Making waves: Opportunities and trials in a transatlantic merger

The combination of Kirkpatrick & Lochart and Nicholson Graham & Jones is the first law-firm transatlantic merger of the year, but there are signs that more will follow as firms look to internationalise their services. Caroline Poynton talks to Michael Johns and Tony Griffiths of Nicholson Graham & Jones and Peter Kalis of Kirkpatrick & Lockhart about the strategy behind the merger and what it reveals about the changing landscape.

It seems a little sad to see a UK firm with the history of Nicholson Graham & Jones (NGJ) completing its merger with a much larger US operation like Kirkpatrick & Lockhart LLP (K&L). The UK firm of 48 partners has a proud history dating back to the 1860s and, while it is not a stranger to merger (having combined with property firm Brecher in 1995), this transatlantic move will inevitably reinvent the firm as the London office of an international operation. And success will spell the end of NGJ’s complete independence – an expansion strategy that some would say is a compromise too far.

Senior partner Michael Johns and managing partner Tony Griffiths say that the firm had come to a crossroads where some kind of change had become necessary. Steady growth from the post-war period to the late 1990s had created a good if quiet reputation for the City firm, but changes in the market have forced many firms to rethink their strategies in recent years, NGJ included. “I think a number of us here and elsewhere began to think that the big boom of the late 1990s had ended and the position of mid-tier firms was numbered,” says Johns. By this time, the firm was enjoying a very respectable £27m turnover, but Johns recalls the competitive landscape, in which firms were being squeezed and pushed into NGJ’s territory. “We all thought that there were too many firms competing for a dwindling amount of work. There was a big pressure on fees and the search for talent, and an environment of low inflation and low interest rates in which clients generally were expecting to pay less rather than more for our services,” he says. Faced with the changing landscape, three choices arose: staying the same and trying to ride it out; downsizing; or merger.

Indeed, the growth of the niche practice reflects a market trend to compete more effectively by closing practice areas to specialise in a select discipline. Larger firms have also faced the need to rethink strategies and reallocate resources, for instance, the high-profile withdrawals of Denton Wilde Sapte in Asia and Clifford Chance in the US.

For NGJ, however, downsizing was unlikely to prove tempting. There were already signs that NGJ had international ambitions, with its membership of international alliance GlobaLex advertised on its website as a means to providing a “truly integrated international legal service”. The real challenge therefore did not lie in deciding the firm’s future direction, but in finding the right merger partner that could meet the firm’s growth objectives without risking NGJ’s carefully built reputation with existing clients.

Choosing a similar firm for merger would have its obvious advantages in terms of comparable outlooks, objectives and cultures, but Johns says the firm saw little merit in such an approach, which would create a bigger firm but with all the same strategic issues. However, the risks of merging with a different kind of firm are greater, where cultural incompatibility becomes a likely obstacle. Indeed NGJ’s merger negotiations with national firm Pinsents in 2003 failed to come to fruition, demonstrating the inherent difficulties of striking the right balance.

With Kirkpatrick & Lockhart, however, Johns and Griffiths are convinced that the partnership is right. “We’ve found that everything that goes into the make up of our culture, for example, collegiality, also exists in spades in K&L, so it wasn’t a case of losing a particular culture, but one of finding a firm that thought along the same lines as us,” says Johns. They were also impressed with K&L’s outlook. “K&L had a very strategic view of what they wanted to do and why they wanted to be here, which was very compelling and exciting,” says Johns.

There must still be some concern, however. Johns agrees that the US market is very different. The sheer scale of legal practice in the US dwarfs many firms, even in the significant UK legal market. For instance, K&L is only the 28th largest firm in the US, and yet it still has over 800 lawyers. It will be hard for NGJ not to feel swamped by the US firm’s predominance in every aspect of the relationship. Johns admits that they have thought about the discrepancy in size, but he maintains that there are credible business benefits for the move: “We are K&L’s chosen European partner and as such, we all think that the positive aspects of the partnership outweigh any of the negative aspects of not continuing to be wholly independent.”

From K&L’s perspective, chairman Peter Kalis has a simple rationale for the merger, saying: “A law firm that fails to meet the trending needs of its clients does so at its own peril. The trending needs of our clients are very much in the direction of globalised ways of conducting business.” Kalis says that the firm decided some time ago that it had to become an international firm and worked to improve its US platform, before approaching the UK market. “On that latter item, it took no stroke of genius to conclude that we should be in the City of London, as it is a great intersection for global commerce and would enable us to achieve our highest ambition,” says Kalis. Picking NGJ as the right partner was the culmination of meetings with several leaders in UK law firms, but once discussions commenced, it did not take long to decide that NGJ had potential. “It is a firm with an historical presence in London. It has generated over a variety of disciplines a very high regard in the marketplace. It’s a firm known for its strong leadership, ethical probity and conservative financial management, all of which are traits that I hope we can accurately attribute to ourselves as well,” says Kalis.

No matter how strategically viable a merger might appear, however, internal uncertainty will loom large. Some kind of employee exodus may prove inevitable, either because people are made redundant through replicated roles or because rival law firms make the most of the instability wrought by change to poach the odd lawyer or three. Griffiths agrees that change can be hard, saying that the merger was at first glance quite ambitious and some of the partners were initially and understandably taken aback. However, a key strategy has been to reassure the UK lawyers by introducing as many as possible to their counterparts in the States.

One way of doing this was a partner retreat held in October 2004. A combined 820 lawyers from K&L and NGJ met in Boston for the three-day gathering, which included a mini college to introduce partners to the new processes of the merged firm, plus a practice expo, in which individual practice areas made presentations to the rest of the firm. “A number of our partners were surprised by the weight of the enthusiasm and energy coming from the US partners – they were clearly very serious about the strategic concept of London. We haven’t had many uncertainties crop up in the past two or three months, particularly after Boston,” says Griffiths.

Cultural synergies or uncertainties aside, there is also the huge task of aligning systems and processes in readiness for 1 January 2005, the launch date for the combined firm. An overall integration committee, chaired by chief administrators Mike Bennett from NGJ and Mike Sullivan from K&L, includes individuals from across the two firms, who are addressing convergence issues in technology, marketing, professional development and finance. In addition, an executive committee, comprising a group of five senior management figures, including Kalis and Johns, is in place to review convergence and ensure goals are met. “We haven’t yet unveiled our new brand or done our launch campaign, but there have already been many visible and substantial collaborations that I didn’t expect would happen so early,” says Kalis.

While managing the smooth transition to combined internal operations, the two firms also face the crucial question of how clients should be approached and the relationships managed through change. For K&L, the strategy was obvious. “Our clients didn’t wait for K&L to become an international firm before doing work abroad,” Kalis says. “They have, in all cases, established relationships with law firms in various parts of the world, but especially in the UK, and usually in the City of London.” The K&L strategy has been to approach clients sensitively, without expecting them to fire existing counsel in international locations. Rather, they have selectively approached major clients to raise awareness of how the merged firm might now help with legal challenges in London and Europe. And Kalis says many have already come back with assignments. “I would have said let’s do our launch, get our name out and then start approaching clients, but it would have been crazy to have sat on our hands for all of these months without bringing to the attention of our clients our enhanced capacity because of the impending combination,” says Kalis.

Involving clients at an early stage has proved a boon for NGJ as well. With the failure of the Pinsents merger, the firm was very much in the public eye. Johns says that worked as good publicity to bring other potential merger partners to the fore, but it could also have been enough to unseat existing clients, who would be unsure of the impact of such ongoing uncertainty. Johns also says that many of the firm’s clients knew that NGJ was looking for a strategic change: “They read the legal press and they heard us say over the period of a year that we were unhappy in the space that we were in.” That clients are now being brought into the opportunities of the combined firm may just work to calm insecurities and ease concerns raised by the merger process. Griffiths also adds: “The longer that we go on speaking to clients about the merger, the more they become interested in what is in it for them. Many are looking for something that can spark their enthusiasm for the opportunities that they might be able to explore in the US. Part of the challenge for us on this side of the pond is to tap into that to the fullest degree.”

As of 1 January 2005, the combined firm will trade as Kirkpatrick & Lockhart Nicholson Graham on both sides of the Atlantic, with Johns as senior partner of the London Office and on the Executive Committee, and Kalis as chairman. The name is a good indication of K&L’s commitment to the London venture, although time will tell whether the Nicholson Graham addition to the name will be dropped, as happened with other US/UK mergers, such as Reed Smith and Warner Cranston. If that does happen, it will indeed be sad to see the name of Nicholson Graham & Jones disappear into the annals of history, but, as Kalis talks about London as the “commercial crossroads” for the further expansion of the firm, it seems that NGJ’s partners will have achieved their objectives of becoming truly international. And, as far as Johns is concerned, that is exactly what is needed: “I think that in five years’ time, the internationalisation of law firms will have moved on and the K&L/NGJ combination will be less unusual. I can’t predict where and how that will happen, but my sense is that this is a compelling strategy.” With DLA just confirming its transatlantic merger with Piper Rudnick Gray Cary, it’s easy to see his point. And, for the mid-tier firms struggling to compete in this global environment, there may be tough times ahead.