Hogan-Lovells union faces many obstacles

Culture and compensation could complicate the deal

Lovells and Hogan & Hartson are considering one the riskiest manoeuvers in the legal business - a transatlantic merger, which in this case would create a global mega-firm of more than 2,500 lawyers, writes The National Law Journal.

That strategy can work (see DLA Piper) or turn to brass (see Clifford Chance). If Lovells and Hogan do merge, they will move from large - but not supersized - players to one of the world's 10 largest firms. Together, they would have $1.9bn (£1.2bn) in revenues, prominent corporate and litigation groups, an insurance practice (currently Lovells') that serves clients such as Prudential and Swiss Reinsurance, and Hogan's top-tier regulatory practice and client list that includes News Corp, IBM and KPMG.

"If the integration is done right, this thing could really sing," said Thomas Clay, an Altman Weil consultant who focuses on law firm mergers.

That's the good news. The tougher questions are ones that partners on both sides are likely to be struggling with at the moment. Can they overcome the client conflicts that plague massive firms - and seem to cap growth? How will they share profits: Will they pool their money, or, like DLA, will they maintain separate profits for the international and US operations? Can they reconcile Lovells' modified lockstep salary system with Hogan's more flexible compensation plan? And what about culture clash? How will the computer systems link up?

"These deals," as law firm ­consultant Peter Zeughauser puts it, "are really tough to put together."

Match game

For Lovells, the merger would give it a huge entree into the US market - with roughly 900 lawyers, up from its current 38. Hogan - already the most international of Washington's homegrown large firms, with around 20% of its team outside the US - would add large numbers in Europe: a merger would more than double the total number of lawyers Hogan has in Germany, bringing it from 60 lawyers in Berlin and Munich to more than 130 lawyers, and giving Hogan offices in Frankfurt, Duesseldorf and Hamburg. It would roughly quadruple the firm's headcount in the UK. The merged firm would also have offices in the key developing markets of Asia and Russia.

News of merger talks broke on 8 October when Legal Week and The National Law Journal posted articles about the discussions. Hogan and Lovells are not talking publicly about a potential deal. Legal Week reported last week that the two firms are in the early stages of talks, which were initiated informally several months ago.

"We don't comment on these types of matters," said Hogan chairman Warren Gorrell (pictured right). Lovells managing partner David Harris (pictured above) did not return a call for comment. A statement sent via email from a Lovells spokesperson said: "We review our US strategy on a regular basis and we have recently been taking a closer look at market developments and the opportunities that we believe are available to us. Beyond that, we are not in a position to comment further and are not going to start naming or confirming individual firms or the nature or progress of any discussions we might be having with them."

Several Hogan partners seemed caught off guard when news of the talks broke, saying they were first hearing of it when The National Law Journal called requesting their reaction. Others said they were still digesting it, signalling that word of the talks had been closely held. "I don't know the details about it," said Michael House, a partner and director of Hogan's legislative group. "I don't comment on things that I don't have sufficient information to comment on."

Consultants and recruiters who have worked on large mergers said the firms involved should rule out major client conflicts at an early stage and expect to cope with differing compensation systems. Legal Week reports that Lovells is to discuss the proposed merger at a meeting of its international executives on 28 October. A meeting like that signals the firm is serious about the merger, and has most likely already looked at client-conflict issues. "Once it's public knowledge, you've got to move quickly to make sure that things are completed," said Stephen Nelson, managing principal of The McCormick Group.

And there will still be other ­ potential icebergs. "There are so many ­potential differences," said recruiter Gary Miles of Alan Miles & Associates. "You've got things like how people get into the partnership, compensation structures, even the fiscal years might be different. And then you've got retirement ages. Many UK firms require you to retire at 55. And here in America, there have been court cases involving whether mandatory retirement ages are legal at all. There are a lot of things that have to be matched up."

In an interview last week, before news of the merger broke, Gorrell said Hogan has a flexible compensation system and partner pay differs from office to office. "There is a wide range in how we compensate our partners. We don't have to pay partners in smaller markets as much as we do in major markets like New York, or Washington, or London. We make sure our partners are compensated for what they do, where they do it." On its Am Law 200 survey, Hogan reported a 15:1 ratio of compensation for the firm's highest-compensated partner to that of its lowest-compensated partner during the 2008 financial year. Lovells, meanwhile, uses a modified version of lockstep compensation, though Legal Week reports the firm has pushed towards a more performance-driven culture.

Altman Weil's Clay said technology differences can also cause problems. "Technology has been the real bugaboo with some of these deals," he said. "It's going to be a big, big, important issue. We see some firms that end up a year or more later not integrating their technology the way they should, and that can really affect how the cultures come together."

When Clifford Chance (CC) merged with New York's Rogers & Wells and Ger­many's Puender Volhard Weber & Axster in January 2000, the adjustment was brutal. The firms were forced to deal with substantial conflicts that required either waivers or dropping the clients. Rogers & Wells' top earners took major pay cuts when the firm switched to CC's lockstep compensation system, driving them to leave for competitors.

So how do Hogan and Lovells match up financially? Billable-hour requirements, a strong reflection of a firm's culture, seem to be within striking distance. Legal Week puts Lovells at 1,700; Hogan requires associates to bill either 1,800 or 1,950 hours annually, depending on their track.

Both firms are suffering from the recession, and posted drops in partner profits for 2008, the first such drop in five years, according to the Am Law Global 100. Hogan's 2008 profits stood at $1.17m (£740,000), down 1.7%. Lovells reported 2008 profits of £586,000, a decline of -11.3%.

Gross revenue at both firms has long been comparable, putting them fewer than 10 spots apart on the Am Law Global 100 list for the past five years. The 2008 gross revenue was $922.5m (£583.7m) at Hogan and £531m at Lovells. Both firms have increased gross revenue each year for the past five years. The rate of growth in gross revenue for both has varied widely. For instance, Hogan's growth revenue jumped 11% between 2004 and 2005, slowed to 7.9% the year after, soared back to 16.6% between 2006 and 2007, and climbed a more modest 4.8% in 2008. Lovells boosted revenues by 12.7% in 2007-08, and 10.9% the following year.

The two firms' revenue per lawyer (RPL), though, showed a bigger spread. Hogan's 2008 RPL was $835,000 (£528,000), while Lovells' 2008 RPL was £354,000, which means the new firm would have made money less efficiently than Hogan does now.

Zeughauser, though, said a consequence of having a global firm is higher leverage. Currently, Hogan has a leverage of 3.8, or 1,111 lawyers to 292 partners. Lovells has a leverage of 5.9, or 1,421 lawyers to 240 partners. Combine those numbers and the merged firm would have a leverage of 4.8, or 2,532 lawyers to 532 partners. Zeughauser said that higher leverage doesn't mean the firm isn't still more profitable than firms with higher RPL. Also, he said that if the two firms are comparable on profits per partner, that's more meaningful. "With so many lawyers outside of the UK, that's going to drive Lovells' RPL down," he said.

For instance, the Am Law Global 100 survey shows that DLA Piper, which has 64% of its lawyers based internationally, has a 2008 RPL of $590,000 (£373,000) if its US and international operations are combined. Its international operations alone, however, post a lower RPL of $440,000 (£278,000).

New competition

Hogan's Washington office is the highest-grossing in the region. The firm has jockeyed with rival Wilmer Cutler Pickering Hale and Dorr for the past few years for bragging rights as the largest office there. Hogan has posted higher profits per partner than Wilmer for the past three years, despite lower gross revenue and revenue per lawyer.

If the merger goes ahead, the firm's new natural competitors would be firms higher up the Am Law Global list such as Latham & Watkins (ranked seventh this year), Jones Day (eighth) and the magic circle firms.

Still, "Hogan is always going to be Hogan in DC," said Anthony Pierce, the managing partner of Akin Gump Strauss Hauer & Feld's Washington office. "I don't see a bunch of Lovells guys coming over here." Eric Bernthal, managing partner of Latham's Washington office, said that "Washington is filled with all kinds of firms. We have a lot of firms that originated in DC. We have a lot that came from outside Washington. And we've even started to get a presence of magic circle firms, so I don't see this affecting Washington all that much."

A more pressing question might be how a merger would change the firm's culture, something partners at Hogan themselves must be wondering about.

Former Hogan partners said the century-old stalwart has tried to be family-friendly. Terri Reiskin, a litigator who left Hogan in 2006 after a push for higher billing rates became increasingly difficult for her auto industry clients, said Hogan "was a place where you didn't make the most money in town, but you had the opportunity to do good work, but also have a personal life." Reiskin, now a name partner in Washington-based litigation boutique Wallace King Domike & Reiskin, said the firm was made up of "very good people, good lawyers, good people, nice friendly welcoming environment."

Until now, Hogan was known for growing through lateral recruitment rather than big mergers. Current partner Janet McDavid, a former member of the firm's executive committee who has been involved with lateral recruitment, said the firm has been careful to recruit new partners who are a good fit. "We spent time with the people," she said, before news of the merger was announced. "That was true, for example, when we brought in the [Heller Ehrman] folks in the [San Francisco] Bay Area. The folks that I work with, it's just been seamless."

William Wright, now a Los Angeles-based partner at Orrick Herrington & Sutcliffe, left Hogan in July 2008. He said Hogan's culture is conservative. "I always felt uncomfortable dressed as a Californian when I was in the DC. office. It's a bit more proper and formal there."

One key feature of the firm is its centralised management structure, he said, adding that "every partner has a say, but Warren Gorrell has been driving the direction of the firm."

And Gorrell has made no secret of desire for global growth. In an interview last week before news of the merger talks broke, Gorrell said Hogan needed to grow more quickly, despite the down economy.

"We think this is a good time to be focused on expansion," he said. "While we're not immune to what's going on, this is a good time to continue to build."

The National Law Journal is a US sister title of Legal Week.