The management teams of Pinsents and Masons will attend respective partnership votes this weekend confident of a successful ballot to create the UK’s 15th biggest law firm. The vote looks highly likely to rubber-stamp the largest domestic merger since Wilde Sapte’s 2000 tie-up with Denton Hall.
So far, so certain. But quite why the two management teams are determined to push through a deal that has surprised and under-whelmed many rivals in equal measure, is far less clear.
Certainly, Pinsents has a history of mergers, with the tie-up of Leeds’ Simpson Curtis with Birmingham’s Pinsent & Co in 1995 and the 2001 takeover of Biddle & Co of London already under its belt.
Yet, despite Biddle, the failure to crack London has remained the national firm’s albatross.
The reasons for this are disputed, although only the ultra loyal Pinsents partner could claim the London invasion has gone to plan, with corporate identified as an area in particular need of investment, especially since the departure last year of highly-rated corporate chief Alan Greenough for White & Case.
Management responds that the corporate slowdown inevitably hit transactional investment and points to the rapid reshaping of the firm’s insurance practice from a reliance on the Solicitors’ Indemnity Fund (SIF) to focus on higher-value work under partners like James Crabtree as a City success story.
Projects is also cited as a solid performer, even if banking has failed to shine.
Nevertheless, by last year Pinsents was once again casting around for another London deal, ultimately settling on Nicholson Graham & Jones (NGJ), which had been considered at the time of the Biddle talks.
But the talks, which went public in November 2003, barely reached due diligence before both firms walked away in January 2004.
Masons, meanwhile, had its own issues, notably a sense that its business model had taken the firm as far as it could.
The firm’s financial performance has been solid at best since 2001. Masons also suffered from a series of partner departures.
There were also two rounds of redundancies and a decision to go against the market last year by cutting its newly-qualified salaries to £43,000 from £47,000.
It is understood the firm sounded out a few potential suitors before approaching Pinsents through a consultant shortly after the Pinsents/NGJ talks failed. Three partners from each firm brokered the proposed deal, led, respectively, by Pinsents senior partner Julian Tonks and Masons construction partner Tony Bunch.
The proposed tie-up was announced to partners at the end of the second week of September.
Pinsents has clearly driven a hard bargain, securing three of the five seats on the proposed management board. Senior partner Julian Tonks and managing partner David Ryan will keep their titles along with financial director Steve Hancock, leaving Masons partners with the head of international and head of chosen markets roles.
A merger with Masons will certainly offer Pinsents the London mass it wants, even if it is hard to see it contributing much to Pinsents’ core corporate pratice. The merged firm’s London office would have revenues of around £70m, forcing Pinsents to confront criticisms that the firm’s ambitions are at odds with its traditions as a Birmingham-run firm with a large and influential office in Leeds.
Although Masons has offices in numerous other locations, £40m of its £62m turnover comes from London. Elsewhere, it generates around £6m from Manchester, £5m from Hong Kong and Shanghai, £5m from Scotland and about £3m each from Leeds and Bristol.
The code-word for the talks, LISA, perhaps sheds the most light on the logic behind the deal.
The acronym stands for Leading Industry Sector Advisers, pointing to the ambition of styling the combined practice as sector focused, with Masons significantly boosting the firms’ joint capability in construction, infrastructure and technology.
Such a strategy will require Pinsents’ respected practice lines in corporate, tax and employment to increasingly target clients in the firm’s chosen sectors rather than function as driving forces in their own right. Despite the existence of Pinsents’ four year old ‘chosen markets’ strategy, this is a radical shift for Pinsents and a u-turn from seeking deals like Biddle and NGJ, which were clearly aimed at delivering quality mid-market credibility.
It also accounts for the most persuasive rationale for the merger — the quality of Masons’ client base.
Major Masons clients include construction giants Amec and Bovis, as well as Amey, DEFRA and Fujitsu, while the firm also has a strong public sector showing underlined by its performance on L-Cat, the ‘super panel’ set up last year to centralise Government legal advisers.
On second glance, Pinsents’ client base, which draws heavily on industrial companies, looks reasonably complementary, including John Laing and corporates Abbot Group, Axa, IMI and RAC.
Compatability also extends to their partnership structure.
Pinsents has a 10-year lockstep based on 20 points at entry to 40 at the top. In addition 10% of profits can be distributed as merit-based pay.
Partners can also be moved up and down the ladder in a tri-annual equity points review, a process that caused a spate of partner departures last year. Masons also has a 10-year lockstep — with 36 points at the top — and a meritocratic element.
Nevertheless, integrating the firms will be a huge challenge — and one that will require considerable investment from a firm — Pinsents — that is not known for its generosity in this field.
Addleshaw Goddard estimates it took a one-off hit of just £2m for its merger last year, although that was largely because it saved buying a new IT system as Addleshaw Booth & Co had already invested in a new platform that could swallow up Theodore Goddard’s. But the nearest comparable merger, Hammonds’ takeover of Edge Ellison, is reckoned to have cost in the region of £4m.
Still, the mood regarding the merger in both firms seems optimistic. One Pinsents partner said: "Everyone I have spoken to seems enthusiastic about it."
Such sentiments will soon be put to the test, with votes scheduled for the weekend and the result set to be announced on Monday (27 September).
Pinsents needs 75% of the partners to vote in favour and will do so with an e-mail ballot, while Masons is expected to have an open show of hands, although it needs a higher percentage.
Securing the deal, which is expected to go live in December, will surely not be the issue.
For both firms the tie-up will be a radical repositioning that will have to be aggressively and clearly managed if it has a hope of unlocking its potential. A drifting integration holds the unappetising prospect of the two slowing each other down. For two firms that cannot afford to lose more ground to their rivals, it is a high-risk strategy.