“Multinational law firm Dentons and China’s biggest legal practice Dacheng Law Offices [have this week] signed off on [a] merger…that will create the world’s biggest law firm. The new firm, as Reuters reported Tuesday, “…will be only the second time a Chinese firm and a global firm have combined, [and ] will [now include] more than 6,500 lawyers in 50 countries.
The first instance of a Chinese-global law firm combination occurred when “King & Wood Mallesons (KWM) formed [in March of 2012] as a combination of Chinese firm King & Wood PRC Lawyers and Australian firm Mallesons Stephen Jaques.” In late 2013, London-based Sj Berwin merged with KWM, making the new KWM “a 2,700-lawyer firm that spans Europe, the Middle East, China and Australia, headquartered in Beijing.”
As Law360 outlined in last week: “Dentons‘ planned merger with the largest law firm in China is a shrewd move that experts say allows it to carve out a bigger name for itself in the world’s leading economy by latching onto a strong local brand, creating a model that global competitors will feel pressure to emulate.” “‘China has become the leading economy across the globe, and foreign direct investment into and out of China is booming, according to John Grimley, author of “A Comprehensive Guide to the Asia-Pacific Legal Markets” and a law firm consultant. Foreign direct investment into China is set to almost double over the next six years, from 6.6 trillion yuan ($1 trillion) in 2014 to 13 trillion yuan ($2 trillion) in 2020, noted a new report by King & Wood Mallesons.”
“Dentons’ merger with Dacheng places the firm in a superb position to advise both foreign companies doing business in China as well as Chinese companies doing business overseas,” Grimley said. “The Chinese economy will continue to expand over time, and Chinese foreign investment overseas will continue to increase markedly — hence the Dentons merger with Dacheng is a wise move as China will play an increasingly central role in the global economy and the wider economy in the Asia-Pacific region.”
In addition to the clear opportunities that helped create the Dentons-Dacheng merger, there are now 3 challenges the newly joined firms will be facing in the future:
- Price-Competition – The Chinese legal market is characterized by intense price competition among approximately 19,000 law firms operating in the country. These competitive pressures are among what led US-based law firm Fried Frank to announce this month that it will close its’ Hong Kong and Shanghai offices.
- Loss of referral business – “Dentons will rely on its Swiss Verein structure to handle Dacheng’s activities, with the firms working under one global brand but with separate financial systems. As a result of the merger, Dentons will lose some long-standing business referral partners in China, and Dacheng will lose some referral partners overseas because suddenly those partners will become competitors, according to Grimley (as outlined in Law360). “A concerted effort will need to be made by the newly merged firm to accelerate cross-referrals between Dacheng and Dentons to make up for these losses, [and] then also seek to integrate the firms’ respective practices, business operations and finances, prospectively,” he said.
- Client Data Security Concerns – Law360 reported further that: “The merger also could give rise to concerns by Dentons’ non-Chinese clients about whether their confidential information could end up in the hands of Chinese rivals, particularly in light of China’s relaxed cybersecurity standards, according to Nick Goseland, senior director at Lateral Link Group LLC. “Is Dacheng going to have access to all the confidential information of Dentons’ clients?” he said. “From what I’ve heard, they’re not, but it’s risky in any sense. You could lose clients here in terms of them being afraid of that.” But the deal was not likely to be undermined by these issues, according to [Ed Wesemann, a law firm consultant at Edge International]. “Dentons has a real smart management team, and I think they thought this through fairly well,” he said.
More China mergers to come
“Ed Wesemann told Law360 that: “Five years from now, it may be inconceivable that a large global law firm wouldn’t have a huge presence in China. ‘Get ready,’ he said. ‘There are going to be a lot more of these mergers. And not just in China. We will see massive consolidation around the world.'”