Legal update: How will your merger discussion be one of the successful ones?

Published: Tuesday 31 May 2022

If the number of mergers announced each month is anything to go by, law firms must be spending a considerable amount of management time on merger discussions and projects. A recent survey suggests that over 50% of firms are actively seeking a merger or acquisition and over 20% of firms are in active discussions. So, the announcements we see are probably just the tip of an iceberg and all of these discussions, whether they lead to a deal being completed or not, take up a significant amount of management time and are, therefore, expensive. They also tend to take the focus away from clients and from client work, which can of course make clients unhappy and, unless communication is handled very well, can at best be unsettling for partners and staff and at worst very disruptive.

We may never know how many of the mergers are truly successful in the long term. Success in corporate mergers is usually measured by things such as revenue, profit and shareholder value. Revenue and profit information is easy to ascertain with larger law firms so ‘success’ of those mergers can be measured. Very often the primary driver behind a firm's wish to merge, acquire or be acquired is not financial, although getting the numbers right is essential. Succession, attracting and retaining talent, increasing the range and depth of services, and increasing geographic reach are all reasons that feed into the strategic decisions firms make.

In the work we have done with law firms, we have observed that much of the long-term success of a merger, however measured, depends on the project starting out on firm foundations. The challenge for any law firm leader going into a merger discussion is how to make sure they are engaging in the right discussions, how to have an effective process to progress those discussions, how to get a good deal for both parties and then how to manage the post-merger period.

Much has been written about the merger process and broadly each discussion follows a similar path. Despite that, there are some common themes that emerge of things that one party or another often does not think about early on. If they did, the way forward could well be easier. Here are 7 key things that we would advise any firm to think about before they start:

Why do it? 

Some firms will have a well-thought out strategic plan and a clearly articulated understanding of why they want to merge and what they want to achieve, but even the best plans can be left vague on certain aspects (e.g. Yes we want to grow and increase some of our practice areas but not others – but which and why?; We might look at a new location but have not really thought though what that will achieve). So, make sure you have a clear strategic logic to as many aspects of a merger project as possible. And, even if your plan is to remain independent, make sure that discussion has been had amongst the partnership, you have a clear strategic plan for the firms future and the decisions are reviewed regularly, particularly if there are any material changes.

Have a plan

When starting a discussion, be sure to have a basic route map to guide you through the process. At the same time, be flexible and willing to revise your plan. What you start out looking for may prove not to be as attractive as you expected when you find it and you will need to rethink. In the course of the discussions, issues are bound to arise that you were not expecting, and you will have to think about and deal with them.

Strengths and weaknesses

In this case this is not a SWOT analysis, although it is worth doing that exercise. What are your strengths and what is unique about you that you can offer another firm? What are you lacking, or what gaps do you have, that you would like to find in a merger partner? Examples might be: we have under invested in our infrastructure and are looking for a firm with better systems, or the alternative to that is we have an infrastructure that will support a much bigger firm so we want to grow; we need to grow a team and we can achieve that more quickly through an acquisition than through organic growth or recruitment; we need to be in a particular location; or, we have access to clients who will only give us better work if we are part of a bigger firm. 

Decision making

Depending on the size of the firm, it might not practical for all decisions in a merger negotiation to be made by the whole partnership, nor should it be necessary and, in any event, it is not a good use of partner time. Decide at the outset which key matters must be reserved for a partnership vote and who has delegated authority to make decisions on more practical matters and matters of details. 

Speed of decision making is important. Time kills deals and if the decision making gets dragged out it sends a poor message to the other party who can then begin to question if your enthusiasm and desire to do a deal is genuine.

Who are the key people and key clients?

Long before you get to the due diligence process undertake a client analysis and identify which key clients you cannot afford to lose if there were conflicts with a merger party. At the same time, know who your unprofitable clients are that might be dispensable. Identify the clients who have the potential to generate more work and who may benefit from you having a bigger team or being able to offer wider services.

Be aware of which partners are key to the business e.g. individuals with a key client relationship or sector profile, or those who make a big contribution to the firm in other ways who you would not wish to lose; and, at the other end of the spectrum, which partners tend to be disruptive or are not team players who you might be better off without, could afford to lose and who might be eased out as a consequence of the merger.

Invest in the relationship

Firstly, invest in the relationship between the leaders of each firm. If the relationship between the two does not work, it is unlikely that the negotiations will be easy, let alone successful, and it will be harder to bring everyone else in the firm on board - they are the ones that have to sell the deal internally. If there is synergy between them, it is more likely that they will be looking at a common goal rather than solely from the perspective of one partner group or the other.

Have the right team for the post-merger integration

Start thinking about the new management team well in advance of completion day. Make sure you have a team with the experience and capability to manage the larger merged firm. Harvard Business Review proposed a theory that 70% of mergers fail because of the incorrect matching of senior management to drive successful integration. A head of HR, marketing or finance who does a good job in one firm might not be the right person in the same role in a firm twice the size. Equally, being a bigger firm can provide more opportunities for ambitious managers and give the firm greater scope to retain and develop talent.

Conclusion

However experienced a firm's leaders are in handling merger negotiations, no two discussions will be exactly the same. This is not surprising given that a merger is about putting two groups of people together as well as two groups of clients. We also learn something new about the merger process from each client we work with - how we might do something differently next time or how to avoid a particular pitfall. However, if these seven common themes are addressed correctly and at the right time the process should be a whole lot easier and in the long run far more successful.

Martin Griffiths,

Director, Richmonte Wells

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