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November 19, 2010 12:42 PM

Letter From London: Why the Norton Rose "Merger" Debate Misses the Point

Posted by Chris Johnson

What makes a merger? That's the question being asked this week, after U.K. firm Norton Rose announced deals with Canada's Ogilvy Renault and South African firm Deneys Reitz. The combined business will rank as one of the world's top 10 firms by headcount when the three-way tie-up takes effect next June, boasting more than 2,500 lawyers in 38 offices worldwide and gross revenue of over $1 billion.

For Norton Rose, the moves represent continued progress in its strategy to target Asia and the global natural resources market. Not everyone is convinced. Detractors have been quick to point out that, as with Norton Rose's union with Australian giant Deacons, which took effect at the beginning of the year, the firms will not share profits--at least, not initially.

In an interview earlier this week with U.K. publication The Lawyer, K&L Gates chairman Peter Kalis referred to Norton-Ogilvy-Deneys deal as a "Noah's Ark merger" due to the lack of true financial integration. "A merger is when two become one, not when two become two," he said, perhaps overlooking that K&L Gates' own website states that the firm is composed of "multiple affiliated entities," with no fewer than six separate partnership structures globally.

When The Am Law Daily put this to Kalis, he responded by correctly pointing out that certain local regulatory requirements dictate that international firms operate through multiple partnership structures. The key question, he says, is whether "all owners of the business are partners of a single entity from which the firm's profits are distributed"--something he insists is the case at K&L Gates.

In fairness to Norton Rose, it hasn't claimed to be merging with anybody. The press release carefully avoids using the M-word, referring instead to Ogilvy and Deneys "joining" the Norton Rose Group, the City firm's international holding company. But such talk misses the point. Even ignoring the semantics, the suggestion that a merger's success is entirely dependent on whether money changes hands is overly simplistic and naive.

The "Swiss Verein"--a Swiss-law holding structure employed by Norton Rose to allow the various constituents to operate independently with limited liability--has been used successfully by law firms since Baker & McKenzie first adopted it in 2004. The change offered Baker the "benefit of a modern business framework together with a prudent approach to managing potential liabilities," then chairman Christine Lagarde said at the time. DLA Piper also operates with separate profit pools between its U.S. and international arms, and the group of newly minted trans-Atlantic mergers--such as Hogan Lovells and SNR Denton--also are structured similarly.

It's important to remember that profits are a byproduct. Fundamentally, law firms exist for one sole purpose: to provide legal advice to clients. So long as they are receiving a fully-integrated service, clients really aren't concerned whether a firm's various offices are sharing fees or not.

Norton Rose knows the perils of operating through non-exclusive alliances better than most, having spent much of the nineties wrangling within the confines of the "M5 Group" of regional U.K. firms. The six members contemplated a full merger in 1994 before their growing strategic differences saw the group disband in 1998. "We'd never do an alliance again--they just don't work," the firm's chief executive Peter Martyr says. "But this isn't an alliance or a joint venture--the group has one management and a common business objective."

Martyr says that the presence of unified global practice groups, which operate with one single partner in charge managing the entire network, means that it is "no different to how you would run a single firm."

That's not to say that Norton Rose's moves have been perfect, however. The arrangement (let's call it that) with Deacons originally was billed as the firm's gateway to Asia. But the Antipodean firm's highly regarded Hong Kong arm, which also boasted three offices in mainland China and strong presences in Malaysia, Taiwan and Thailand, didn't join the party.

And while the attraction of assuming Deacons' offices in the vibrant business districts of Melbourne, Sydney, and Canberra was obvious, many questioned why an international firm would want 80 lawyers based in the more isolated cities of Brisbane and Perth. It was not until the Ogilvy and Deneys moves this week that the full importance of these two outposts became clear as part of a wider mining and natural resources play. By acquiring practices in Australia, Canada, and Africa, Norton Rose has added a number of the hottest jurisdictions for major global resources deals.

The axis--an unusual and perhaps even unique combination for a major international law firm--will also prove attractive to Chinese clients, who have increasingly been investing heavily in the countries. South America is an obvious next step--Chinese oil company Sinochem's acquisition of a 40 percent stake in a Brazilian offshore field from Norway's Statoil in May is just one recent example of major Asian investment in the region. Martyr admits that Brazil is "unsurprisingly" on the firm's radar.

The locations might be spot on. Still, the choice of Montreal-based Ogilvy instead of one of the more recognized mining and resources firms in Calgary--Stikeman Elliott; Blake Cassels & Graydon; and Osler, Hoskin & Harcourt--has some lawyers in Canada scratching their heads. Vancouver firm Fasken Martineau, another leading force in the sector, would have killed two birds with one stone by providing South Africa capability through its own office in Johannesburg.

Martyr is unconcerned, saying that the combination of the network's existing expertise means the issue will be rectified "in three seconds flat." "It's not like going into a shop where you can try lots of different items to get exactly what you want," he explains, although he claims several other Canadian firms had made merger approaches before Norton Rose started negotiations with Ogilvy.

Martyr also adds that Ogilvy's mining and resources practice is "actually much more significant than we thought--it's just that they're not structured around it." He points to other mutual benefits in banking, corporate, and disputes. The Canadian firm's life sciences and pharmaceuticals group will spawn a sixth global sector focus across the Norton Rose network, he says, though Ogilvy doesn't have an office in Vancouver, a key centre for the industry in Canada.

Martyr also admits that he would rather have avoided doing two deals at once, and Norton Rose now faces the somewhat daunting task of integrating these businesses into a group that is still evolving following its last addition.

It could soon have to welcome one more. The next step and ultimate end goal is a U.S. merger. "We're now by far the biggest firm in the world not to have a U.S. office, and also the one with the biggest footprint," he says. "So long as we find a firm that shares our culture, which is our number one priority, then we're in a good position to move."

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