Exclusive: A&O and O'Melveny Pull Plug On Merger Talks
The firms have called off talks after 18 months with some blaming foreign exchange rate volatility.
September 02, 2019 at 08:51 AM
5 minute read
Allen & Overy and O'Melveny & Myers have called an end to their merger talks, Legal Week can reveal.
The decision to not move forward with talks, almost 18 months after they were revealed to be in discussions, came amid adverse macroeconomic conditions that have impacted how a deal would be valued, according to two people close to the process.
"Foreign exchange rate volatility and a reduction in U.S. interest rates affect how any deal gets valued," one of the people said. "It made it too difficult to agree a valuation of each firm, and how financial integration and pay would work as a result."
When the talks emerged, £1 bought $1.41, compared with $1.21 today.
An agreement had been close and some key terms had been agreed by management, including a name and governance structure, according to people with knowledge of the discussions. Both sides had spent the last year thrashing out those details, with meetings held between management and partners in London, Frankfurt and Singapore offices, among others.
But questions had been raised by some A&O partners over whether a deal with O'Melveny – code-named 'Orion' within the Magic Circle firm – was the right fit for the firm.
A&O's senior and managing partners, Wim Dejonghe and Andrew Ballheimer, had spent recent months discussing the merger with partners to shore up positive opinion. They had even planned to hold an open partner ballot on the decision, which would have allowed the firm's management to know who had voted in favour of the tie-up or not.
"It's a huge strategic thing and an almost impossible job to persuade everyone – you have so many different interest groups"
One A&O partner told Legal Week last week: "It's incredibly hard – you have to persuade a material proportion of argumentative partners to move in the same direction. To Wim and Andrew's credit, they've got something which is not a stupid strategic idea, and brought it to a point where they have had had meaningful engagement on it. It's a huge strategic thing and an almost impossible job to persuade everyone – you have so many different interest groups."
Both firms issued statements today (September 2), saying that despite "some compelling synergies between us", they had mutually decided not to continue discussions.
The duo stated they had "developed a great deal of mutual respect" for each other and expect to remain in close contact in the service of shared clients.
The A&O statement also said that growing in the U.S. remains "the highest priority" for the firm, stating it will "significantly increase" its focus on lateral individual and team hires. It added that it "remains open to considering opportunities for larger combinations". The firm recently hired a New York finance counsel from U.S. firm Cahill Gordon & Reindel.
O'Melveny's statement added: "The firm's best course is to continue executing on its strategic plan – which has led to an unmatched culture, deep client partnerships and record financial performances."
Despite those comments, many eyes will now be on each firm's transatlantic strategy.
At A&O, Dejonghe and Ballheimer, and their leadership predecessors, have long been pushing for a U.S. merger, with the pair highlighting the issue as a priority when running for their roles in 2016. Like many of its Magic Circle peers, the firm faces a challenge in competing via a small operation in such a large and developed economy.
At O'Melveny, questions have been raised about the future of its London presence, with several partners and lawyers having left since the merger talks began. Following the exits of partners including a funds trio to Akin Gump, and several other lawyers to outfits including White & Case and Ropes & Gray, O'Melveny operates a stripped-down operation in the city. According to the firm's website, the outpost now comprises four partners, six counsel and one associate.
An O'Melveny spokesperson said: "We have a strong London team and are considering strategic lateral and organic growth opportunities there."
Los Angeles-based O'Melveny, which since 2011 has been led by chairman Bradley Butwin, has been exploring a number of growth options in recent years. Legal Week sister publication The New York Law Journal reported late last year that the firm had held preliminary merger discussions with Willkie Farr & Gallagher, but that the discussions never went far. Both firms denied they held merger talks.
Earlier this year, the U.S. firm announced record financial results. Its gross revenue increased by 8.5%, climbing just past the $800 million mark. The firm's revenue per lawyer hit $1.19 million, while a 12.6% increase in profits per equity partner (PEP) brought that figure to $2.26 million.
A&O grew its top line by 5% to hit £1.627 billion ($2 billion) for the 2018-19 financial year, while it raised PEP by 1% to hit £1.66 million.
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