4 key considerations to avoid merger failure

By Kevin Wheeler

The level of merger activity in the legal market has reached fever pitch, with barely a week going by without a new law firm pairing announcing (or having leaked) that they are in merger discussions. In fact, recent research by Smith & Williamson reveals that 29% of the UK Top 100 expects to merge with another firm in the year ahead.

Increased competition in the legal market is undoubtedly behind this consolidation. Firms see a merger as the opportunity to “bulk up” and gain greater clout in the market, as well as to boost profits by reducing duplicated costs across the newly combined firm. Building a global network capable of servicing clients with international needs is also a strong driver of current merger activity in our sector.

However, mergers are not easy to pull off and firms need to be wary. So much time can be spent focusing on the internal issues – both pre- and post-merger – that the firm takes its eye off the ball and loses its way in the market, with both clients and partners departing in the process.

In fact, so fraught with difficulties is a merger that the Smith & Williamson research reveals that more than half (56%) of current merger discussions between law firms are ending in failure, with a third spending in excess of three months in negotiations before the decision to halt talks is reached. Add to this the well-established research by the likes of McKinsey and KPMG, which shows that in excess of two-thirds of all mergers fail to produce the hoped-for benefits, and you can see that law firm management teams need to think long and hard before contemplating a merger.

So, what should they be thinking about?

Increased market opportunities

First and foremost, firms should be using a merger to increase their strengths in key markets. Anything that delivers added value to clients and helps to differentiate the firm further from its main competitors is likely to pay dividends over the longer term. Increased sector experience, extended international networks and a fuller range of service offerings are likely to be viewed favourably by clients, but only if these can be delivered seamlessly and efficiently and without significant conflicts arising.

Carrying out an exhaustive and “honest” appraisal of where the combined firm will sit in its chosen markets after merger should be a key piece of due diligence for any management team contemplating a merger. Commissioning independent research to support such analysis is crucial to making an informed decision about the benefits of merger.

Financial compatibility

Unless the two firms are financially compatible, a proposed merger is usually dead in the water from the outset. It is crucial that the profitability of the merger candidates is similar, so that partner earnings from one side are not in danger of being diluted by those from the other. The partner remuneration systems also have to be closely aligned for the merger to work; a firm with a pure lock-step system is unlikely to offer a good combination with one which relies on a performance-based system of remuneration for its partners. Producing a hybrid remuneration system after merger or moving lock-step partners to a merit or performance-based system is likely to be problematic, leading to partner exits.

Cultural compatibility

Culture is difficult to define and measure in any organisation, but spend enough time in two organisations from the same sector which are not culturally similar and the differences soon become apparent. Try merging two such organisations and you will encounter severe difficulties and lots of fall-out in terms of departing staff. The same is true for law firms.

Although all (commercial) lawyers have had a similar training, the way individual firms are managed and operate varies enormously. Some law firms’ management teams are very autocratic, setting demanding targets for individual partners which if not met can result in expulsion from the partnership or de-equitisation. Other firms are much more collegiate and run on traditional partnership lines: if partners have a “lean” patch, the management tends to be more forgiving, with individuals given time to bring in new work or improve performance. Such firms tend to be lite on partner targets, business plans and partner appraisals. Bringing two such firms together is likely to be very problematic.

Systems and infrastructure

Finally, never underestimate issues surrounding systems and infrastructure, including buildings. These days, large law firms rely heavily on their practice management, CRM and document systems. Without these, they would cease to function. This was brought home to me very clearly when early on in my career my firm went through a merger and decided that this represented a good opportunity to move to a new practice management system, ditching the two legacy systems in the process. This did not go to plan (if there was ever a plan!) and the merged firm was without this vital system for three months, during which time it came very close to financial meltdown.

In a people business, the importance of the buildings cannot be overlooked. Ensuring that you have the right configuration of buildings in which to house your lawyers is important, remembering that the sooner you mix the two firms’ lawyers, the sooner you will get cultural integration. Failing to ensure that you don’t have too much empty space post-merger (especially long leases on buildings that you cannot easily exit from) is a mistake many merging law firms have made in the past.

Focusing on these four main areas should enable those management teams contemplating a merger to conduct robust due diligence of any tie-up that they are planning.

Filed Under: Practice of Law

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