With just weeks to go before stepping down as managing partner of Allen & Overy, one of the world’s largest law firms, Andrew Ballheimer was plunged into the biggest crisis the legal sector had seen since the 2008 financial crash.

The spread of coronavirus triggered an urgent shutdown of the group’s 42 global offices and a rapid shift to remote working in the midst of its first IT upgrade in 15 years.

Mr Ballheimer, 58, speaking from his North London home, where he is working alongside his wife and two of three children, says he ideally “wouldn’t have introduced a new IT system as we went into a global pandemic. But that’s what’s so destabilising about this crisis — we couldn’t have predicted it and we can’t predict its long-term impact.”

A&O’s overhaul was tested with its 5,500 staff just three days before the firm shifted entirely to remote working. He admits the process did involve “some element of stress”.

IT issues have been the least of the firm’s worries, however. The pandemic has caused a sharp decline in lucrative work on corporate deals and accelerated an already growing need for cash on the group’s balance sheet.

Although it has no long-term debt, A&O, like most law firms, runs with low cash reserves creating a rapidly worsening financial situation if clients pay late and work dries up.

“Our business needs a certain amount of cash flow and clients were having issues and saying they couldn’t pay their bills on time. We had to make sure we weren’t pushing them too hard but obviously we had to look after the business,” he says, adding a cash buffer was important as “the priority was the preservation of jobs of our people”.

It is a sudden turn in fortunes for a firm that generated a record revenue of £1.6bn last year on the back of top-tier banking work and corporate dealmaking and whose top echelon of partners took home £1.7m in profits on average.

Mr Ballheimer had intended to ask his 550 partners to stump up more capital during the summer for the first time in 11 years after its cash position had grown too thin.

Facing a slowdown in revenue, he was forced to accelerate that plan and hold back partners’ quarterly payouts as well as freezing pay reviews for less senior staff. The measures — echoed across the sector — were discussed with senior partner Wim Dejonghe and the finance team over the weekend on March 14 before being approved and communicated to partners on March 26 on a conference call.

“Partners were asking why we had gone first [taking action before other firms]. But we presented an analysis of the issue, we said we needed a cash buffer.”

Handling the fallout of coronavirus followed a difficult 18 months of high-stakes and ultimately unsuccessful merger negotiations with US law firm O’Melveny & Myers, which collapsed last summer.

Conquering the US market has become a pressing need for the elite cadre of UK firms known as the “magic circle”, who work on the City’s most lucrative deals but have lost ground in recent years to aggressive US legal groups moving in on their territory.

Firms such as the Los Angeles-founded Latham & Watkins — the largest in the world by revenue — have surfed a decade-long private equity boom driven by US fund houses and benefited from links to the US investment banks financing the world’s largest deals. Such firms have lured partners with generous pay deals, such as the $10m a year package Kirkland & Ellis paid for Freshfields private equity specialist David Higgins in 2017.

A&O saw an opportunity to leapfrog its magic circle rivals overseas by tying up with West Coast law firm O’Melveny & Myers to create a group with more than £2bn in combined revenue. Until that point, A&O’s efforts to expand in the US had revolved around hiring big-hitting partners, including a leveraged finance team led by White & Case partner Scott Zemser in 2016 and three finance partners from Paul Hastings the year after that.

The hires involved breaking the firm’s sacred “lockstep” remuneration structure, in which partner pay is tied to seniority, unlike the more aggressive “eat what you kill” model prevalent in the US. But highly paid partners can be lured away, making a more sustainable strategy vital.

“[The merger] was a chance to accelerate away from our competition,” says Mr Ballheimer. “A&O is the magic circle and the global elite, but we want to be part of the global elite who are equally at home in English and US law,” he says. “The States is half of the world’s legal industry and we are much smaller there than we are here so we had to build it out.”

Discussions proved knotty and time-intensive, not least because the two groups were pushing for a fully integrated firm at the time the merger closed. Others have opted instead for a Swiss verein structure, meaning merging entities remain separate after the deal is done.

“That was ambitious and it also meant that detailed discussions took a long time, as each side tried to better understand what the combined firm would look like,” says Mr Ballheimer. His “pragmatic and insightful” wife was on hand to give counsel, while partners helped him draft 550 written answers to questions posed internally.

“People were anxious about the loss of identity but O’Melveny had the same [concern]. We were each proud of our culture and anxious about losing our heritage.”

By summer 2019, partners were on board and the deal was on the brink of going ahead. But at the last moment, sterling moved sharply against the dollar, throwing the merger into disarray.

“We ultimately reached agreement on all [the] issues but then FX and interest rates moved against the deal,” he says. “The strengthening of the dollar against the pound impacted valuation and interest rate cuts in the US affected pension costs on their side. That meant that we couldn’t agree a financial deal that both sides could support.”

Mr Ballheimer was in Spain with his family when the dream died. “Wim called me as I was having a cup of tea on our terrace and said, ‘This doesn’t look good, does it?’ and I said, ‘No, I think it’s over.”

Lawyers often claim that the longer a merger process takes, the more unlikely it becomes. Mr Ballheimer concedes that time “becomes a real challenge in pulling off a merger of this complexity, but resolving complex issues of detail of course takes time. So it’s a bit of a Catch-22.”

“If we could have got to a deal more quickly, I think it would have helped,” he says.

Mr Ballheimer would have remained in post for at least three more years if the merger had completed. Instead he will leave to advise companies coping with crisis situations. His six-month transition period at A&O is likely going to be as good a primer as any.

Three questions for Andrew Ballheimer

Who is your leadership hero?

I am a bit of a history buff and one of my “heroes” is George Marshall (the US general who was army chief of staff in the second world war and then US secretary of state). He led by example in a quiet but clear manner, always with integrity and never about himself, always about the greater good. Two examples of this were his declining the field leadership (and glory) for the D-Day landings in 1944 and his advocacy of what became the Marshall Plan in 1947 (to rebuild Europe).

If you were not a CEO/leader, what would you be?

In my dreams, a professional tennis player. My parents arrived in the UK in 1939 from Nazi Germany and they were keen on me being a lawyer, an accountant or a doctor. I pass out at the sight of blood though so that was off the cards, and I thought law was more interesting than being an accountant. Thirty three years on, I’m still here.

What was the first leadership lesson you learnt?

My first job was working at McDonald’s flipping burgers. My boss there led by example and always worked at least as hard as anybody else and nothing was beneath him.

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