Allen & Overy in merger talks with US West Coast firm O'Melveny & Myers

Allen & Overy (A&O) is in merger discussions with US firm O’Melveny & Myers, Legal Week can reveal, with the magic circle firm edging closer to a long-sought transatlantic tie-up.

If a merger between the two firms were to go ahead, it would create a business with a combined revenues of £2bn ($2.8bn) and a total lawyer headcount of about 3,000.

Details of the talks have, to date, been contained to only a small number of senior figures, although A&O partners were told in January that the firm was in discussions with several US firms about a potential combination.

According to a former O’Melveny partner, the firm is in “deep” merger discussions with A&O. Firm leaders have travelled to meet one another and they have discussed titles of the combined firm, the source said.

A&O is understood to have held talks over potential tie-ups with a number of US firms in recent years, and the magic circle firm has been open about its need to increase its presence on the other side of the Atlantic.

One A&O partner said: “We have to have critical mass out there from both an offensive and defensive position. I definitely see the case for us to do something.”

It is understood that the talks are being led on the A&O side by senior partner Wim Dejonghe and managing partner Andrew Ballheimer, who prioritised the need for US expansion when running for their roles in 2016.

Los Angeles-based O’Melveny, which since 2011 has been led by chairman Bradley Butwin, has been exploring growth options during the past year. Legal Week sister publication the New York Law Journal reported that the firm held preliminary merger discussions with Willkie Farr & Gallagher within the last year, but that the discussions never went far. Both firms denied they held merger talks.

The two firms have similar profitability, with O’Melveny seeing profit per equity partner (PEP) rise 3% to $2m (£1.4m) in 2017, while A&O posted PEP of £1.51m ($2.1m) for 2016-17.

O’Melveny grew revenues by 1.7% to reach $738m (£526m) last year. The US firm has posted modest revenue rises in recent years after less than stellar financial results in 2014, when revenue slipped 9.3% and PEP dropped nearly 8%, after a year which saw a six-partner team including high-profile London partner Libby Savill leave for Latham & Watkins.

The US firm has scaled back its presence in Asia in recent years, after a series of partner departures to rivals, and at the end of the last financial year it had 660 lawyers across its 15 global offices.

Alongside five US west coast bases and sizeable offices in New York and Washington DC, O’Melveny has small outposts in London, Brussels, Beijing, Hong Kong, Seoul, Shanghai, Singapore and Tokyo. Its UK base, which according to its website is staffed by seven partners and 17 other lawyers, has been led since 2015 by tax partner Jan Birtwell, who joined from Linklaters in 2005.

A&O, meanwhile, has two existing US offices in New York and Washington DC, the latter of which was launched by a team of former O’Melveny lawyers in 2011. The firm has made a number of senior hires in the US in recent years, including a team of finance partners who joined from White & Case and Proskauer Rose in 2016, although one of that group – global leveraged finance co-head Scott Zemser – recently left to join Mayer Brown.

The UK firm enjoyed a standout 2016-17 financial year, posting double-digit growth across all key metrics, with revenue and PEP rising to record levels. The firm added more than £200m to its top line, with revenue rising 16% to £1.52bn against a 26% hike in average PEP to £1.51m.

The combined revenue total of £2bn ($2.8bn) would place the merged firm near the summit of the Global 100 rankings, just below Kirkland & Ellis and Latham, both of which have passed the $3bn mark this year, and ahead of DLA Piper, which took in $2.63bn (£1.87bn) last year.

Commenting on the latest discussions, one former A&O US partner said: “There was always a gap between the economic and cultural quality of the type of firm you can attract and the quality of the firm that A&O partners would be happy to call a merger equal. That gap has narrowed in the last year – A&O turned in a very strong year and remains a well-regarded global firm. The number of potential quality merger partners has increased as a result.”

Dejonghe’s predecessor, David Morley, previously admitted that he would have liked A&O to have made more progress in the US during his leadership tenure. In a candid video interview with Legal Week in 2016, he predicted that his successor would lead the charge for A&O in the US and said UK law firms needed to rethink their approach and be more open to merging.

In a statement, A&O said: “While we have said for several years that we are open to considering a merger with the right partner in the US, we talk to many law firms in many countries all of the time and we do not comment on market speculation and rumours regarding any particular firm.” An O’Melveny firm spokesman added: “We have no plans to merge and never have.”

Additional reporting by Christine Simmons