Although this year’s transactions generally are smaller deals, the robust law firm merger market of 2013 has been continued into 2014. Mergers grab headlines, create excitement and almost always provide the merged firm a little boost from the afterglow of positive publicity. Unfortunately, any positive vibe from a merger will not last forever. And more importantly, the merger itself ultimately can prove to be a big negative because only half of the mergers consummated turn out successfully. For a merger to end up on the “success” side of the ledger, today’s law firm leaders should proceed carefully to assure that in any merger the two firms fit together well.
Numerous reasons propel firms towards merger but for many firms the significant step of merger is worth considering because (i) it solves succession plan issues, (ii) client needs dictate a broader platform, and/or (iii) financial or market dynamics demand 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, the analytics ultimately come down to five areas of compatibility. If the fit is right, or reasonable measures can be taken over a reasonable period of time to assure a good fit, 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. These subtleties need to be studied. The respective firms’ clients that are “competing to the death” in the marketplace may not see the benefit of being represented by the single firm the merger creates.
Compensation Compatibility. The setting and paying of compensation is tough in any circumstance. But trying to blend two systems in which one firm’s lawyer behavior is different than the other firm’s due to compensation system induced motivations 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. Prior to getting too deep in the merger discussions, strong law firm leadership will study the two firms’ compatibility in these five areas. When considering a potential merger, is there anything more important than making sure the fit is right?