News about the search for a merger partner by Bingham McCutcheon has been in the media the past few weeks. If the search leads Bingham to the altar, its transaction likely will be among parties equally sophisticated and aware of the intricacies of law firm merger. After all, Bingham owes its current size to a series of mergers over the last decade or so. While its merger partner may have leverage due to Bingham’s current state, Bingham will hold its own in representing its interests in the arms length negotiations.
Not all law firms jumping into the merger game are as experienced as Bingham. Some larger law firms have extensive merger experience. Many times, smaller firms do not. In addition, when size disparity exists, the larger law firm may have a more intricate way of managing its operations, performance and strategic activity. For the smaller law firm, it is important that it understand the fundamental character of the larger law firm so that it can realistically assess the wisdom of the proposed merger and negotiate the best deal possible. Anything less risks irreversible change based on short-term excitement and infatuation.
There are many compatibility considerations-everything from culture, financial metrics, operations, clients and compensation systems to grasp and understand. For the small law firm being romanced by the large firm, it is also helpful to approach the discussions with these thoughts in mind:
Understand the Terminology. The older and larger a law firm, the more likely it will have a language of its own that describes some basic concepts. Sometimes the terminology seems unintelligible, sometimes it seems to make sense and on rare occasions it describes concepts that match perfectly. But don’t assume that familiar sounding terms have meaning to you. Unless you get behind all the nomenclature, you’ll be lost when it comes to understanding key components of the proposed transaction.
Determine How Other Merger Partners or Groups of Laterals Have Fared. In this day and age, a lot of the firms seeking to do a merger have been at it for a while. If so, dig deep into the firm’s track record of integration, post-merger success and failure. Bingham McCutcheon merged with Riordan & McKenzie in 2004 and by 2007 only 50 percent of the new additions from that firm remained. There has to be an explanation and whether it is good or bad it needs to be heard.
Delve Into the Firm Policies. No one would contemplate a merger without digging into the other firm’s constituent documents. But a lot of what gets done in a firm is contained in the firm’s policies. Many law firms use policies extensively as management tools-those tools can make day-to-day life starkly different from the happy talk heard during the courting stage. Read them and understand them-they tell you what your future may be like.
Understand the Firm’s Strategic Plan. If the firm has a strategic plan, read it to make sure the firm’s strategy and tactics are clear, but also read between the lines. Gaining a holistic understanding of a firm’s strategy can help determine if your acquisition fits within the larger firm’s plan. For example, if the larger firm’s strategy seeks to eliminate low margin practices, some of your smaller firm’s practices may not fit that well. If so, the larger firm’s discipline or post-merger plans have to be questioned. If your prospective merger partner doesn’t have a strategic plan or it is old, its commitment to management has to be questioned.
Get a Handle on Recent Financial Performance. No doubt your suitor is pouring over your data in an attempt to determine whether a merger will be a net benefit or burden. You should do the same and not assume that just because it is bigger it is financially stronger. You should also assess the value of your equity pre-merger and post-merger. How a delta in capital, and other financial disparities, is resolved may be the difference between doing the deal or not.
For the smaller firm involved in a law firm merger, getting it right is very important because a “do-over” is seldom available. What other key thoughts should a small law firm consider when facing the prospect of merger?