ANALYSIS: Herbert Smith Freehills Merger To Overcome “Panic” & “Loss-Making” Operations

Since our recent article profiling the looming merger between Freehills and Silver Circle firm Herbert Smith, more details have come to light. We spent some time re-reading emails in our inbox and stumbled onto some interesting comments regarding Freehills’ Singaporean office and its Asian affiliate TransAsia Lawyers.

The Numbers

Before we get to that, let’s look at what was reported about the merger (AFR 20/1/2012):

Freehills is gearing up for a vote on whether to merge with Herbert Smith. If approved, the merger is tipped for July 1. Freehills’ management is working out a proposal to put to the firm’s partnership about the deal… expected to involve combining the firms, most likely under a “Swiss Verein” equity structure.

Looking at the numbers, it appears that the move is a merger of equals, supporting the naming of Freehills in the rebranded firm. Both firms have similar revenue and partnership numbers. Freehills reported revenue of $510 million in FY 2010/11 while Herbert Smith reported revenue of approximately $560 million over the same period. Freehills has 197 partners, while Herbert Smith is reported to have over 250 partners, although that number is expected to drop prior to the merger.

It certainly sounds like the firms would make a nice fit for each other, but why merge?

The Rationale

With major rivals Mallesons and Blake Dawson securing major international mergers late last year, it should come as little surprise that Freehills is also eagerly assessing its merger options. To be sure, let’s look at the comments from an anonymous Freehills insider sent to us over the Christmas break:

Freehills in a panic about Mallesons’ tie up with King and Wood, plus its Aussie partners are furious that its Asia plans have failed horrendously and weighed the partnership with huge losses over the past 20 years.

Huge losses … in its single overseas office in Singapore? Sounds unlikely to us. Perhaps our tipster was talking about the relationship the firm has with TransAsia Lawyers? To that end, we received the following interesting tip-off over the Christmas break:

Freehills partners arent considering a tie up with China alliance partner TransAsia – at the most recent Freehills all partner conference, the managing partner of TransAsia castigated the partners of the Aussie firm for being disorganised, lazy and expectant and threatened to terminate the relationship. All this against the backdrop of growing anger from Freehills partners about their “rudderless” international strategy and “massive loss-making” of their international operations.

Umph. Maybe Singapore is costing Freehills some major wedge. We also received these comments:

Freehills desperately needs cosmetic surgery to mask its Singapore office, which has a terrible reputation with clients and is a laughing stock with competitors. TransAsia are reported to be unimpressed with Freehills and in any case can only offer a bandaid where much more invasive treatment is required. Either Freehills management pimps the firm to a global player and imports some real international presence, or more star partners like Philippa Stone will perform their own extreme makeover and give the firm the chop.

There you have it. Rudderless, loss-making and in need of some serious pimping. Cue pimp-daddy Herbert Smith.

The New Look Firm

 So we’re now pretty sure the name of the firm, if the merger proceeds, will be Herbert Smith Freehills. But where will it operate? We know that Freehills has only one office outside of Australia, being the apparently unprofitable shop it has open in Singapore, but what about Herbies?

Herbert Smith lists the following offices on its website:

• London
• Belfast
• Moscow
• Brussels
• Madrid
• Paris
• Abu Dhabi
• Doha
• Dubai
• Beijing
• Hong Kong
• Shanghai
• Tokyo
• Bangkok
• Singapore

The firm also claims to have an “Africa” and an “India” group, although it doesn’t specify where those offices are located, as well as associated offices in Jakarta, Dammam, Jeddah and Riyadh. Looking at the firms side by side, it seems to us to be slightly perplexing that Herbert Smith, a firm with such a diversified revenue base, would find enough value in Freehills – a firm virtually immured in Australia and thus beholden to its status as a proxy for China – to merge.

Crucially, however, Freehills is something of an Australian market-leader in WA. It has more legal staff based in Perth than any other law firm with 27 partners and 125 other fee-earners on the ground. The merger would suddenly position Herbert Smith as the most important firm in one of the most important and emerging legal centres in the world. But is it enough?

There would also be the upside associated with disbanding Freehills’ current Singapore office and synergies achieved by grouping back-office functions in a low-cost jurisdiction. Plus there’s the important issue of being regarded by clients as an enterprising, serious law firm, and with all major European players heading down under, perhaps Herbies should too.

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