A law firm considering a merger has a lot to think about. Evaluating the differing cultures, financial metrics and compensation systems is a must. Merging two law firms without vetting the client fit is not only unwise, but it also is not likely to end well. Yet, finding an acceptable match in the two law firms’ clients is not a quest for perfection. It is a case of avoiding disaster that places at risk important client relationships that have taken a long time to develop. As reported by Robert Denney, approximately 50% of law firm mergers fail, so it behooves law firm leaders to understand the clients a merger will bring together. When significant trouble appears pre-merger, wise counsel favors a “steer clear.”
At least two purposes are served by engaging in an in-depth review of client compatibility. Obviously, it prevents the occurrence of a highly combustible combination. The second purpose served is no less important. The client compatibility exercise will present, front and center, the ability of two separate firms having different loyalties being able to work together on the toughest of issues. After all, clients are like a firm’s children. Criticism from an outsider may not go down well. But if difficult decisions are addressed with tact and a long-term view, two firms can come together with promise for the future.
Legal or Ethical Conflict. The easiest indicator of a bad fit is if diligence reveals that each firm represents a party to litigation or other matter than creates an ethical conflict that cannot be waived. Depending on the importance of the respective clients to the to-be-merged firm, an attempt may be made to withdraw from the relationship so that the merger may go forward. Many times, this is easier said than done as not only can feelings get hurt, but a “Hot Potato” withdrawal can end up being ineffective. And even if a waiver is ethically possible, the manner in which one is pursued can demonstrate a lack of fit between firms.
Issue Conflict. Some firms stake out a position regarding the type of client they consistently will represent. For example, a real estate firm may commit to representing only developers, or a labor law firm decides it will only represent management. Considering a merger with a firm that “sits on the opposite side of the table” will be problematic. Surmounting that problem may depend on the relative size of the conflicting practices or a willingness to sacrifice one firm’s practice in favor of the merger.
Business Conflict. In contrast to firms with issue conflicts, firms too much alike can have business conflicts. Two firms may represent clients that compete head to head in the marketplace. Convincing a client that hiring its competitor’s lawyers may not be an easy sell. Moreover, a business conflict may seem resolved by an abstract conversation with a client only to prove unresolvable when actual facts and conduct are involved. All clients demand loyalty and any perceived lack of loyalty may only arise when real life circumstances are presented. Finally, in many instances, the existence of a business conflict will ultimately lead to other conflicts.
Vision. If one firm’s vision or plans for the future involve pursuing initiatives that don’t fit well with the other firm’s client base, care in pursuing the merger is imperative. A firm committed to becoming the leading SEC controversy firm in a market can experience difficulty in explaining that vision to a merger partner that covets its close relationship with that regulatory body.
Clients are the lifeblood of any firm so a cursory review of potential client conflicts is not adequate. Moreover, apparent acquiescence by a merger partner during the courting and closing phase does not mean the potential conflicts will go away or be forgotten. A merger partner looking for “any port in the storm” may remain quiet for fear of killing the merger, only to raise concerns post closing.
The existence of legal conflicts is most often cited as the basis for calling off mergers. No doubt, that is a compelling reason. But other conflicts that trace themselves to a client base can be just as important.
How many of these other conflicts have you seen as insurmountable?