Intrigue. Anxiety. Poorly disguised glee. These are just some of the industry reactions to Monday’s shock announcement that Allen & Overy would be entering the Australian market, largely courtesy of a cohort of partners poached from Clayton Utz. In the short term, the move raises questions about Clayton Utz and what caused such a mass defection. In the long term, the move raises questions about the future shape of the Australian top tier.
Clayton Utz’s stolen generation
Clayton Utz has issued a brief statement in which CEP David Fagan expressed disappointment at the defections and said that such movements did periodically occur as part of “the lifecycle of a firm.” Fagan said that he was confident the firm was in “excellent shape.”
There is no question, however, that the defections represent a major blow to Clayton Utz. The defectees include senior figures such as Michael Parshall, joint head of the M&A group, Geoff Simpson, partner in charge of the Perth office, and other partners held in equally high regard. Industry observers contacted by ALB agreed that Allen & Overy has recruited extremely judiciously and has in effect stolen a sizeable part of the generation of Clayton Utz partners who represented the future of the firm. Indeed, sources close to the firm have suggested that the defections were a symptom of generational division within the firm. These divisions are said to have deepened following the appointment of Darryl McDonough to the CEP role, a move which ALB understands generated acrimony within certain sections of the firm’s partnership. One of Allen & Overy’s new Australian partners, banking specialist Grant Fuzi, is understood to have also been a candidate for the CEP role at Clayton Utz. Sources close to the firm say that several partners known to be unhappy with the firm’s leadership were not included in the list of A&O’s initial recruits, and have speculated that these partners will defect in coming months. Plans to slim down the partnership have also been reported to have been a key cause of dissent.
Rumours and innuendo are an inevitable part of any large organisation and ALB does not intend to suggest that disharmony is widespread in the Clayton Utz partnership. A firm source said that Darryl McDonough was widely supported within the organisation. Despite industry conjecture, is also unclear whether the departing partners did so for personal reasons, or for reasons related to dissatisfaction with Clayton Utz.
Given that Clayton Utz has more than 200 partners, an exodus of 14 is relatively small. The key question is what the defections say about the health of the firm and whether the defections will be an isolated incident. Clayton Utz is one of the more diversified top-tier firms and it may be the case that Fagan’s confidence in the fortunes of the firm is well founded. It is worth noting that commentators from rival top-tier firms have expressed confidence in the ability of Clayton Utz to recover from the loss, although an initial period of confusion and lowered morale is likely.
Bolt from the blue
Someone at the offices of Chang, Pistilli & Simmons owes partner Mark Pistilli a beer. Last month, while international mergers, real and speculative, were attracting all the attention, Pistilli was one of the few commentators who predicted that the real threat to the top tier would come not via an international merger but via aggressive lateral recruitment by a new entrant.
“If [international firms] came out here and recruited, for example, the best of the M&A team out of Mallesons, the resources team out of Allens and the insolvency team out of Blakes, that would be a real threat. The PEP for firms such as the Magic Circle firms is a lot more than it is in Sydney, so they can afford to poach the top talent,” Pistilli told ALB in January. At the time, it seemed like an outlandish prediction. All eyes were on the Lovells-Hogan & Hartson merger, the first major UK-US law firm union. Many predicted that international firms would not turn their attention to Australia until they had put trans-Atlantic alliances in place. One of these, ironically, was David Fagan: “There’s no doubt that over a period of time, there’s likely to be more linkages into the Australian market from international firms, but I think what this merger’s showing is that for the big US and UK firms, the trans-Atlantic merger is the key merger they want,” Fagan told ALB in December. Minter Ellison’s John Weber was another to hold the same view : “As important as the [Australian] market is to us, at the end of the day it’s only 2% of the world’s economy,” he said.
Implications
The arrival of Allen & Overy disproves the theory that an Australian presence is not a priority for international firms. And while Allen & Overy will be undertaking domestic work, it is not necessarily the Australian market itself which will be the ultimate prize, but rather the opportunity to use an Australian base as part of an integrated Asia strategy. Norton Rose is already using Australian ex-Deacons lawyers to augment its Asia operations, providing an important cost advantage over rivals who are drawing resources from the US or the UK. This strategy is similar to that employed by US firm Dorsey & Whitney, which opened its doors in Sydney last year, with the aim of using its Australian operations as a springboard into Asia.
The first shot in this battle has only just been fired, but already some are predicting the end of an era. “This is the end of the big firms – other [international firms] will come in and just poach the guts out of them,” said Mark Pistilli. “They can take the profitable parts, leave the less profitable sectors behind and you’ve also got lower overheads - no need to rent ten floors of Governor Phillip Tower.” Watch out Mallesons – Nostradamus has spoken.
That having been said, Allen & Overy’s coup may simply be a product of the peculiar circumstances prevailing within the Clayton Utz partnership in 2009. Whether or not other big UK and US firms, should they decide to enter Australia, will be able to similarly entice away such a large segment of a firm’s partnership without the benefit of pre-existing disharmony remains to be seen.
Additional reporting by Josh Scott