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Merging into the future

Cover Story
|Written By Robert Todd
Merging into the future

In the course of five weeks last fall, four of Canada’s top 20 national law firms underwent significant facelifts by way of mergers. It began with a pair of firms joining forces to enhance the scale of their operations, continued with a firm linking up with a global powerhouse to expand its international presence, and ended with a fourth firm swallowing up a regional player to gain a foothold in one of Canada’s fastest-growing provincial economies. It will take years to determine the value of these moves by McMillan LLP and Lang Michener LLP, Ogilvy Renault LLP, and Miller Thomson LLP respectively. What is evident in the short term is that law firms are feeling pressure to solidify their position in the market as their global counterparts descend on Canada.

Ogilvy Renault’s Nov. 15, 2010 deal with Norton Rose Group called the profession to attention unlike any previous law firm merger. Never before had a Canadian firm essentially folded into the operations of a global behemoth. Sure, some downplayed the significance of the deal, saying that by becoming Norton Rose OR — which officially happens June 1 — Ogilvy was simply taking advantage of a global franchising opportunity, as Norton’s global offices use the Swiss Verein structure and do not share profits. Ogilvy and Norton Rose have countered that their organizational structure has worked for global accounting firms, which are as strong as ever. They say the most important thing is that their operations will otherwise be fully integrated, and work will be shared accordingly. Regardless, Ogilvy’s clients will have at their service a firm with over 2,500 lawyers in 38 offices worldwide. Ogilvy will add to the group its 232 partners in six offices as well as, according to Legal Business magazine, an estimated annual turnover of about $318 million.

Peter Martyr, the London-based group chief executive of Norton Rose Group, says his firm saw parallels between Canada and Australia, where in 2009 it merged with the Deacons law firm. Both countries have strong capabilities in Norton Rose’s niches — financial institutions, resources, infrastructure, and transportation. Both countries also have a number of highly respected and well-run law firms that seem to lack the wherewithal to follow their clients internationally. It was therefore evident that a merger on the scale of its move in Australia was in order for the Canadian market.

While this made eminent sense to Martyr, he encountered a range of responses from Canadian firms’ leaders when they met to test the waters. “There are some firms [that] get it immediately; there are some who see a potential threat; there are others who don’t see it at all,” says Martyr. Ogilvy’s managing partner was among the first group. “John Coleman was somebody who very much had the same ideas as I had; instinctively understood what we’d done in Australia; instinctively understood what we were trying to achieve; and understood the business connection that lay behind the whole prospect.”

Perhaps even more importantly, Coleman and Martyr meshed on a personal level, which the Norton Rose head believes is vital to any merger. “These are not deals, I believe, that you can drive by reference to some complex set of documents. This has got to be something where you stay on the same page, and there should be limited words, but you should have the ability to talk and resolve any issues that arise. And I felt with John, we just hit it off.”

Combined with the synergies between the two firms’ businesses, and Norton’s jointly announced merger with South Africa’s 200-lawyer Deneys Reitz, Martyr believes Ogilvy has vaulted itself into the mix internationally in a way unmatched by other Canadian firms. The combined moves put the Norton Rose Group in an enviable position to take advantage of significant profit streams. Resource-rich economies, such as Canada, Brazil, South Africa, and Australia, are expected to lead the way as high-demand economies, such as India, China, and Japan, fuel growth. “Read the press over the last year; you cannot fail to be impressed by the number of deals that are passing between Australia-Canada, Australia-South Africa, South Africa-Canada, often financed from China,” says Martyr.

Coleman says that, unlike other large Canadian firms, Ogilvy opted against growing its global presence through representative offices. Clients are looking for a more robust presence than can be offered by an office with just a few lawyers, he says. From the firm’s perspective, such offices act largely as networking hubs for landing inbound Canadian work, yet can be very costly to operate. “We really want to be able to help our clients around the world as they grow globally, and having a representative office just won’t do it for them,” he explains.

There has also been much said of the gaping hole in Norton’s global presence. After all, how can a firm honestly call itself global when it is absent from the United States? Martyr acknowledges the significance of this gap, but says his firm has opted to strengthen its operations elsewhere before entering the fiercely competitive American market. “I think we all stand at exactly the same place in terms of the importance of the U.S. Clearly it is crucial.” At the same time, the process of choosing a partner through which it can break into the U.S. market cannot be taken hastily. “It is the single most risky and the single most important decision that we will take,” says Martyr. One of the top roadblocks seems to be the unique organizational and cultural approaches taken by many large U.S. firms. “A lot of Canadian lawyers probably find the type of organization that we are, which is very multinational, easier to assimilate than some of the U.S. style of management and way in which firms are run,” he says.

For the architects of the Nov. 9, 2010 merger between McMillan and Lang Michener, the move was set in motion a year prior during a coffee-shop chat between Robert Cranston and Andrew Kent. Cranston, Lang Michener’s eastern division managing partner, says his firm was eager to expand its Toronto presence and get on the ground in Montreal, which a merger with McMillan would provide. Lang Michener already had a significant office in Vancouver (where McMillan was absent) and a lawyer in Hong Kong, and viewed McMillan’s 20-lawyer presence in Calgary as a means of bolstering its ability to attract work from the Asian market. “There was, at a high level, some real potential there, and that’s really what got us thinking about talking to Andy and his firm,” says Cranston. At the same time, the firm knew it needed to bulk up. “The whole issue of scale is important. You have so much more opportunity, whether it be from a hiring perspective or growth, if you have more scale. And to the extent that you’re looking to do certain kinds of M&A transactions, clients also like to think that you have the scale to handle large transactions as and when they come.”

The average size of North American law firms has grown steadily over the past decade. By getting together to create a 400-lawyer presence, McMillan’s CEO Kent says the combined firms, which will operate under the McMillan name, will now be able to compete for work neither would have qualified for in the past. “If you want to compete at a certain level, it’s really difficult to develop the specialized expertise, depth of resources, the organizational competencies, if you don’t achieve a certain critical mass,” he says.

Miller Thomson’s Dec. 7 merger with Saskatchewan’s 24-lawyer Balfour Moss LLP was the bookend on the flurry of deals annouced in late 2010. The alliance made Miller Thomson the first national firm to gain a foothold in the prairie province that has become a key source of the world’s potash, uranium, and oil, and was projected to have led Canada in growth last year at a rate of 6.3 per cent. The firm’s chairman, Gerald Courage, says after a process of due diligence, it became clear that Balfour Moss was the shop it felt best suited to link up with to take advantage of the province’s boom. The pair shared several key clients, and with roots dating back to the 19th century, Balfour Moss was as well-established in the Saskatchewan market as any other regional, full-service firm in the market. “It’s a province that’s really on the upswing,” says Courage. “There are real opportunities, and we’re happy that, as a national firm, we’re the first mover in the province.”

“Joining ranks with a national law firm will allow us to pursue growth opportunities in the Saskatchewan market that are currently out of our reach,” said Balfour Moss’ Brian Scherman the day of the annoucement. “We took our time to consider potential partners. Miller Thomson appealed to us because of their open, approachable, no-nonsense approach to practising law.”

The Balfour Moss deal is the latest in a string of moves over the last five years by Miller Thomson that has seen it double in size to approximately 480 lawyers. While that rate of growth may lead you to believe the firm is ready for a breather, Courage suggests otherwise. While light on specifics, it’s apparent more growth is high on Courage’s list of priorities. Internal growth at existing offices is planned, and the firm will look at its “strategic interests” to seek out strong merger partners to branch out to new jurisdictions. Meanwhile, the firm’s international presence is served though membership in a global law-firm alliance and through a number of “best friends” relationships with U.S. firms, which he says are as strong as ever.

The most recent law firm marriage happened at the beginning of January, when mid-sized Bay Street shop Aylesworth LLP annouced it was being folded into the Toronto affiliate of Michigan-based Dickinson Wright PLLC. Dickinson Wright had a small Toronto presence for some time, with three Canadian-licensed lawyers, but the firm wanted to “expand its footprint.” The new firm will be known as Dickinson Wright LLP and operate as a separate entity from the U.S. firm. The expanded Toronto affiliate will have about 25 lawyers. “Aylesworth and Dickinson Wright in Toronto entered into a practice combination agreement. It’s not an acquisition per se, it’s a combination of the practices,” said chief marketing officer Michelle Murad on the day of the official announcement.

It’s clear that each of these deals made sense for reasons unique to each firm involved. Yet experts say outside forces are converging to force the hand of some Canadian firms’ strategic plans. Ed Wesemann, a consultant based in Savannah, Ga., who has helped law firms across the globe shape their strategic plans, believes the Ogilvy-Norton Rose merger marks the start of a trend that will see a series of U.K.-based firms link up with North American shops. With Wesemann estimating the U.S. legal market’s yearly value at approximately US$260 billion (he pegs the Canadian market at about Cdn$13 billion, and the U.K. market around £25 billion) it’s no wonder the British are emphasizing an enhanced presence in this part of the world.

Wesemann suggests the British see alignment with Canadian firms as an entry point to U.S. legal work, as many firms here have strong ties to American companies. “When it comes to transactions, things are going back and forth across the border, most of the major firms have offices in New York, and a number of firms have offices or close ‘best friends’ relationships with Canadian firms,” he explains, pointing out that major U.S. legal publications are chockablock with ads touting the services of Canadian firms. Meanwhile, the similarity between Canadian and U.K. legal education and legal traditions make for further synergies. In light of all this, Wesemann says he would be “shocked” not to soon see a few more significant mergers between U.K. and Canadian firms. He points out that the few large U.K. firms that weren’t already kicking the tires on such a move will certainly get into the act in response to the Norton Rose-Ogilvy deal.

While many commentators have emphasized Canada’s strong resource economy as the major draw for global firms seeking a presence here, Wesemann believes there’s more to it than that. “Canadians are the most humble people in the world; or self-effacing I guess is the right word,” he says. “Canada has, probably, one of the most rigid legal education systems in the world, and produces very good lawyers. In Toronto, Vancouver, and Montreal, you have three extraordinarily sophisticated international cities that do business around the world routinely. So Canada is not at all an unnatural place for [global firms] to be.” At the same time, Canadian firms may be feeling pressure to link up with foreign counterparts based on suggestions that referral networks have begun to lose a bit of their lustre. “The recession has caused a lot of firms to say, ‘Instead of transferring that piece of business to our affiliate firm, our best friend, in Toronto, why don’t you guys get on a plane and we’ll find a local counsel, and you go and close the deal yourself. So we’ll keep the revenue, thank you,’” explains Wesemann. That approach has been helped along by the amorphous nature of legal services, especially in corporate commercial work, where it’s often unclear where consulting stops and the practice of law begins.

Meanwhile, the volume of legal work in Canada is declining as large corporations continue to be swallowed up by foreign investors. Legal departments of the large institutions that have remained intact seem increasingly intent on engaging a single, global firm for all of their legal needs. Simon Fish, executive vice president and general counsel at BMO Financial Group, has traditionally retained Ogilvy Renault. He says the firm’s new international presence through Norton Rose will be of interest to him, especially in light of the firm’s experience in Asia. “They’ve gained a presence in [China] which is now significant, and probably stronger than any other Canadian firm,” says Fish. “We would have to see them as more than a Quebec-based Canadian firm. They’re now part of a global network, with capabilities beyond those that they had previously.” He adds that the idea of one-stop legal services shopping “has a certain attraction to it.”

It’s not just clients that seem eager to get involved with global law firms. Many lawyers are also looking for a change of pace. By aligning their practice with a firm present in all of the world’s major financial hubs, they can grow their client list and expand their skill set in a way that is typically impossible with domestic firms. “Most of my clients were inbound into Canada and the U.S., and I was leaving a lot on the table,” says Jim Rossiter, an M&A specialist who left Cassels Brock & Blackwell LLP in Toronto for global firm Baker & McKenzie LLP in late 2009. He adds that it had been tough to make things happen on an international scale, as he was always working with other lawyers at other firms. At Baker & McKenzie — a 3,750-lawyer firm with 68 offices across the globe that opened its Toronto office in 1962 — he works on deals with his colleagues across the continent who are all linked up by a single computer server. “So for me, it was very much a question of capturing clients that were going elsewhere, and bringing it all in-house,” says Rossiter. “It certainly makes it more lucrative, but also it’s a lot easier to service the client.” He has recently worked on files in Argentina, Japan, Italy, and Spain. “I didn’t even go after this; these are just people you know, and you’re sitting and you’re talking, and you don’t bother,” he says. “But all of a sudden [you realize], I’m part of a 4,000-lawyer global powerhouse firm. ‘What are you doing in Tokyo? Yeah, I can take care of that for you.’”

It’s this unparalleled opportunity that Jim Holloway, managing partner of Baker & McKenzie in Toronto, says has allowed his firm to recently pluck an impressive list of laterals from other top national firms. Holloway points out that global law firms are a relatively new phenomenon. Many consider Baker & McKenzie — which has by now bulked up significantly from the base of 26 offices in 20 countries it had in the late 1970s — to be a pioneer of the model. While it is well-established, many of the other large global firms have up to now been focused on planting their flags in the primary global financial centres of London, New York, Hong Kong, Beijing, and Tokyo. With their presence in those cities now well-established, they’re poised to move into strong, yet secondary, financial capitals like Toronto. “Canada is certainly on everybody’s radar screen,” says Holloway. “I don’t think it’s the epicentre of anyone’s strategy, nor should it be, but it’s becoming an increasingly relevant market, and as these firms get established in other places, we move up the list of other next locations.”

Some of Canada’s top regional firms admit to being courted by such firms. Brian Fulton is the managing partner of Lawson Lundell LLP, which has established itself as a strong regional firm in Western Canada, with about 100 lawyers in its Vancouver office joined by small offices in Calgary and Yellowknife. The firm has thrived under the regional format by establishing a niche in the mining and energy markets. Fulton says partners will meet this spring for regularly scheduled strategy sessions, and admits those talks will be particularly timely in light of the recent flurry of merger activity. It’s a topic that simply can’t be avoided. International firms wooed potential Canadian targets when the International Bar Association met in Vancouver last October, says Fulton. “There were certainly a number of firms approaching us, and I’m sure approaching others, about doing something more expansively,” he says.

Robert Seidel, national managing partner of 200-lawyer Davis LLP, believes the genesis of this global interest in Canadian firms is the country’s emergence as a reliable source of energy, with the Alberta oilsands as the primary driver. It has helped that Canada has led the way on project finance, infrastructure, and energy and the environment. “These are all top-of-mind international issues,” says Seidel. Canada’s stronger-than-average performance during the economic crisis, fostered in part by a strong banking sector, has further enhanced its image. “Because of those fundamental pillars in the Canadian economy, Canada is punching above its weight in terms of the legal profession and the acknowledgment by clients in industry that this is a great place to invest,” says Seidel.

Although these factors have brought the legal world to Canada’s doorstep, Seidel isn’t convinced that firms here must fit a stereotype to survive. He sees each looking inward to determine what type of approach best suits them. His firm has gone through that exercise and plans to grow. On the international front, in December the firm was finalizing a move that would significantly expand its presence in Japan, which Seidel says began over 60 years ago. He notes Davis hopes to use the larger presence to penetrate deeper into the Asian market, especially China. “The World Bank has targeted that part of the world as a place where there’s going to be significant investment in the future, because there are so many people there. There’s enormous wealth too.”

All of this is to say that Canada’s top law firms appear to be entering a new phase of transformation. It’s unlikely to involve the same volume of mergers that took place in the 1990s after national firms were given the go-ahead, but it will be transformative nonetheless. Some firms will find ways to better serve clients abroad, others will focus on solidifying their regional practices, and still more will remain fixed on expanding their national coverage. Partnership committees across the country are currently putting their minds to where they want to fit into the equation. “Everyone is looking for where their sweet spot will be,” says Ogilvy’s Coleman. “It will mean change for some firms. Other firms will choose not to change; they’ll be happy with the spot that they’re in.”

McMillan’s Kent says he’s learned over the course of a career that began in 1979 that flexibility is a key ingredient for success. Circumstances can change in an instant, so it’s best to avoid rigid strategic plans. “Law firms have a certain amount of positive momentum. It’s easy to coast, without realizing you’re coasting,” he says. “I think it’s good for organizations to embrace positive change.”

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