To merge, or not to merge? That is the question. More and more law firms face that issue these days. We often advise law firms facing that watershed possibility and take them from considering merger in the abstract to addressing its reality. But as Larry Bodine and Robert Denney recently reported, roughly 50% of mergers fail. Consequently, properly evaluating a potential merger is extremely important. A flawed analysis, a few undeserved assumptions or allowing momentum to overtake critical examination can doom a merger to failure. Conversely, a lack of confidence in a proposed merger because a systematic and thorough analysis was not performed can be a lost opportunity for both firms.
Numerous reasons propel firms towards merger but for many firms the business-altering step of merger is worth considering because (i) a new generation of leaders is not rising to the top, (ii) client needs dictate a broader platform, and/or (iii) financial or market dynamics augur for change. Getting from the step of being “receptive to merger ” to the step of “closing a merger” is a long process that requires careful and in-depth analysis. While due diligence, merger term negotiations, who is included and internal selling can occupy firm management for weeks if not months, in our experience, the analytics ultimately come down to five areas of compatibility. If compatibility exists, or reasonable measures can be taken over a finite period of time to reach compatibility, the merger has a much greater chance of success.
Cultural Compatibility. Culture is more than being comfortable with your new partners. Culture involves many things that you may take for granted, including employment arrangements and practices with legal and non-legal personnel. How one firm hires or fires an employee matters. Promotion practices, performance evaluations and decision-making processes say a lot. These everyday interactive things define a law firm’s DNA and its personality. Understanding the two personalities avoids a schizophrenic result.
Financial Compatibility. Seldom do two law firms display the exact same financial metrics. Firms with a wide gulf in metrics like profits per partner, revenue per lawyer, productivity per lawyer, capital, and realization are not likely to mesh. Metrics that are more closely aligned nonetheless need to be scrutinized to avoid a false positive based on apples being compared to oranges. Disparity in billing rates, firm debt, unfunded pension obligations and space utilization undermine financial compatibility.
Client Compatibility. Clients make a firm. Besides the all-important question of legal conflicts, a firm needs to know the philosophical and strategic approach of its betrothed to business conflicts, client profiles and the proposed billing rates. While it is easy to see the incompatibility of a law firm with a huge union clientele trying to merge with a firm that represents management, other more subtle problems can lurk beneath the surface and need to be studied. Clients that are “competing to the death’ may not see the benefit of being represented by the same firm.
Compensation Compatibility. The setting and paying of compensation is tough in any circumstance, but trying to blend two systems in which lawyer behavior is different at the respective firms due to motivations from the compensation systems is even tougher. Moreover, if one firm’s lawyers are used to being paid a larger draw every month than the other firm’s lawyers, something will have to give. An otherwise compelling merger may be saved with phasing in the two systems, or better yet, a new system that utilizes compatible best practices.
Operational Compatibility. No firm can succeed if it does not operate smoothly. Technology or other operational concerns need to be understood and dealt with up front lest they create undue frustration post merger. Not all these issues can be resolved as of the merger’s effective date, but understanding the issues, developing a plan for dealing with them and communicating about them and their planned resolution helps greatly.
Merger’s can be risky, but they also can propel a firm to places not realistically possible if left to organic change. Digging deeply into the data and understanding compatibility in these five areas is critical to a successful merger. In the transactions you have experienced, what other areas of compatibility need examination to improve a merger’s chance for success?