By the beginning of January when the merger was consummated, "Haythe" had been dropped from the name of the new firm, which would carry on, simply, as Torys. Lost in the hubbub over Haythe was the second question on everyone's mind, 'Why did Torys do it?'
Last November, Toronto-based Fasken Campbell Godfrey and Quebec-based Martineau Walker (Montreal and Quebec City) announced that they were converting their 14-year alliance and international partnership (London, UK) into a full merger. Five weeks later, Vancouver-based Russell & DuMoulin joined in the "merger of equals" to create Fasken Martineau DuMoulin LLP, the second largest firm in Canada with over 500 lawyers. The strategy of building a "national law firm" through mergers is more familiar territory. Indeed, the largest firm in Canada, McCarthy Tétrault, staked out that territory ten years ago. Several other leading firms have offices in three or four of Canada's largest cities and capability in both common and civil law as well. What is compelling about the national merger strategy now-as opposed to five or ten years ago?
Les Viner, managing partner of Torys, explains his firm's strategic thinking as follows. "We build practice areas by trying to forecast client demand for those areas, like technology. At some point, it occurred to someone that if US law were a practice area, it would be the biggest growth area we have. But we always would stop at the border (in our strategic analysis). We would look at everything Canadian and we would slice it and dice it...securitizations, derivatives, etc. All these (practice areas) put together are not as big as US law for our clients' needs. So why don't we think about (US law) as a practice area? Why are we thinking there is a border? There shouldn't be a border."
Torys may have broken a psychological barrier by crossing the US border in a significant way, but the strategy really is no different from what has been happening across provincial borders in the last two decades. In 1981, Toronto-based McCarthy & McCarthy, as it then was, opened an office in Calgary (under the name of Black & Co. due to antediluvian law society regulations). Why? "We had enough people in planes for oil and gas related deals that being on the ground made sense," says Toronto McCarthys partner Gary Girvan. "Calgary was an opportunistic move in a booming economy." More recently, Montreal-based Ogilvy Renault shrugged off an affiliation with Osler, Hoskin & Harcourt LLP and opened its own office in Toronto in 1997, which now has 39 lawyers practising Ontario law. In some ways, different languages layered on top of different legal systems (civil and common law) make the border between Quebec and Ontario more daunting than the border between Ontario and New York. The "cross-border" strategies of McCarthys, Ogilvy and-now-Torys have one fundamental characteristic in common. Each is leveraging existing client relationships for growth in new jurisdictional markets. The strategy essentially is a client-opportunity strategy.
Fasken Martineau DuMoulin LLP is also focused on clients, but the strategic thinking underlying its merger is different from Torys. Alan Schwartz, Q.C., Chair of the National Board of the firm and managing partner of the Toronto office, explains that globalization is the main driver behind his firm's merger. "Much legal work, as part of globalization, comes from international sources. Canada is regarded as a small country economically and international clients want to get one stop shopping. They don't want to be involved in managing the legal issues in different jurisdictions directly. This is especially true with respect to Quebec and its civil law system." Schwartz also notes that there is "an intangible marketing value" to being the second largest firm in the country. When it comes to getting on the dance cards of international clients interviewing firms in Canada for the first time, sometimes, size matters.
The Faskens (FMD) national merger strategy essentially is a positioning strategy. In addition to positioning the firm to attract international clients coming to Canada, the FMD strategy positions the firm to match the business expectations of its Canadian clients, which have been forever altered by globalization as well. Louis Bernier, managing partner of the Quebec offices of FMD, explains, "Local clients don't exist anymore. (Even if a client) is local today, (the client) will become national or international tomorrow. Many tasks may be performed at a local level, but clients are not (local)." The view on the West Coast is the same. Sue Paish, managing partner of the Vancouver office of FMD, says that she and her colleagues in the former Russell & DuMoulin had noticed a shift. "Regional businesses are not as prominent as they were 10 or 20 years ago," says Paish. "Clients are national and international now."
One of those national and international clients is RBC Dominion Securities. Eighteen months ago, the Royal Bank decided to merge its corporate banking and investment banking operations across the country to provide integrated solutions and seamless service to its clients. Furthermore, the head of RBC Dominion's client coverage teams, across eight industries, is now based in New York. Ian McArthur, a Vice President with RBC Dominion in Calgary, likes to use Michael Allen and his colleagues in the Vancouver office of Faskens to work on structured finance and project finance transactions. McArthur explains that an increasing number of deals involve US bank syndications. "When you go to a New York bank for syndication, they look to who is acting on the deal," says McArthur. "The likelihood of New York having heard of Russell & DuMoulin is more remote than them having heard of Faskens. The national firm provides an additional level of comfort." As well, adds McArthur, "The additional resources that (the Vancouver office) can bring to bear (through their Toronto and Montreal offices) are significant." The FMD national strategy clearly positions the firm with added credibility and resources for its Canadian clients. Concurrent with the launch of the national firm, Fasken Martineau DuMoulin also created a presence in New York by opening a representative office staffed now with three lawyers practising Ontario and Quebec law.
Last month, McCarthy Tétrault celebrated its tenth anniversary as "Canada's National Law Firm" with full-page ads in major newspapers across Canada. It is interesting to note that, aside from the firm's initial foray into the Calgary market, its merger strategy also was a positioning strategy. McCarthy's partner Gary Girvan explains. "We wanted to differentiate ourselves. The country was shrinking. Banks and investment banks were operating on a national basis and we thought there could be synergies to operate on a national basis." When McCarthy & McCarthy tested the idea with some major Toronto clients who operated in the other Canadian centres, they found those clients firmly ensconced with local law firms. "(One client) said don't go forward on the basis that we will provide you with work," says Girvan. "This (reaction) caused us to rethink the plan and it worried some sceptics. But we felt that ultimately the national presence would give us something to market."
There is a third leg to FMD's positioning strategy, which responds to globalization dynamics that were not present ten years ago. The accepted wisdom in the legal community these days is that, sooner or later, legal services will "globalize" in the same way that the Big 5 accounting firms globalized in the 1970s and 1980s. Schwartz explains, "The merger...allows us to be positioned to be part of a global alliance should that phenomenon occur." André Bourbonnais, Vice-President and Chief Legal Officer of Teleglobe Inc., a long-standing client of Martineau Walker, agrees with Schwartz's analysis. "They are going in the right direction (with the national merger)," says Bourbonnais. "If Canadian firms want to be on the radar screen of the (global) mergers (of law firms) that are inevitable, then they have to be national." Schwartz also believes that the national firm-and, perhaps, a global alliance-may be necessary to compete with the Big 5 accounting firms should they be successful over the long-term with their ambitions to add a full range of high-end legal services to their "multi-disciplinary practices". Another FMD client, Peter Brent, General Counsel of health sciences company MDS, concurs. "Faskens can see what the Big 5 firms are doing," says Brent. "Any firm that doesn't see that as a threat is living in the dark ages."
Globalization also provides the backdrop to the client-opportunity strategy of Torys, but only insofar as Canadian clients are doing more business south of the border and around the world. Torys believes that there are opportunities to leverage its existing client relationships in two ways. First, there is a competitive advantage in knowing how its clients prefer to operate. It can be time-consuming, expensive and, sometimes, frustrating for clients to have to reinvent those relationships with US counsel. Les Viner explains, "(Every client) has a way of doing things. It sounds easy, but it isn't easy. They like you to report in certain ways; they have thresholds and priorities that are understood. It takes a long time working with (a client) to understand what they want. When you are in the deal-doing business, you don't want to have to instruct counsel every single time about what those parameters are."
TLC Laser Eye Centres Inc. began using Torys a few years ago when the company went public. Since then, most of the growth of the TSE-listed company has been south of the border where it now has 55 eye clinics (in addition to 5 clinics in Canada). On a recent US acquisition and a cross-border financing, Ron Kelly, General Counsel of TLC, used Torys' lawyers in both the Toronto and New York offices. "Having one point of contact (David Chaikof in Toronto)-no matter where the work is being performed-and one bill for all offices is important to me," says Kelly. "If someone you know is on top of (all matters), that is important."
Bracknell Corporation is another TSE-listed client of Torys that is expanding in the U.S. Last fall, the facilities services company acquired Nationwide Electric, Inc., one of the largest electrical services companies in the U.S. "The deal had more value to us if it could be completed within a short time frame," explains John Naccarato, General Counsel of Bracknell. "Torys' New York office was able to do the (anti-trust) filing in an expedited time frame...The traditional approach of retaining local counsel adds a layer of complexity to (any) transaction." The cross-border merger makes sense to Naccarato. "Our customers are asking us to see the border as transparent," he says, "and so I am expecting the same from my service providers. (The US work) allows (Torys) to develop more intimacy with our business. My expectation is that (our counsel) are an extension of our business."
The second way in which Torys believes it can leverage its Canadian client relationships is aimed at acquiring new international clients in the long term. In Canada, Torys is one of the big fish in a small pond. When major international corporations come to Canada they often choose to swim with Torys. These engagements provide Torys with access to senior, international decision-makers and an opportunity to show the clients what Torys can do. Once established, relationships and reputation can open doors that otherwise would be shut to small fish in the big ponds. Les Viner explains, "We get to 'credentialize' ourselves in our small economy with global clients, which we can then transfer to New York and internationally. It is a huge piece of the strategy that people miss." The Torys long-term strategy is not just about New York. "It is also an international strategy," says Viner. "Capable, talented lawyers with lots of deal experience-and the ability to deliver New York law-takes you around the world."
Of course, as Viner is the first to acknowledge, "The strategy doesn't work unless you have great lawyers." So, why not merge with a top-tier New York firm? Viner explains, "The most common question (we hear) is 'Why wouldn't you want to merge with Cravaths or another similar firm?' First, anyone who knows Cravaths would know that they don't want to merge with anyone," says Viner. "But even so, our strategy is different. Our strategy is not to import Cravaths into Canada. Our strategy is to do what we do well for our clients in more markets than Canada." Indeed, as suggested in the editorial column of the November issue of this magazine, Torys is exporting to New York the brand identity that it enjoys with its Canadian clients.
So, who is Haythe & Curley? "Our firm has always been a corporate transactional firm from the day we opened the doors in 1982," explains presiding partner Steve Curley. The original partners and associates in the firm grew up together at a mid-sized firm called Casey, Lane & Mittendorf, which no longer exists. "A significant piece of our client base has been private equity and venture capital investment funds-and lenders into those funds," says Curley, a tax lawyer. Over the years, the firm developed or added expertise in litigation (led by executive committee member Charles ("Trip") Dorkey), real estate, public finance, employment, health care, and trusts and estates for high net worth individuals. Ten years ago, the firm opened a Beijing office, which now has eight professionals qualified locally. The firm today consists of approximately 25 partners and 50 associates. "Our strategy has always been global," explains Curley. "We have found that non-US clients are more used to, and accepting of, a smaller law firm. In some years, a third of our revenues would come from cross-boarder relationships."
Some of those cross-border relationships included Canadian clients who had relationships with Tory Tory as well. EdperBrascan Corporation, a long-standing client of Tory Tory, which has relationships with a number of US firms, had used Haythe & Curley on cross-border financings. "I think (the merger) is a super fit," says Robert Harding, Executive Chairman of EdperBrascan. "I was amazed at how similar the cultures (of the two firms) were." Harding notes that the lawyers he has dealt with at Haythe & Curley "are astute businessmen as well as very capable lawyers."
From the perspective of Haythe & Curley, the strategy also made sense. "We had been approached by other US firms that wanted to get into New York," explains Curley "but (there never was) a particularly good reason for them to be in New York other than it would be nice to be in New York. Torys is the only firm (of the dozen that we spoke with) that had an economic imperative to be in New York. They had clients demanding service in New York. That is far less true of California and Chicago firms. So it was really a natural strategy, rather than a contrived strategy." In addition to fuelling growth with interesting work from Canadian-based clients, Curley believes that synergies with Toronto will enable the New York office to expand more quickly in areas such as technology and debt finance.
Tory Tory and Haythe & Curley had known each other for some time. Brian Flood, a senior corporate partner at Torys, first worked with lawyers from Haythe & Curley while they were still members of Casey, Lane & Mittendorf in the 1970s. Over the years, the circle of lawyers running into one another on transactions widened. "We share the same values as Torys," says Curley. "We have always been partner driven. Partners have always actively practised law. Neither office is highly departmentalized. There is a tendency in both offices to have broad practices, which we think is a good thing for lawyers and a good thing for clients." The two firms first began to muse about closer ties when Flood was Chair of Torys in the early 1990s. In 1998, representatives from each firm held a series of dinners to get to know one another better and explore strategies. Polite courtship led to formal dating early in 1999, when committees were struck to look for agreement in principle on the big issues of governance, structure, compensation and name, and to dig into the complex, cross-border details that flow from those big issues.
As early as the summer of 1999, Torys began test-marketing the strategy with Canadian clients who had not used Haythe & Curley. "In the formal dating phase," explains Viner "we had questions in our mind as to whether our clients would be open to our referral suggestions. (As well), we were testing the depth and breadth of the capability (at Haythe & Curley) to see if it was a match with our clients' needs." One of those clients is Kevin Riley of Royal Bank Equity Partners. "Torys is our number one law firm...on M&A transactions," says Riley. "They understand our business philosophy and management style. Torys introduced us to Haythe & Curley on a cross-border transaction and we noted that (Haythe & Curley) had the same philosophy and culture (as Torys) in servicing their clients. They are responsive and you get partner involvement on files." On the wisdom of the merger itself, Riley says, "Our needs are North American...I think they have made a clever move." Harding of EdperBrascan agrees, "Given (that) most Canadian companies are accessing capital through the US markets, (Torys) is ahead of the curve on this one."
One factor holding back the curve, perhaps, is the importance of referral relationships between leading Canadian firms and top-tier New York firms. Any Canadian firm that enters the New York market-so the thinking goes-runs the risk of losing out on referrals from New York firms. Osler, Hoskin & Harcourt LLP and Stikeman, Elliott each have offices in New York (six and five lawyers, respectively), but they practise Canadian law. The only other Canadian firm that practises New York law is Goodman Phillips & Vineberg. Indeed, GPV has been practising New York law since 1984 when the office opened, and only one of the nine GPV lawyers in New York today is even qualified to practise in Canada. Toronto-based Stephen Halperin, who is co-managing partner of GPV's international operations, explains that the New York office is "an effective boutique...with particular expertise in Canada/US tax. It has been profitable for a long time." Halperin says that his firm's relationships with the large New York firms are stronger than ever and that the New York office "doesn't have the depth" to compete with, nor does it "hold itself out as a competitor" to large New York firms. "New York is a vibrant, robust market," says Les Viner of Torys. "There is lots (of work) for everyone...It would be crazy to think we are eating anybody's lunch."
One question mark in the Torys strategy is whether significant Canadian clients who already have established relationships with top-tier New York firms will choose to send work to Torys in New York. Rogers Communications Inc., for example, "relies significantly on Torys" in Toronto at the corporate level and "considers Cravath (Swain & Moore) as our primary US law firm," says David Miller, Vice President, General Counsel of Rogers. (It should be noted that Russell & DuMoulin (now FMD) has been Rogers' "primary firm in B.C. for years" and Martineau Walker (now FMD) has been their "primary firm in Quebec for years." In Ontario, Rogers also relies heavily on Lang Michener). Recently, Rogers turned to Torys, including lawyers in the New York office, for an investment in a US technology company and for a software licence with a US company. "Because the (software) agreement was governed by New York law, it was quite a seamless process (to use Torys)," says Miller. Using the New York office of Torys "does have more continuity," says Miller. "They understand the way we do business-I guess they get it from (lawyers in Toronto)-and there is less of a (learning) curve." As a result of developing relationships with the New York lawyers on these files, Miller has begun to "go to the (New York) lawyers directly on purely US (matters)." Miller notes that "being a large client of the firm (can lead to) better or quicker service." While Cravaths may be Rogers' "primary US law firm" for billion dollar financings, implicit in Miller's comments is that there may be a certain level of work for which it makes sense to involve Torys in New York.
But what about the billion dollar US deals? Long-standing Torys client Thomson Corporation recently announced its intention to sell its US and Canadian newspaper business (excluding The Globe and Mail), which includes 55 daily newspapers and more than 75 non-daily newspapers, mostly in the U.S. Goldman Sachs was retained to advise on the sale, which is expected to fetch in the neighbourhood of US$2.5 billion. Torys was retained to provide legal counsel on both sides of the border. It makes sense that Torys is involved since it was involved in acquiring most of the newspapers over the last 30 years. Nonetheless, the retainer represents a significant opportunity for the merged firm to prove that it has the depth to handle big cross-border deals.
The client-opportunity merger strategy of Torys is clearly different from the positioning merger strategy of Fasken Martineau DuMoulin LLP. The differences are compounded in two further respects. First, the two firms have different merger philosophies, which reveal themselves in the firms' approaches to partner compensation. Fasken Martineau DuMoulin LLP is taking a "blended approach" to allocating profits, which, in effect, preserves local profit pools and local autonomy over partner point setting. Torys, on the other hand, is taking a "one-firm-firm" approach with one profit pool and combined point setting between the New York and Toronto offices.
Louis Bernier explains the Fasken Martineau DuMoulin LLP approach: "There will be one firm budget with a blended approach to expenses and revenues. Some expenses will be national and some expenses will be local. Each office will have its own compensation system, but there will also be (a national incentive pool for) compensation for activities of national scope." Bernier hastens to add, "We expect each partner and associate to behave as members of a national firm. Each compensation committee will take into account activities at a national level as well as local."
For many legal pundits, the "blended approach" to partner compensation reflects, perhaps, not so much a merger philosophy as a merger reality. No matter how much the partners from the three FMD firms may genuinely desire to integrate themselves into one firm as quickly as possible, the practical reality is that they practise in different cities and, outside a relatively small circle, barely know each other. Michael Fitch, who was the managing partner of Russell & DuMoulin for six years, including through the merger negotiations, shows the wisdom of experience when he says, "We felt that retaining as much autonomy as possible (over compensation) at the start was the way to go in order to get our partners comfortable with the merger." Even after 14 years of affiliation, the partners of Fasken Campbell Godfrey and Martineau Walker felt that the blended approach was the way to go. The new FDM partnership agreement calls for the mandatory review of the compensation system in two years.
Alan Schwartz takes comfort in the fact that the blended approach to profits and compensation has worked well for other national firms, such as McCarthy Tétrault. Certainly, a merged firm creates incentives and mechanisms for sharing that are significantly more powerful than in affiliations. Gary Girvan of McCarthys' Toronto office recounts a recent experience of receiving a conflict referral from another law firm to act for a US-based company on a hostile take-over bid. "After 45 minutes on the phone with the new client, I said you really should be using counsel in Calgary because that is where the target is," explains Girvan. The next day the new client was on a plane to meet with Richard Shaw, Q.C., in the firm's Calgary office. "I don't believe you would have seen that happen if we only had an affiliation," says Girvan. "There is not enough interest built into (affiliation) arrangements, even though it might be in the best interests of the client." McCarthys' has no formula to allocate "credit" to Girvan or the Toronto office for the referral, but Girvan trusts that the Toronto allocations committee will recognize and reward that kind of inter-office sharing as part of the mix of contribution criteria it considers.
The merger philosophy of Torys produced a much different approach to partner compensation. "We all agreed from the start that this is a one-firm-firm, with one profit pool," explains Viner. "What is good for an individual, and good for a city, is good for the firm." With respect to how compensation setting will work, Viner says, "It is not very complicated. First, we are not calculating profit by city. How can you figure it out anyway if you are sharing an infrastructure?" he asks. Indeed, under the "one-firm-firm" philosophy, says Viner, "If you can figure it out, it means you are not doing it right." Viner goes on to explain the other elements of the Torys approach: "Secondly, we respect that we are in different markets...(although) we don't have a formula for what that means. Thirdly, I think we recognize that (each of the two firms has had) a "smoothed meritocracy". It is a meritocracy, but it is gentle and compassionate and long-term in focus-not so much 'what did you do for me last year?' And we have to be wise and fair-and that's it," says Viner. Easier said, of course, than done.
Torys is now in the middle of its first compensation setting exercise. The compensation committee of nine partners includes four partners from Toronto, four partners from New York, and Viner. (The committee includes all seven members of the firm's Executive Committee.) "Everything we do (as a committee), we do together," says Viner. Torys stands out among Canadian firms for the effort that it puts into partner review every two years. In addition to partner questionnaires and financial data, the process includes a peer review conducted through partner interviews and an "upstream" review of partners by associates, conducted by an outside consulting firm. The upstream feedback process solicits input on leadership, mentoring, communication and professional development of others. Although the partner review and compensation setting process at Torys requires a greater investment of resources than the process followed by other firms, the process is necessary to instil confidence among partners that their contributions will be recognized in the one-firm-firm approach.
Torys had been one of the few leading Canadian firms (Davies, Ward & Beck is another) to maintain only one principal office in Canada, again reflecting its one-firm-firm culture. Certainly, it was a departure for Torys to merge with another firm in another city, and it would have been even more challenging had Bennett Jones joined in the merger (see the Editorial in this issue of Lexpert). However, in many ways, it would have been a far greater departure for Torys to enter into a merger that did not adopt a one-firm-firm approach.
The second respect in which the differences between the client-opportunity and positioning strategies of Torys and Fasken Martineau DuMoulin LLP are compounded has to do with professionals. Law firms compete in two markets: the client market and the professional market. The "professional market" refers not only to existing lawyers at a firm and its potential recruits; it also refers to the relative reputation of law firms among peers in the legal community. The information explosion, ignited by the Internet, has exposed law firms to an ever-increasing availability of information. This exposure heightens awareness of "who's hot and who's not" in the legal community. If a law firm is perceived to be standing still in today's "professional market", it is falling behind. Reputations hard won and well deserved have a very short half-life, and no firm can afford to rest on its laurels in terms of the opportunities that it offers to its lawyers.
Both Fasken Martineau DuMoulin LLP and Torys had one eye on the professional market as they were considering merger strategy. Michael Fitch, the former managing partner of Russell & DuMoulin, says, "There were two main reasons for deciding that we needed a national platform." The first reason was the capability to offer clients seamless service across the country. The second reason, says Fitch, was that "our people, especially new lawyers that we are recruiting, were feeling more attracted to the idea of being a national firm." Sue Paish, who took over from Fitch, explains, "(Russell & DuMoulin) has always prided itself on having the brightest and best lawyers. We want to provide the most exciting opportunities and clients that we can in order to attract the best (lawyers)."
"(The Torys strategy is) also about lawyers," says Viner. "We have created a wonderful platform for challenging, dynamic and interesting careers for lawyers. If you continue to recruit and retain great lawyers you will keep great clients. (New York) provides a whole new avenue of possibilities for people." Three partners and three associates from Torys wrote the New York bar last summer, and passed. Several more Canadian lawyers are scheduled to write the exams this year. "The reason (for becoming qualified in New York)," says Viner, "is not to send everyone to New York. The reason is because (the merged firm wants) a global staffing model. It is a one-firm-firm." As pictured on the cover of this magazine, Torys has sent one partner and three second-year associates to New York, and has plans to send more lawyers later in the year. An associate from the New York office will be coming to Toronto as well. Richard Willoughby, the Toronto partner who moved to New York, spent two and a half years in Torys' London, UK office (which closed in 1999) and, for the last two years, was responsible for managing Torys corporate department.
The differences in the peer strategies of Torys and Fasken Martineau DuMoulin LLP might be captured again in the terms "opportunity" and "positioning". Based on the transfer of lawyers to New York, the Torys professional strategy might be described as a peer-opportunity strategy. The FMD strategy, which creates a significant national firm, gives the firm momentum in the professional market and might be described as principally a peer-positioning strategy. Certainly, there will be more opportunities for FMD lawyers as the firm integrates its lawyers at the practice group level. However, FMD has no immediate plans to transfer lawyers between offices.
Both Faskens and Torys plan to grow. FMD has indicated that its sights are set on Calgary as the next link in its national chain. If FMD were to attract another "equal" as a merger partner, FMD might even vault ahead of McCarthys as the largest firm in Canada. Torys had no plans to expand into other cities. "The future growth strategy