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With the Chinese New Year fast approaching, it is once again the time for Chinese firms to take stock of the last year and look ahead. Perhaps the single most significant event concerning top Chinese firms, and which has widespread global implications, is the dramatic fall of King & Wood Mallesons’ UK, Europe, and Middle East arm (KWM EUME).
At a time of reflection and renewal, Chinese firms with global ambitions can draw a few important lessons from the unfortunate event that marks the biggest ever UK law firm collapse.
Below are six lessons Chinese firms with global ambitions can learn from the woeful tale of KWM EUME.
- Carry out a thorough due diligence process on not just the financial health, but also the culture and leadership of a potential merger partner
Last Tuesday (17 January) was a sad day as hundreds of staff and some – albeit fewer – lawyers at KWM EUME became jobless when the firm went into administration.
In KWM’s China offices, partners and lawyers expressed sympathy for their European colleagues’ misfortune following months of turmoil.
But there is also a feeling of betrayal among some senior-level Chinese partners. Many said that the Chinese partnership had tried best to support the European arm but the collapse became inevitable.
A highly ranked partner in China put it bluntly. “It’s something that’s been done to us instead of what we’ve done to them,” he says. “We’ve also been the victims of the European situation.”
In an official statement issued by the Chinese firm in Chinese regarding its European arm’s collapse, the sentiment was echoed. Phases such as “a lack of core leadership” and “partners don’t share a common vision for the future and the same values” were used to define the reasons behind the financial crisis and its rejection of the rescue plan offered by the Chinese and Australian members that ultimately led to its administration.
“It wasn’t a good idea to merge with a second-tier firm,” a KWM China partner says of its decision in 2012 to add legacy SJ Berwin to its global verein.
At the time of the merger, SJ Berwin was ranked 22nd by revenue in the UK, and 23rd by profit per equity partner.
While it enjoyed a good reputation in certain practice areas in the UK, the merger with legacy SJ Berwin is considered a “marry down” for both legacy King & Wood and Mallesons as they are the top-ranked players in their respective market.
According to sources in the firm, due diligence on the firm’s financials was carried out and the global management was aware of the amount of bank loans prior to striking a deal.
Financial information is easy to obtain, but they can only reflect one aspect of the firm’s market standing and strength. Having not traditionally worked together on many matters, the Australian and Chinese partners, the majority of whom don’t have an in-depth knowledge about the mid-tier UK firms, were less aware of the firm’s highly competitive culture that did not aid cross-referrals and prioritised high take-home earnings.
In last week’s editorial notes, The Lawyer editor Catrin Griffiths pointed out SJ Berwin never matured into a firm in which collective endeavour was prioritised. The firm was undercapitalised historically, because the priority was keeping partner drawings as high as possible.
“It was partner behaviour that led to the financial chaos, not the other way around,” she concluded.
So the first and foremost lesson to be learnt is that Chinese firms seeking global mergers need to do their homework right. That means not only looking at a firm’s financial wellbeing, practice areas and clients, but also giving stringent attention to culture, collegiality and the strength of the leadership.
2. Keep an open mind about the brand
Several sources familiar with the firm have commented that putting the “King & Wood” name in the front of the global brand was an absolute precondition to any deal at the Chinese firm. Like many top-tier Chinese firms, the fear of losing control and the fear of being perceived as “being acquired by a foreign firm” is one of the reasons hindering more Chinese firms from merging with an international counterpart.
“King & Wood was too fixated on the naming rights. It won’t do a deal with any firm unless its name is at the front,” says a former KWM China partner. “But realistically, which top-tier global firms, the likes of Clifford Chance and Sullivan & Cromwell, would agree to that term? So the only other choice is to choose a second-tier firm.”
King & Wood Mallesons’ ability to pull off a deal that transformed a Chinese household name into a global brand was applauded. But in hindsight, dropping the SJ Berwin name and adopting the KWM name in Europe has caused significant reputational damage to the brand following the UK firm’s collapse.
3. A Swiss Verein is cost-effective but it’s not always easy to make it work
There has been much debate about whether global firms under a Swiss verein structure are operating as truly one firm and how effective it is to ensure consistency across multiple jurisdictions. It is generally viewed as a relatively cost-effective way for firms to expand beyond national borders and get firms over various regulatory hurdles.
But in KWM’s case, the Chinese firm has started to realise that having a more integrated platform in Europe may serve its global ambition better than having a verein member that shares no financial incentive and runs with a great degree of autonomy.
The change of view is evidenced in the Chinese statement issued recently, which labelled the new 32-partner European platform as “being fully integrated and managed by King & Wood Mallesons China” and “a fundamental upgrade”.
“The most significant difference is that the new UK, Europe and the Middle East offices are operated under the full management of King & Wood Mallesons. It’s a fundamental transition and upgrade which single the true global transformation,” said the firm in its statement.
A partner of the Chinese firm explained that although under the new structure each office is still a member of the global verein in compliant with local regulations, in nature, all European partners are partners of the Chinese firm and all offices follow the leadership of the Chinese firm.
“The feeling of going in to the new London office is like going to your own home where partners are like your family. There’s a strong contrast from the gloomy feeling of going into the legacy SJ Berwin’s London office before,” he said.
He said the European partners who decided to stay with KWM are committed to the firm’s value and vision and whose practices are of strategic fit of the firm’s global plan. “We have mixed feelings about the European crisis. In a sense, the unfortunate collapse of the legacy UK firm has given us a new opportunity to build something that works better for us,” he said.
But the fact that KWM’s new European team is significant reduced from the 164 partners and 510 lawyers at the time of the 2013 merger poses questions on how the much smaller platform can service Chinese and Australian clients’ mandates in Europe.
The views outside of the firm are less optimistic. “The new platform is not longer a full-service offering. It is harder for the firm to pitch for Australian and Chinese companies’ major mandates in Europe. For the short-term at least, it may also be difficult for the European offices to win new clients as the previous firm went into administration,” observes a European partner in a global firm.
4.The “China concept” alone is not enough to sustain a global merger
China, the second largest economy in the world, is undoubtedly an important market for global legal providers. The fast growing outbound investment and export of capitals are also providing exciting new opportunities for domestic and international firms alike. The previous two KWM mergers were built on the “Asia century” concept.
However, a former Mallesons partner who now works in a global firm questioned the rationale for Australian and Chinese firms to become truly global.
“Outbound transactions by Chinese companies and Australian companies are merely a notable part of any global firms’ revenues. Chinese clients are also far from the biggest fee-paying clients for any UK and US firms. For a global firm to work well, there has to be global mandates from common clients, despite whether its offices are financial integrated or not. There is yet a firm base for Chinese firms or Australian firms to expand globally in a big way,” he commented.
A KWM China partner shared a similar view. “It’s unrealistic to think that China work will become the lifeline of a UK or US firm. It can add new growth area but won’t become a backbone practice,” he said.
A managing partner of another large Chinese firm also noted that domestic firms have started to take a more sober view on the option of merging with a foreign counterpart.
“Many US and UK firms approached us for merger talks because China was a hot market for growth. But I wonder how long that interest will last and how well a merger will work out now China’s economic growth is slowing down. More importantly, Chinese companies’ appreciation of lawyers and the way they instruct counsel are still a distant away from American and European companies,” he said.
5.Global expansion requires significant financial investment
Last year, in a bid to prevent legacy SJ Berwin from heading into administration, KWM China stood ready to offer £14.5m in aid, although the rescue plan was later rejected. Following the administration, KWM China is understood to have provided financial support to each of the seven offices, estimated to be in millions of pounds.
For any Chinese firms inspiring to be a true global player, it needs a strong war chest. With the majority of the Chinese firms still operate on the similar principles of “chambers of barristers”, few will have the same level of cash reserve for future development as KWM China.
6.Be prepared for the worst and have a crisis management plan
Without any previous precedence, KWM is a trailblazing Chinese firm seeking its way to global dominance. To many of its domestic rivals, its journey is expected to be rocky and windy.
”As a pioneer in expanding globally, KWM China will inevitably face great challenges and hurdles. The legal fraternity is generally sympathetic towards its crisis in Europe,” said a partner in a rival top-tier Chinese firm. “But the collapse of its European arm hasn’t impacted on its leading position in China in any way.”
For any firm with the courage to take on the established global players, their efforts should be encouraged and applauded. But it is strongly advisable to be prepared for the worst and come up with a crisis management plan as the KWM story has showed that “what can go wrong will go wrong”.
As we say goodbye to the year of Monkey and usher in the year of Rooster later this week, The Lawyer’s editorial team wishes all our readers a happy and prosperous Chinese new year!
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