Who actually benefits from law firm mergers?

Who actually benefits from law firm mergers?

By Nick Hood

News of how the energetic pursuit of the safe haven of a merger by London law firm Davenport Lyons had ended in a pre-pack rescue deal by its smaller West End rival Gordon Dadds was broken in truly modern form last week when a change was made to the firm’s Wikipedia entry, announcing that it had gone in to Administration. This was the last sad act in an on-off saga as talks first started and then swiftly terminated with Shakespeare’s and Howard Kennedy FSI.

The final details of the Gordon Dadds deal may emerge over time, but it is clear that in addition to its creditors, at least some Davenport Lyons staff have paid with their jobs for the partners’ financial ambitions, in particular the very recent move to new offices in Covent Garden.

The increased property burden is unlikely to have been the sole cause of Davenport Lyons’ demise. More likely the firm tripped over one of the inescapable realities of commercial life: recovery kills more businesses than a recession ever does, because of the strain it puts on depleted working capital resources. In the case of professional practices, this has been made infinitely worse by HMRC’s peremptory re-writing of the tax rules for fixed share partners in LLPs.

Despite all the protestations about building market share, creating synergy, exploiting complimentary skills and all the other PR-speak pushed out by the leadership teams of law firms when they announce merger discussions; the real driver is often a fear of the future as an independent mid-market firm in a rapidly changing legal market. There is an entirely understandable desire to huddle together penguin-like for financial protection.

The result is often carnage among the support staff, partner fall out, disaffection amongst competing specialist teams, an explosion of internal politics, client uncertainty and considerable “blurring” of well established brands. Huge amounts of time and money are spent on managing these outcomes; managers and fee earners alike are distracted in the process.

The futility of it all is illustrated by a detailed analysis this month in The Economist of figures produced by American Lawyer relating to the recent history of major law firm mergers in the US. Within the list of America’s top 100 firms by revenue, the six which had merged saw their profit per partner fall by 8.2% in 2013. By contrast, the other 94 unmerged firms grew profit per partner by an average of 2.7%.

There is absolutely nothing wrong with the theory of bringing together major professional services businesses and there have been some notable success stories, especially for accounting firms. Equally, bolt-on acquisitions of much smaller rivals create relatively little internal or external turbulence. But the suspicion based on actual and anecdotal evidence is that perhaps some law firms may be inherently less commercial, or else they have had greater difficulty moving from the traditional collegiate business model to a modern corporate approach.

The question is if mergers involve so much risk, what exactly are the rewards if staff suffer and partner profit shares fall? Creative destruction is all very well, but it needs to be financially productive as well. Otherwise mergers can sometimes be little more the flexing of egos in pursuit of professional pipe dreams.

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About the author:

Nick Hood is a Director of the legal costs firm, Kain Knight.  He is a Chartered Accountant and also an insolvency practitioner with the Begbies Traynor Group, as well as a business risk analyst for corporate health monitoring experts, Company Watch.

Email: nick.hood@kain-knight.co.uk 
Tel:  +44 (0)7967 658 296