Allen & Overy and Shearman plan merger to create $3.4 billion law firm

“Magic circle” law firm Allen & Overy is merging with New York’s Shearman & Sterling to create an approximately $3.4 billion practice in one of the largest transatlantic legal mergers in history.

The merger, which requires a vote by partners at both firms, would create one of the world’s largest law firms by fee income and comes months after Shearman, 150, abandoned merger talks with Hogan Lovells.

Allen Overy Shearman Sterling, as the newly merged firm is known, will have almost 4,000 lawyers in 49 offices.

The proposed deal is the first merger between a London-based magic circle firm and a US rival since Clifford Chance merged with Rogers & Wells in 2000. It is also a big step forward in Allen & Overy’s quest to conquer the lucrative American market. the collapse of an attempted merger with California firm O’Melveny & Myers four years ago after the two sides could not agree on a valuation.

The contact follows a tumultuous period for Shearman, which lost a number of lawyers in a break-up with Hogan Lovells earlier this year and has undergone a difficult restructuring.

Allen & Overy managing partner Wim Dejonghe said in a statement: “We believe A&O Shearman will be a firm unlike any other in the world.”

Speaking to the Financial Times, Dejonghe explained that the tie-up would give both companies crucial scale in London and New York. Allen Overy Shearman Sterling will have “more than $1 billion in U.S. revenue, 30 percent [coming from] in the UK and 40 per cent in the rest of the world and I don’t think anyone has that,” he said.

London-based Allen & Overy – which posted revenues of £1.9bn in the year to the end of April 2022 and employs around 5,800 staff worldwide – has long sought a move into the lucrative US market, which has proved difficult for London. based companies to hack.

Meanwhile, Shearman, which has a total of 1,350 employees and reported revenue of $907 million in calendar year 2022, has been looking for ways to grow and increase profitability after finding that its existing global network brought higher costs but inadequate scale.

Allen & Overy’s “number one strategic priority [has been] to reach lawyers of the same depth and strength in the United States, and specifically in New York, and this provides us with that in one step,” said Dejonghe about the new office boasting a large number of lawyers. He added that both companies “qualified, but we didn’t have enough teams – we didn’t have enough in the US and Shearman lacked them in the rest of the world”.

Both firms said they are looking to build stronger expertise in private equity, life sciences and the energy transition. Shearman will be represented in global leadership positions in the combined company.

Adam Hakki, Shearman’s senior partner, said the two firms “know each other extremely well and have been researching things for years” but that “focused discussions over the past few weeks” have brought them closer to serious proposals.

Shearman, once one of Wall Street’s most powerful advisers, has cut back on lower demand in recent months. It has also undergone restructuring to focus on its more profitable regions, such as the United States, and on profitable sectors, including private equity.

The firm suffered from a lack of economies of scale in its network of offices and struggled to compete with more profitable US rivals who were able to offer higher salaries to their partners. Allen & Overy faced a similar problem as it sought to grow in the U.S. market and in recent years has made changes to its compensation system that allow it to pay more to its star partners.

Shearman’s private equity partners took home an average profit of $2.48m last year, compared to just under £2m for Allen & Overy partners. Both companies have said that unifying their pay structures will not be difficult.

The deal is expected to be handed over to the partners of both companies before the summer, with the aim of being completed within 6-12 months.