dealbreaker

The first thing anyone thinks about when a merger is suggested is the proftability of each respective firm. It makes sense. Why would a group of highly profitable partners dilute their earnings with a less profitable firm? But it also ignores the fact that many of these issues can be resolved internally.

Within every firm there is a wide disparity of what each partner brings in and this is normally reflected in how each one is remunerated. It can be the same when firms merge.

Okay, the challenge in this case is a steep one. Kramer Levin's profit per equity partner is $2.4 million, way ahead of HSF's $1.6 million. The revenue per lawyer (RPL) numbers are also substantially different. Kramer Levin’s RPL is $1.28 million, close to double that of HSF, which is just under $700,000. This is one case where many would have anticipated a Swiss verein structure rather than a financially integrated firm.

But perhaps this can all be addressed by the salaries and remuneration system the combined firm puts in place. Allen & Overy and Shearman & Sterling also had a slight disparity between the firms on PEP and RPL. Crucially, it was only after the firms merged that the management rolled out a three-level modified lockstep partner remuneration system.

HSF and Kramer Levin's leaders say they are working on how a partner remuneration system will work that will fairly compensate partners according to their region. Cynics would say this dodges a crucial sticking point. Supporters would say it can be sorted out in due course.

Either way, it seems many now believe it does not need to scupper negotiations before they begin.
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Names Can Be Sorted Out Later

Herbert Smith Freehills Kramer doesn’t exactly roll off the tongue. HSF Kramer sounds a bit like the name of a starship in a bad novel.

The fact the firm will have different branding on either side of the Atlantic—HSF Kramer in the U.S. and Herbert Smith Freehills Kramer outside of it—also sits awkwardly with the idea of being an integrated firm with all the benefits that brings.

And yet what choice did the firms have? Whenever you start amalgamating too many surnames you hit branding problems. Even the pithy A&O Shearman is officially called the more unwieldy Allen Overy Shearman Sterling.

The craze of rebranding as three letters—like DLA and CMS—is over. A sticking point in the A&O talks with O’Melveny & Myers was the name. Sometimes it’s best to compromise just to get the deal through.

The rebranding can come later. DLA Piper Rudnick Gray Cary became just DLA Piper. Freshfields Bruckhaus Deringer eventually became just Freshfields. Mayer Brown Rowe & Maw became just Mayer Brown.

Perhaps the best the newest firm can hope for is that in a few years’ time it can rebrand again as simply: Herbert Smith.