December 3, 2010 6:00 AM
LETTER FROM LONDON: Collapse of Proskauer Talks Won't End SJ Berwin's U.S. Ambitions
Posted by Chris Johnson
"All things come to an end," wrote poet Geoffrey Chaucer in Troilus and Criseyde. And so, having limped on for most of the year, the protracted merger talks between Proskauer Rose and U.K. firm SJ Berwin finally ran out of steam last month.
With pressure growing on management on both sides to bring negotiations to a resolution one way or the other, it came as little surprise when the firms released a joint statement saying that the combination was "not workable at this time."
But new SJ Berwin managing partner Rob Day insists that the collapse of the Proskauer talks does not mark the end of his firm's U.S. ambitions. Rather, he says, it's merely a pause in plans that have now been developing for almost two decades.
Although SJ Berwin only recently made serious moves toward completing an American merger, the firm first began investigating the prospect in the early nineties, Day says. In 1994, former arbitration head Tim Taylor, now based in Dubai, wrote a strategy paper for the board that supported such a move.
In many ways, SJ Berwin's practice lends itself well to a transatlantic tie-up. The U.S. market is a key component in the areas of funds and private equity--two of the firm's core strengths. SJ Berwin also is known for having a more American-style, performance-based culture than is typical for a U.K. firm.
"We see the possibilities of the international play," says Day, who succeeded former managing partner Ralph Cohen following a contested election that fell in the middle of the Proskauer negotiations. "It would also help us break into Asia, which is a very exciting market but one that we feel is better attacked as a larger organization. A strong presence in Europe and the U.S. would allow us to offer services to outbound clients."
While the idea of a merger may have been percolating for years, it wasn't until the firm's strategy committee met in January 2009 to assess the recession's impact on the legal market that the process stepped up a gear.
"It quickly became clear that the international firms had fared better through the recession and had bounced back more quickly," Day, one of the committee's 13 members, recalls. "We decided that a U.S. combination was the right way to progress our international expansion, so we started looking seriously at the options available."
The firm called in external consultants in December, and formed a merger committee that included senior partner Jonathan Blake, E.U. and competition head Stephen Kon, Paris managing partner George Pinkham, corporate head Steven Davis, and litigation head Craig Pollack and Day--then a partner in the corporate department.
After drawing up an initial long list of potential targets based on U.S. firms with complementary practice areas, geographies, and scale, the committee narrowed the pool to just over ten firms. Day confirms that tentative approaches were made to each of the firms on this list, which included SJ Berwin's U.S. referral partner, Goodwin Procter.
The two firms have a well-established relationship--Goodwin has even been subletting space in SJ Berwin's London headquarters since late 2009--but sources involved in the discussions say that the U.S. firm was more focused on developing its domestic business and wasn't ready to commit to such an extensive international play, particularly during a recession. (Goodwin declined to comment.)
With most of the other discussions similarly short-lived, the list was soon whittled down to just two: Orrick, Herrington & Sutcliffe and Proskauer Rose.
"It was an interesting strategic choice," Day says. "Orrick is almost the polar opposite of us. It's a strong, debt-led, finance firm; we’re a strong, equity-led, corporate firm. It has good capital markets but little private equity, we’re the opposite. It would have been an immediate diversification play."
Orrick's Asian practice was another major draw. Having inherited much of the former Coudert Brothers operations, the San Francisco-based firm now has a significant presence spanning Beijing, Shanghai, Hong Kong, Tokyo, and Taipei.
Proskauer, on the other hand, did not offer the same kind of international opportunities, but represented a "very strong complementary fit" in funds and private equity, Day says. The strategy committee had also decided that New York was of "crucial importance," Day adds, leading the firm to ultimately decide that Proskauer represented the "more powerful combination." (While Orrick has made headway in New York since launching in 1984--it is now the firm's fifth largest office--management still considers the firm's presence in the city to be underweight, according to senior Orrick sources.)
What happened next is the subject of some debate. Shortly after the Orrick talks ended, an internal memorandum from Orrick CEO Ralph Baxter, saying that "based on our discussions to date and the information now available to us, the team working on this does not recommend pursuing it further," was leaked to the press.
Having already seen a number of attempted mergers fall down in public--with Dewey Ballantine, Coudert, and Cooley, to name but a few--the document helped save Orrick from further reputational damage by suggesting that it was the one to have walked away. Several senior sources at SJ Berwin, however, now claim that it was in fact the U.K. firm that called off the talks, saying that a call was made to Baxter on April 26 informing him that negotiations would not proceed any further.
"It's not like an M&A transaction or running an auction process, you've got to decide which way you're going to go," says one equity partner with knowledge of the situation. "It's incompatible to be saying to two very different firms that we love you both equally."
Baxter categorically refuses to comment (as does Day), other than to express his "high regard for the firm," but Orrick sources insist that their leader's memorandum was accurate, pointing to SJ Berwin's faltering financial performance as just one of several factors that contributed to the U.S. firm's withdrawal.
It is true that SJ Berwin's real estate and private equity-focused practice has, like many others, struggled during the recession. In the last completed financial year, SJ Berwin's profit per equity partner (PEP) was just $678,000--less than half that of either Orrick or Proskauer. Although Proskauer declined to comment, management sources indicate that it was similarly concerned by the U.K. firm's recent financial decline.
"It would be misleading and naïve for me to say that profitability wasn't an issue," says Day. "You can work hard on quantifying business cases, but you get to the point where you need to take a leap of faith. It's far easier to make that leap when people on both sides are feeling confident, rather than thinking about risks and profits."
Day admits that the "disparity" in SJ Berwin and Proskauer's profits made an "already complicated deal even more complex," and that the two firms were looking at operating with a degree of "structural separation" should the merger go ahead, including maintaining separate profit pools.
However, further analysis reveals that the disparity is not as severe as it first seems. Comparing the two firms' partner profits throughout the past decade (see PEP graph below; click on the image for an expanded view) shows that SJ Berwin's profitability has been broadly in line with Proskauer's.
Its PEP was just 8 percent below Proskauer's following the dot-com boom in 2000 and actually exceeded its U.S. peers for three consecutive years beginning in 2005, although its profit margin and profit per lawyer--more objective measures of law firm profitability--remained below Proskauer's even during this purple patch. (SJ Berwin's profit margin was higher than Orrick's in seven of the last ten financial years, but was significantly lower in the last two.)
It is only during the downturns--the dot-com crash of 2001 and the global financial crisis of the last three years--that, without the large litigation practice characteristic of U.S. firms, SJ Berwin's more cyclical business has fallen away and struggled to generate profits to match Proskauer.
But even ignoring the profitability issue, the talks with Proskauer were beset with difficulties. The process got off to a bad start, with news of the talks breaking in the press almost as soon as they had begun.
"Pretty much the whole of our discussions took place in the public eye--before they even really got going," Day says. "[For mergers to be successful], you need a period to quietly work away at them in the dark, to come up with a business case to present to the partners. When you're trying to do that in the public eye, you start to suffer from the uncertainty that it creates."
This uncertainty began to take its toll. With the firm increasingly subject to rumor and speculation, SJ Berwin's partnership was becoming frustrated with the lack of official communication internally, according to several senior sources at the firm.
In fairness to SJ Berwin's management team, the fact that the talks were still at such an embryonic stage meant that there was little to report to the wider partnership. Still, by the time the negotiations were first discussed openly at the firm's annual partner conference last summer, they had become a divisive issue.
A number of senior partners left while the talks were ongoing. Banking partner Stuart Brinkworth started the exodus in June, moving to Hogan Lovells just a few months after being promoted from fixed-share to equity partner. Arbitration cohead and Russia practice leader David Goldberg was next, joining White & Case in August, with real estate head Jon Vivian leaving for Irwin Mitchell alongside three partners in September, and property litigator Michael Metliss moving to Berwin Leighton Paisner in November.
The continued losses made Proskauer uneasy, according to deep sources at the U.S. firm, but the talks were soon to face a more serious threat in the form of two contested management elections.
In August, news broke that SJ Berwin managing partner Ralph Cohen had stepped down early, a little more than a year into a new three-year term to which he was reelected in May 2009. Day, who was chosen as his successor over fellow corporate partner Perry Yam in a contested election, insists that Cohen first informed the board of his intention to stand down in April, a month before the talks with Proskauer started in earnest. But Day admits that the close-run battle--Day is understood to have been behind after the first round of voting, according to sources at the firm--was a "distraction."
"You can't be in Frankfurt talking to your partners about elections and in New York talking to people about merger terms," he says.
Proskauer's was also distracted by its own management balloting, which saw corporate partner Joseph Leccese winning another contested election in October to succeed incumbent chair Allen Fagin.
Despite both Day and Fagin (according to sources close to the negotiations) being strong supporters of the union, they were unable to salvage the deal.
"We got to a point where we were happy that the strategic idea [of the merger] was good, but we failed to carry the momentum required to pull it off," Day explains. "We were still several months away from being able to rebuild it to the point where we could present business plans to partners for consultation and vote. Having been subject to such uncertainty for so long, the thought of still being in that position for several more months was too difficult, so we decided to call it off."
While Day says that it 'wouldn't be prudent" for the firm to immediately pursue a U.S. merger with another target--"it would start looking like desperation, and that was never what we were about in this process"--he remains convinced that it is the "absolutely the right strategy" in the long term.
And with senior sources at SJ Berwin revealing that profits were up by 34 percent at the half-year stage of the 2010-11 financial year, the U.K. firm seems to be back on track.
"All law firms that want to be very serious international players will have to consider a move like this," Day says. "Looking at these opportunities is absolutely the right thing to be doing."
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