May 4, 2011 6:00 AM

LETTER FROM LONDON: There's Something About Canada

Posted by Chris Johnson

Every summer, rodeo fans flock to Calgary for the city’s annual Stampede. This year they may be joined by a posse of managing partners from Am Law 100 and other international firms, looking to rope a merger partner.

Top of the list of likely candidates are global giant DLA Piper and Clyde & Co, the U.K.’s sixteenth-largest law firm--both of which are currently in talks with Canadian firms about prospective tie-ups. London-based Clyde is in advanced discussions with Montreal insurance boutique Nicholl Paskell-Mede, while DLA chairman Frank Burch recently told U.K. publication The Lawyer that it has spoken to the majority of Canada’s leading firms, and remains in talks with "three or four."

DLA denies claims that it has resumed talks with 650-lawyer Fasken Martineau, which it previously courted in 2008, and declined to comment on other firms. However, sources close to the firm say that it has made approaches to Fraser Miliner Casgrain; Borden Ladner Gervais; and McCarthy Tétrault--the latter considered by many to be the number one target of international firms now looking at Canada.

A host of other U.S. and international firms are apparently investigating potential launches after merger-mad U.K. firm Norton Rose sparked the sleepy market into life last November by announcing its combination with 450-lawyer Canadian practice Ogilvy Renault. A senior source at White & Case confirmed that Canada is currently on the firm’s radar, while Vinson & Elkins is also being linked with a move north of the border. (Neither firm responded to requests for comment.) Adam Pekarsky, a founder of Canadian legal recruiter Perkarsky Stein, says that he has "never seen a period of volatility like the one we're seeing now."

Much of the action is centered on Calgary, Canada’s third-largest city and the home to its vibrant energy and natural resources industry, which has been attracting growing levels of interest from resource-hungry emerging markets.

China has been particularly active in Canada of late. Last April, Blake Cassels & Graydon advised state-owned oil giant China Petroleum and Chemical Corporation (Sinopec) on its $4.65 billion precedent-setting acquisition of ConocoPhillips’s 9 percent stake in Syncrude Canada Ltd., the largest operation in the country’s controversial oil sands. This March, Toronto-based Osler, Hoskin & Harcourt (which repped Conoco on the Sinopec deal) advised PetroChina Company Limited on its proposed $5.4 billion investment in Encana Corporation’s natural gas assets. The joint venture would be the largest Chinese investment ever in Canada’s energy sector.

Toronto firms have also been moving into Calgary in an attempt to tap into the booming market. Ogilvy launched a Calgary office last January headed by Scott "Rusty" Miller, former general counsel of Petro-Canada (now Suncor Energy Inc.). With the arrival of Torys in March, five of Canada’s seven leading firms--the so-called Seven Sisters--are now present in the city.

As for the native Calgary firms, Bennett Jones; Macleod Dixon; and Burnet, Duckworth and Palmer all could be attractive prospects for international firms seeking a foothold in the market.

"International firms that do establish a presence in the Calgary market will likely be acting for foreign investors rather than existing oil and gas producers, at least for the near term," says Burnet energy partner Alicia Quesnel. "After that, we'll have to wait and see. Many of the national firms that have a presence in Calgary are now part of the fabric of the legal community. Eventually, international firms could do the same."

There are many other factors that are attracting international firms to Canada. The country's banks did not require bailing out; the Canadian dollar is trading at record levels, and the country’s pension funds--such as Stikeman Elliott client the Ontario Teachers' Pension Plan--are aggressively buying assets abroad. It’s also a culturally compatible, predominantly English-speaking jurisdiction, making international law firm mergers relatively straightforward prospects. "Canada has emerged from the recession has one of the world's most stable economies," says Adam Lepofsky, president of legal headhunter RainMaker Group. "It seems to have awakened the world to the attractiveness of the Canadian market, but it’s surprising it has taken so long."

Shearman & Sterling and Skadden, Arps, Slate, Meagher & Flom have both operated small Canadian outposts for years, but only practice U.S. law. Baker & McKenzie, which first entered the market in 1962, is the only major Am Law 100 firm to have established a meaningful local law presence. A source in Baker’s management committee says that the firm is looking to "significantly expand" its 60-lawyer office in Toronto, which remains the country's key financial center.

However, the real question is whether the Canadian firms would actually be interested in an international merger. McCarthy entered into an alliance with Fried, Frank, Harris, Shriver & Jacobson in 2000 that lasted six years before the arrangement was terminated, but most firms appear reluctant to surrender their independence.

"Canadian firms have been a bit naive about the marketplace," says Jim Middlemiss, a Toronto-based law firm consultant at WebNews Management Corporation. "They’ve protected their market well but have been a bit slow in developing international practices. A lot still think they don’t need to merge with international firms."

“For the most part, major Canadian firms see themselves as being well positioned and will not see merger in their plans--at least for now,” says Macleod managing partner Bill Tuer, adding that his firm was "considering its strategic options."

It’s clearly a sensitive subject: of the 12 leading Canadian firms The Am Law Daily approached in relation to international mergers, only two others—Blake; and Davies Ward Phillips & Vineberg—would comment. And then only to say they weren’t interested.

There would also be the issue of relative profitability to contend with. Canadian firms are famous for their lack of financial transparency--McCarthy is the only firm to publicly disclose even its revenue. However, three senior headhunters confirmed that the market’s lower billing rates and associate leverage means that even the most profitable firms--such as Stikeman; Goodmans; and Davies--struggle to achieve average PPP of more than $1 million. A mere handful of star Canadian rainmakers earn more than $2 million, they add. Norton Rose avoided this potential hurdle by structuring its Canadian deal under a Swiss Verein, meaning that the two firms are not financially integrated.

For now, most Canadian firms seem happy to play the waiting game, but that could soon change.

"Ogilvy’s merger with Norton Rose served as a wake-up call to everyone," says Heenan Blaikie co-managing partner Norm Bacal, who admits that his firm has spoken to a few U.S. and U.K. firms--although not DLA. "We're not sure we quite understand why they did it, but we're looking at it with interest. We're sticking to our own strategy, but if DLA or another big firm came in, then we'd all have to really rethink what to do next. You could see a lot more [mergers]."

The market hangs tentatively in the balance. Another merger could push it over the edge.

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