Allen & Overy and Shearman & Sterling Announce $3.4bn Merger

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Allen & Overy Shearman Sterling merger
LONDON, UNITED KINGDOM - 2023/03/02: People walk along Waterloo Bridge past the City of London skyline, the capital's financial district. (Photo by Vuk Valcic/SOPA Images/LightRocket via Getty Images)

Magic circle law firm Allen & Overy has unveiled plans for a significant merger with New York-based law firm Shearman & Sterling in a deal valued at $3.4 billion. The merger, if approved by partners, would result in the creation of a formidable legal entity with nearly 4,000 lawyers worldwide. This move marks a notable attempt by a UK magic circle firm to establish a major transatlantic alliance in over two decades.

The merger negotiations between Allen & Overy and Shearman & Sterling were conducted discreetly over the span of a few weeks. Such UK-US legal unions have historically faced challenges due to the complexities of integrating different cultures and compensation structures, often leading to partner departures. Clifford Chance’s 2000 merger with Rogers & Wells serves as a cautionary tale in this regard.

For Allen & Overy, this merger is the culmination of a twenty-year endeavor to expand into the lucrative American market. By joining forces with Shearman & Sterling, Allen & Overy aims to bolster its presence in the US legal landscape, having recently established offices in prominent cities like Boston, San Francisco, Los Angeles, and Silicon Valley. Despite experiencing revenue growth from these investments, retaining staff has proven challenging, with lawyers being lured away by financially stronger domestic competitors.

The merger presents an opportunity for Shearman & Sterling to navigate a turbulent period, which has seen the firm undergo significant restructuring and suffer partner departures. With 1,350 remaining staff, Shearman & Sterling would gain the resources and influence of the much larger Allen & Overy. Although described as a merger, Shearman & Sterling is substantially smaller than Allen & Overy, which boasts 5,800 employees globally and generated revenues of £1.9 billion in the year ending April 2022, compared to Shearman & Sterling’s $907 million for the 2022 calendar year.

Overcoming challenges related to partner compensation will be crucial in the integration process. Both firms have indicated that establishing a new compensation system would not be arduous. It is anticipated that the combined entity will adopt a modified lockstep model, incorporating performance-based and tenure-based remuneration elements. Allen & Overy adjusted its pay structure in 2020 to provide higher compensation for top-performing partners in the US market.

The merger negotiations were kept under tight wraps to avoid leaks, which were believed to have derailed Shearman & Sterling’s previous talks with Hogan Lovells. Only a select group of top-ranking lawyers were privy to the discussions until the wider partnership was informed on the morning of the public announcement.

The proposed merger between Allen & Overy and Shearman & Sterling represents a significant strategic move in the legal industry. While challenges related to integration and cultural alignment may arise, the merger has the potential to create a global legal powerhouse capable of delivering enhanced services to clients across various jurisdictions. The partnership would strengthen both firms’ capabilities in key practice areas, such as banking and finance, and provide a solid platform for further growth and expansion in the future.