The Economist Asia Edition - April 14, 2018

58 Business The EconomistApril 14th 2018

1

M

OST of London’s “magic-circle” law

firms are intrepid creatures. Over the

past 20 years they have busily expanded

abroad, opening offices everywhere from

Antwerp to Yangon. But despite having

hundreds of lawyers on the ground in

America, one prize has proved elusive: lay-

ing down deep roots in the world’s most li-

tigious market.

Allen & Overy, a top-tier London firm,

would like that to change. It has reportedly

been in merger talks with an American

firm, O’Melveny & Myers. With O’Mel-

veny denying any plans to merge, a union,

which would create one of the world’s

largest law firms by revenue, may not get

off the ground. But that is unlikely to stop

Allen & Overy from approaching others in

its pursuit of an American alliance.

For the big British firms, America holds

the key to greater profitability. Its allure in

part reflects its importance on the world

stage. Judgments made in America’s

courts, such as those in anti-bribery cases,

have ramifications beyond its borders.

New York law, like the whole body of Eng-

lish law, is a popular choice of governing

law for international business transac-

tions. The magic-circle firms with global

ambitions already tap into some of that

work through their American outposts.

But they have made few inroads into

the American domestic market. It is large,

accounting for about half of the world’s le-

gal-services market by revenue. And it is lu-

crative, partly because of the robust litiga-

tion scene. The leading American firms

generate nearlytwice the profits, per equ-

ity partner, of their British peers (see chart).

In contrast, profits at magic-circle firms

have been watered down by their expan-

sion into emerging markets, because cli-

ents there cannot be charged as much as

those in London or New York. Slaughter &

May, the only magic-circle firm without

global aspirations, has done correspond-

ingly better as a result.

America is a difficult market to crack.

Relationships with clients tend to be deep-

ly embedded. And with no shortage of

American competitors vying for business,

the magic circle has struggled to differen-

tiate itself from the crowd. O’Melveny may

have been attractive to Allen & Overy be-

cause of its established litigation team,

says Nicholas Bruch from Legal Intelli-

gence, a research provider. Among other

things, the firm is representingAT&T,a big

telecoms firm, in an antitrust lawsuit

brought by the Department of Justice.

The Brits are also not helped by their

relatively measly pay for partners. The

magic-circle firms all operate some varia-

tion of the “lockstep” model, which broad-

ly remunerates partnerson the basis of se-

niority. The scope for large awards tends to

be limited, compared with the “eat what

you kill” system followed by most Ameri-

can law firms, which can generate super-

star salaries for partners bringing in the

most business.

The few American firms to use the lock-

step system have experienced partner de-

fections recently to higher-paying prac-

tices. The British firms, with their smaller

profit pool, have found attracting and re-

taining American talent hard.

Even so, there are some lonely hearts in

America who might welcome a transatlan-

tic romance. Legal mergers involving at

least one American firm reached a record

high in 2017. Singletons with neither a

strong speciality nor an international foot-

print are feeling squeezed.

That said, the business case for uniting

can collapse in the face of large differences

in culture and pay. Some partners always

leave after a merger. If enough depart, cli-

ents in tow, the very rationale for a union

leaves with them. The last time a magic-cir-

cle firm merged with an American coun-

terpart—Clifford Chance, with Rogers &

Wells, in 2000—integration was painful

and partners left. The prospect of an Amer-

ican alliance may set the pulse racing. But it

is risky, too. 7

Law-firm mergers

Transatlantic

trysts

A top-tier British firm seeks a liaison

across the pond

Magicking away money

Source: ALM Intelligence Legal Compass

Law firms, profits per equity partner, 2016, $m

0123456

Wachtell, Lipton,

Rosen & Katz

Quinn Emanuel

Urquhart & Sullivan

Paul, Weiss, Rifkind,

Wharton & Garrison

Cravath, Swaine

& Moore

Kirkland & Ellis

British firms

US firms

Slaughter and May

Freshfields

Bruckhaus Deringer

Allen & Overy

Linklaters

Clifford Chance

R

AKUTEN is a jack-of-all-trades. Since

pioneering e-commerce in Japan in

1997, it has been a rare example of a highly

entrepreneurial Japanese firm. Today it

spans more than 70 businesses providing

credit cards, a travel agency, a golf-reserva-

tion system, matchmaking, wedding plan-

ning and insurance. It owns Viber, a calling

and messaging app and has invested

heavily in Lyft, a car-hailing service. Now it

is adding another: on April 9th the govern-

ment gave Rakuten a concession to operate

Japan’s fourth mobile network (Rakuten

currently runs mobile services using an-

other operator’s infrastructure).

Rakuten sees this as the next step in

building its “ecosystem”. It reckons it re-

tains its approximately 95m registered us-

ers in Japan by being a trusted brand that

can provide customers with everything

they need at every stage of their life, and by

rewarding their loyalty. Customers get

points if they use their popular Rakuten

credit cards, for example. These they can

then spend on otherRakuten services.

Much online shopping in Japan takes place

on mobile phones.

But most analysts see Rakuten’s move

Rakuten

Downwardly

mobile

TOKYO

A Japanese e-commerce giant struggles

to retake the lead from Amazon