Author: Georgina Stanley, Pui-Guan Man
15 Feb 2013 | 00:00
Two decades ago, Norton Rose's fortunes looked bleak. Today, thanks to a quick succession of mergers, it is a global powerhouse. But as the firm's key players tell Georgina Stanley and Pui-Guan Man, the hard work has only just begun
When Norton Rose's merger with US firm Fulbright & Jaworski goes live on 1 June, it will have completed its fifth tie-up in just three-and-a-half years.
Given that even one merger is beyond the ability of many of the UK's leading players, the achievement cannot be underestimated.
The unions mean that in just 42 months, Norton Rose will have transformed itself from an also-ran UK law firm with a smattering of international offices and turnover of £314m into a global giant operating in 55 locations around the world with revenues approaching £1.3bn.
Not only have the deals transformed the firm itself, but they have also helped change the legal market.
A new-found acceptance of mergers without financial integration, driven in part by Norton Rose, has helped create a new band of credible players with the scale and spread to provide real global alternatives to the magic circle and leading US firms without the hefty price tags and huge profits per partner.
Little wonder that earlier this year, Norton Rose Group global chief executive Peter Martyr (pictured) – who will hold the same role at Norton Rose Fulbright when the deal goes live – took a well-deserved holiday. Little wonder it was his first holiday in two years.
But while only the most cynical could truly knock what has already been achieved, what comes next will be every bit as difficult and important as the mergers themselves.
As Norton Rose LLP chairman Stephen Parish comments: "Our generation has done the mergers. That's not the hard work, it is just time consuming. The really hard work comes now and it is how you develop that platform.
"That is going to require the efforts of 1,250-odd partners to make it happen, whereas putting the deals together was the brainchild of a comparatively small group of partners working with people of a similar mindset."
Rising from the ashes
Norton Rose's history is well documented. Not one, but two IRA bombs in the 1990s rocked the firm financially and left its partnership scarred.
Meanwhile, some poor decision making – typified by the failed dalliance with the national M5 Group alliance alongside firms including Wragge & Co – delayed moves to internationalise just as many of its rivals embraced global expansion.
"The shift in international strategy was part of an evolutionary process, not a big bang," explains Martyr.
"[The UK business] was, and is, an international business with an international client base. This was where we were pointed 10 years ago, but we were too small then to embark on the office launch strategy of some of our rivals. It meant our choices were limited as we weren't set up to be national."
As Norton Rose licked its wounds in London and dabbled with small-scale international growth, its rivals were starting to benefit from their earlier efforts to internationalise.
The result was profit levels that lagged not just the magic circle, but City rivals such as Ashurst and, by 2005-06, Simmons & Simmons. Perhaps inevitably, the firm has suffered a steady trickle of senior departures since the early 2000s.
The approach changed in 2008. More than a decade after senior figures in Norton Rose's management team acknowledged the need for a fundamental shift in its international approach, Martyr – a disputes partner who had been elected as chief executive in 2002 – received the directive he needed from partners to realise this long-held ambition.
In the 2007-08 financial year, Norton Rose had achieved a 27% growth in revenues. This compared very favourably with an 11% growth in turnover at Clifford Chance (CC).
Yet Martyr pointed out to the partnership that even with that rate of growth, it would take years to catch up with CC, let alone if trading conditions became more difficult.
The point-proving exercise secured him the mandate to pursue his vision of bolting on businesses like a jigsaw puzzle in order to grow.
He was also given free rein to pursue unions with other firms without the need for regular consultations with the partnership.
"We asked partners if they agreed that this was what we needed to do and that we would initially need to develop this strategy with a lead team of partners only," says Martyr.
"We got support on both points and so far, it seems to have worked."
Parish (pictured) adds: "The reality was that the management team had been considering our strategy for a number of years before 2008. I remember retreats with charts saying ‘This is where we are and where we want to be'.
"It meant that as a management group, you got comfortable with that philosophy then, gradually, over the years, the idea got drip-fed to the partnership way before any deal was on the table.
"This meant that when we came along with the deal, it wasn't a surprise and people were already on board.
"Peter was the ideas man. He saw this was a good route for us to follow and then walked everyone along the way.
"Lawyers are conservative and don't like change, so it does take someone evangelised to say 'This is what we should be doing and this is why'."
Step by step
Martyr may have had a clear vision of what the firm's future should be, but he was also aided by circumstance.
The 2010 union with Australia's Deacons was the building block for all of Norton Rose's subsequent efforts.
Yet it was Deacons which first approached Norton Rose about a possible merger, with the initial contact coming as early as 2008 and the tie-up agreed in June the following year.
Wayne Spanner, Australia head, comments: "Back in 2006, Deacons spent quite a lot of time thinking about the future.
"We could see a trend of globalisation, and a political and economic shift from the West towards the East that we knew we had to be part of. We started to talk to Norton Rose around 18 months before we did the deal".
Now suddenly, it was Norton Rose that was ahead of the pack. Many of the leading UK firms have since piled into Australia in a bid to share the spoils of the resource-rich nation and its links with China.
These include close rivals Herbert Smith and Ashurst, which have both sealed tie-ups with local firms.
At the time, though, while Norton Rose's management had Australia in their sights before Deacons' approach, the US was still very much the main target, with Australia expected to come later.
Knowing Deacons would speak to other UK firms and not wanting to lose out on what it recognised was an important market, Norton Rose chose what it believed would be a risk-free option: a deal without financial integration.
It adopted the Swiss verein structure already in use by firms such as Baker & McKenzie and DLA Piper. The structure allows for revenues to be combined but for each part of the business to maintain separate profit pools.
Not having to merge profit pools makes tie-ups far more straightforward as different financial year-ends, differences in profitability and the tax issues associated with a full merger can all be side-stepped.
The structure has since been adopted not just for Norton Rose's subsequent deals but also those of Hogan Lovells, Squire Sanders and Dentons.
Once considered very much second best when compared to a full merger, a Swiss verein is now seen as a credible alternative to financial integration.
Sealing the Deacons merger prompted a strategic rethink at Norton Rose. The firm put its US merger ambitions on the back burner and instead focused on bulking up its coverage in the rest of the world.
In short order, it secured two mergers in Canada and one in South Africa.
"Australia allowed us to start our strategic growth and gave us a good shot in the arm with good new people," explains Martyr.
"It was the catalyst for reshaping the legal market and helped us reshape how we did things. We had been thinking of the US as the main part, but we ended up coming at it last.
"The States was ultimately where we wanted to be, but this gave us additional opportunities."
You had me at hello...
Getting the Deacons merger off the ground meant that Norton Rose had gained valuable experience by the time it moved into Canada and South Africa. So much so that it was able to do the two deals together.
After all, there was no need to even look at financial integration – the firm already had a functioning alternative structure that made adding new parts relatively straightforward.
Like Deacons, the Canadian firm Ogilvy Renault was already reviewing its international strategy with a view to addressing its lack of global reach when a chance meeting in late 2009 between its chairman, John Coleman, and Martyr at a managing partners' conference ignited the talks.
Coleman had been impressed by Norton Rose's Flex programme. This had seen the firm set itself apart from most of its City peers by avoiding post-Lehman partner culls and redundancy rounds in preference for asking fee earners to work reduced hours on reduced pay.
He was also attracted by Norton Rose's focus on industry sectors, known internally as its ‘headlights' strategy.
"The very first thing we looked at was whether we were culturally compatible – you can't change a firm's culture," comments Coleman.
"Two of the key factors Peter had right were the headlights focus and fostering a culture of respect for lawyers and staff.
"On a practice level, Norton Rose was lacking weight in the pharma and intellectual property business that we were able to add our strengths to, while we were lacking Asia.
"For us, it was like a Jerry Maguire ‘You had me at hello' moment."
As was the case with Deacons, both the Ogilvy deal and the simultaneous addition of South Africa's Deneys Reitz to the group were opportunistic and quick.
Both firms were struggling to provide an international offering to their clients and were wary of losing out to international rivals.
Before Ogilvy joined forces with Norton Rose, it had held talks with Macleod Dixon with a view to strengthening its offering in Western Canada. The addition of this second Canadian firm was the next piece of the jigsaw.
All the while, Martyr stuck with his previously articulated policy of only informing a handful of partners about the talks.
In each case, many of Norton Rose's partners only became aware of the deals shortly before they were asked to vote them through.
Surrounding the States
By June 2011, while Norton Rose still lacked the US presence it craved, it was in a very different position in terms of finding a suitable partner.
With more than 2,500 lawyers across 38 offices, Norton Rose Group was now one of the biggest law firms in the world by both headcount and revenue.
Crucially, due to the willingness, and in some cases active desire, of its merger partners to sacrifice their names, the Norton Rose brand had not only survived, but had strengthened, gaining a reputation in three continents on top of Europe.
In addition, the mining and resources strength of all of the merger partners meant the offering looked joined up.
After surrounding the US with its geographic expansion, it was time for the firm to re-ignite its search for a US merger partner, and Norton Rose started speaking to dozens of firms.
Tim Marsden (pictured), deputy managing partner, comments: "We couldn't not do anything or we'd have been left in the crush zone where, come the next recession, everyone would go shopping.
"[The way we did it] was all very much planned. We spoke to many firms over a period of about eight years. It was about building relationships and understanding what was out there – trying to get a feel for a highly-skilled market."
In contrast to the deals that preceded it, the merger with Fulbright was not remotely opportunistic.
The two firms knew each other well, having enjoyed a close relationship going back many years. They also had a similar industry focus.
While Norton Rose had frequently come knocking on Fulbright's door in the past, this time round, after a difficult few years, it was Fulbright that was keen for a tie-up.
The US firm, founded in Houston in 1919, is known for its strong energy practice as well as its healthcare expertise and booming disputes practice.
But while its revenues put it within The American Lawyer's top 50 law firms, its profitability and other metrics have regularly lagged behind and there is a sizeable profits gap with its Houston peers Vinson & Elkins and Baker Botts.
Revenue, lawyer count and profits per partner have all been drifting downwards since 2008, with estimated turnover for 2012 standing at $587.7m (£378m).
Legal Week reported in 2011 that Fulbright was consulting its partners on whether it should explore a merger with Norton Rose, with the pair starting informal discussions around spring the following year.
From Norton Rose's perspective, the timing could not have been better.
While it had merged its way to continued growth, Fulbright looked to be on the wane, making the timing of this deal far more favourable.
Parish says: "We'd always had a close relationship, we'd done very careful analysis of the market and Fulbright always came out on top."
Fulbright chairman Ken Stewart adds: "The decision to join forces with Norton Rose came after long and careful consideration. The more we spoke with Norton Rose, the more we knew that it was the right move.
"Global businesses are looking for law firms that can provide a global platform and a broad range of services. That's what this move gives us. We knew Norton Rose well, we had worked closely for more than 10 years and we are strongly complementary.
"Our cultures are built on our people, innovation and client service, and cultural fit was a key factor in our decision to combine."
In just a few years Norton Rose Fulbright, as it will soon be known, has become a global giant. Based on 2011 revenue rankings for the world's largest law firms, it will sit comfortably within the top 10 at around sixth place, just behind Latham & Watkins and CC.
This compares with Norton Rose's 14th position before the US deal.
The commitment to the headlight sector focus, which covers six industries, means that in contrast to other international leaders, Norton Rose is not trying to be everything to everyone.
Instead, its efforts are concentrated on very specific areas.
As the managing partner of one City firm comments: "If you are a client looking for a global energy offering for example, Norton Rose looks like a very good bet indeed."
While the firm claims not to measure referral activity between the different parts of the business, some of the positive benefits of Norton Rose's mergers have already become apparent.
In Australia, since the merger, turnover has grown by 10% year-on-year, the firm has made 26 lateral hires and it has managed to secure high-profile mandates from clients it would previously have struggled to win, such as transport company Bombardier.
The firm's global links have helped it win new clients in the UK, such as Danish utilities company DONG Energy and Toronto mining company Barrick Gold.
New panel appointments on the banking side, thanks to the tie-ups, include Royal Bank of Canada, Standard Chartered and ANZ.
And this is all before the addition of Fulbright, where shared clients include GlaxoSmithKline, AIG, Bank of America and Bayer Corporation.
On a practice level, the Fulbright merger adds significant litigation capacity. Norton Rose is planning to ramp up the rest of its disputes practice globally to reflect this strength.
Litigation head Deirdre Walker comments: "One of the things the international mergers have crystallised is that the disputes practice was underweight within the [UK] LLP.
"Two years ago, it accounted for around 14% of income. It is now 18% and there are plans to grow further. In contrast, at our merger partners, disputes brought in between 30% and 50%."
The deal will also add a global investigations practice to the business at a time when regulatory work and white collar crime is becoming increasingly high-profile and lucrative.
Most importantly though, the mergers provide a level of scale that would be hard to find anywhere else.
To date only DLA Piper, Bakers and Hogan Lovells can really provide a similar kind of coverage across both the UK and US (and Hogan Lovells does not yet have anything in Australia or Canada).
It is a model that looks set to pile pressure on several parts of the market – the squeezed mid-tier City players such as SJ Berwin, Simmons and CMS Cameron Mckenna through to the magic circle, which may argue they provide a more elite service, but cannot come close to providing a similar level of coverage.
As Martyr comments: "Our strategy is based on there being global giants and us being one of them. Global wins."
So far... so good
Thus far, there is no denying either the case for the mergers or the ease with which Martyr and the management team have pulled them off.
The firm has made the process of both carrying out international mergers and going global look positively easy – no doubt to the pain of many of its rivals.
But the work is far from over. To date, the plan has been clear and the firm has achieved everything it set out to do.
Now Norton Rose has to achieve something harder still: it has to pull everything together into a single, functioning firm growing in its own right and not simply through acquisitions.
Some of this will be time-consuming, but relatively straightforward. After all, the firm does now have a 120-page book on integration.
HR, IT, finance systems and other back office functions will have to be integrated with the US, and at some point between now and June the firm needs to formalise what its management structure will look like.
This means finalising practice group heads, headlight group leaders (currently the firm has single global practice and headlights heads), and the size and shape of its executive team and supervisory board.
Further global expansion will also be relatively easy to achieve once decisions have been made on how to split the cost of financing planned moves into Brazil, South Korea and Turkey in the shorter term and jurisdictions such as Nigeria and elsewhere in Africa, Mexico and mainland China later down the line.
Rivals, however, question whether Norton Rose's strategy is as clear cut when it comes to the deeper question of what the ultimate goal is.
According to Martyr, the mission is to do the best legal work globally and be an elite firm that is recognised for its work in specific industry sectors.
It also wants to keep its reputation for having a more collegiate and considerate culture than many of its peers. According to Marsden, brand recognition is going to be the key going forward.
But none of this sounds terribly easy to quantify.
Chris Carroll, outgoing senior partner at Travers Smith, is generous in his assessment of the firm's achievements thus far, but echoes most observers when it comes to the firm's future challenges.
"They have distinguished themselves from their peers, their practice focus is good and they've got their name out there. They have now got international coverage, bulk, revenues and momentum.
"The only thing missing – the elephant in the room, if you like – is profitability. It looks like that is still work in progress."
Norton Rose's management, however, insist that profitability is not going to be the primary benchmark against which to measure the firm's success.
As Martyr comments: "We spent many years in deep anxiety about how to become magic circle, but now we realise that you don't need to. We operate in a different place and are comfortable in our own skin.
"Why does the legal profession want to crow about how much it earns? Of course, profit should be good and people need to want to work for you but it's an elephant in the room."
To an extent, he is right. Earning more than £1m a year should not be the norm within law firms or the ultimate goal in terms of success.
But there does need to be an alternative measure by which to gauge success and, in order to hire the best people and retain them, firms cannot fall too far behind their most comparable peers.
As one partner at a rival firm comments: "Sometimes, nice is not enough. I don't care if nobody has heard of our brand as long as we are making some money. Ultimately, that's why people come to work."
And so far, while the mergers have made a huge impact on revenues, they are yet to have a tangible impact on profitability.
Profits per equity partner (PEP) for the UK partnership were hovering at around £477,000 in 2011-12 – roughly £50,000 lower than in 2000-01 (see graph).
"We could always do better on profits, but we do take a long-term view," concedes Martyr.
"We've been growing all through the recession, we manage our finances conservatively and grew net profit, etc.
"All our metrics are going in the right direction and I think we are seeing the benefits of becoming global. It is not our aim to be profitable at any cost."
At present, financial integration is not on the agenda for Norton Rose, with partners arguing that Nirvana is not a single profit unit.
But without any shared profits or single remuneration structure, some argue it could be hard to motivate partners within different parts of the business to cross sell.
Hogan Lovells, for example, has two separate profit pools, but then combines them into a single notional pool from which partners are paid on the same remuneration structure.
Even DLA Piper is set to return to the thorny issue of financial integration after skirting around it for years.
In the longer term, there is also the issue of succession. Martyr's vision and energy coupled with the support of his firm have proved to be a phenomenally successful formula.
But some former partners question whether all within the firm will continue to swallow Martyr's autocratic style of leadership now that the firm has moved into a new phase of its development.
Plus there is an issue as to how long Martyr, who is in his late 50s, can keep going at the same pace with the same level of support.
The firm would not confirm its partner retirement age, believed to be 65, but Martyr's current rolling term as global chief executive is due to end 18 months after the merger goes live.
Considering where the firm was in 2009 and even 2010, after its Australian merger went live, Norton Rose has been on a remarkable journey.
It now sits in a privileged position as one of a small group of global giants alongside the likes of Hogan Lovells, DLA Piper, Latham & Watkins, Skadden Arps Slate Meagher & Flom, Linklaters and CC.
That is some turnaround for a firm that had spent much of the 1990s and the first few years of the 21st century losing ground to its rivals.
For a firm that prides itself on a collegiate culture, it is also striking that this success is so closely associated with a single person.
While the firm had long recognised the need to expand internationally, successive management teams had struggled to gain buy-in for their plans.
That changed with Martyr, who exploited a history of strategic errors and indecisiveness at the firm by winning the case for decisive action to achieve the firm's goals.
He then went on to use his power with skill, most notably by making the Swiss verein fashionable, and also by recognising that the culture that had held the firm back for so long could now become its secret weapon.
With eye-catching initiatives such as the Flex programme, Martyr sent a signal to firms that operated in less cut-throat markets than the UK that Norton Rose could be a safe harbour if they needed a global platform.
True, he also got lucky in that he secured this mandate at precisely the time when several quality regional firms across the world were coming to the conclusion that they did indeed need to bulk up.
But he was prepared to ride this luck and had the vision, flexibility and freedom to adapt the overall plan to the circumstances to impressive effect.
It will, nevertheless, be impossible to judge the true success of Martyr's legacy for several years to come.
As Parish comments: "What we've achieved for our partners is possibly the best international platform of any law firm. It's now up to them to exploit that and boost profitability.
"The competition is now much more limited and theoretically at least that should let us grow profitability.
"Peter isn't particularly interested in what happened last week. He is much more interested in what's going to happen tomorrow. Now we all have to make it work."
While long-term success will depend on the efforts of the wider partnership, it would take a brave person to bet against Martyr driving them to achieve just this.
NORTON ROSE: EVOLUTION OF A GIANT
June 2009 Norton Rose partners approve merger with Australian firm Deacons
January 2010 Norton Rose Group goes live
November 2010 Firm announces launches in Canada and South Africa through mergers with Canada's Ogilvy Renault and South Africa's Deneys Reitz
June 2011 Ogilvy and Deneys join the Norton Rose Group, taking headcount to more than 2,500 fee earners across 38 offices
October 2011 Norton Rose announces second Canadian merger with Calgary's Macleod Dixon
January 2012 Macleod Dixon joins the group, adding a further 250 fee earners
November 2012 Firm confirms US merger with Fulbright & Jaworski
June 2013 Norton Rose Fulbright to go live with about 3,800 laywers and revenues of $2bn (£1.28bn)
NORTON ROSE FULBRIGHT: THE FACTS
• 3,800 lawyers
• $2bn (£1.28bn) revenues
• 55 offices
• 11 offices and 800 lawyers in the US (Austin, Dallas, Denver, Houston, Los Angeles, Minneapolis, New York, Pittsburgh-Southpointe, San Antonio, St Louis and Washington DC)
• Additional offices in London, Riyadh, Dubai, Beijing, Hong Kong, Munich, Bogota and Caracas, plus seven offices in Canada and five in Australia
• Headlight sectors: energy; pharmaceuticals and life sciences (including healthcare); financial institutions; infrastructure, mining and commodities; technology and transport
• Core practice focus: litigation and disputes; corporate; intellectual property; banking and finance; global regulatory and investigations (new)
• Management: Peter Martyr (global chief executive); Ken Stewart (managing partner US plus leadership role on global executive); Adrian Ahern (appointed global chairman for one year from May 2013)
• Financial structure: Swiss verein; five separate partnerships (US; Canada; Australia; South Africa; and UK, Europe, Middle East and Asia) each with its own profit pool from which partners are paid. Efforts have been made to bring remuneration structures in line with merit-based elements, but there are no current plans for full financial integration and a single profit pool
NORTON ROSE FULBRIGHT: REACTION
Chris Carroll, senior partner, Travers Smith
"I don't think you have to have something more than a verein. Clients couldn't give a stuff if you're financially integrated as long as they get a joined-up service.
"I think they may be too big to integrate now, anyway. It's early days and difficult trading conditions, but all the bricks are in place for a structure with potential."
Quentin Poole, senior partner, Wragge and Co
"I think it's a really good merger and a major plank in Norton Rose's long-term strategy. It started to put together a global firm through a series of strategic mergers in order to make itself bigger and stronger.
"My guess is that it did so before approaching a US firm, in part to give it a better hand at the negotiating table."
Charlie Geffen, senior partner, Ashurst
"They've done extremely well to identify a clear strategy and have executed it superbly. I think they've done exactly the right thing – they have proven how important a brand can be and have played a leading part in the consolidation of the legal sector in the process.
"It's a lesson for all that the old order is far from settled."
US firm chief executive
"Fulbright is a pretty darn strong law firm. The combination strikes me as somewhat defensive, though, in the sense that you have got two firms merging in order to disguise weaknesses.
"You sometimes get mergers that are quite successful in complimenting areas they are weaker in."
Top 10 global law firm leader
"What they've put together in a very short space of time is what appears to be a global capability. They've helped redefine the legal market, recreate it and there's nothing wrong with that. Now though it's all going to depend on how they integrate it and market to clients.
"You need to have something to motivate partners to work together and I think that will be hard without common financial incentives.
"It will also be interesting to see how they run themselves at a management level, for example, will they have single global practice heads and a single client programme?"
"You can't claim to be a truly global firm without a presence in the US. The global game is very much on and at the moment they have set the pace.
"The challenge now is integration – at the time you do the merger, you've only done about 25% of the work."
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