Why mergers of equals are so rare

If mergers of equals are the ideal, why then do so few take place? After all, there are several law firms with equivalent-sized peers. The problem is that many of these firms are occupying the same market position (or at least trying to). They may even mirror each other’s geographical position. Inevitably this means the partners in firm A spend most of their working lives competing against partners in firm B to win work from the same clients and the same potential clients. “Why not just combine and stop the endless competition? We’re even the same size. It’s a perfect fit,” you may say. That sounds logical, but it’s not that simple.

Let us say that in each of these firms there are two finance rainmakers apiece who dominate the relationships with the key banking clients. If such client relationships are in conflict then the deal is a non-starter. But, even if they do not generate business conflicts, rainmakers from either firm may wonder what is in it for them. Why invite your greatest competitors for your best clients’ attention into the room next door? If the other firm’s rainmakers had great client links to a group of banks you had never approached before, or were all based in another country, it would be a different story. But when operating in the same market position, in the same legal jurisdiction, combinations are tricky.

If one extends this scenario across all of the two firms’ practices then one may find a number of leading partners who see no benefits to them in a deal with their peer. Moreover, would they even get on together if put in a combined business, even if the managing partners would? While a corporate may ride roughshod over senior individuals’ wishes in the face of compelling financial logic the same type of approach rarely works well in a law firm partnership. Corporate employees may talk, but partners walk.

In which case what would a merger of equals need to take place? It likely means:

  • Naturally, firms with similar lawyer counts and revenues.
  • Similar profits per equity partner (though there is always some room here).
  • Operating at or near the same market position (as why merge with a far weaker firm?)
  • Practices that won’t be in competition when combined, but be additive.
  • Lack of destructive geographical overlap (and this is critical).
  • A lack of destructive client conflicts (real or perceived by the clients).

To work it would also need shared cultural values, partners who actually get on and share similar strategic visions. The chances of all these factors aligning are very small, hence perhaps why out of 90 mergers involving the UK 100 since January 2011 at best seven could be regarded as mergers of equals. In this light, a deal with a smaller firm whose practice focus and client mix was largely additive and helped expand the combined firms’ capabilities is a far easier merger to get through.

Richard Tromans, Founder and Consultant, TromansConsulting -  www.tromansconsulting.com

Filed Under: Legal Services

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