How to do mergers

We are told that 75% of law firms have spent some or all of the last 12 months in discussions about “merger”.

In the USA it is reported that mergers are up by 80% in the first three quarters of 2011 against the same period in 2010. The market there is being driven by transactions involving smaller firms. In the UK the volume of transactions is very much smaller than the volume of discussions. Why is that so?

There are a set of clear drivers which are forcing firms to review their businesses and consider changing their shape and size:

• The Legal Services Act. This is not only worrying the high street but also larger firms who fear attack from well funded but as yet unidentified outsiders.
• The economy. Has undermined the finances of most firms and removed the comfort that firms felt before. The refrain of “we are happy as we are” has pretty much disappeared.
• Professional Indemnity premiums. Firms with less than 10 partners are finding their options reducing every year. Some areas of work attract very high premiums.
• The regulatory and compliance regime. The weight of this is perceived to fall disproportionately on smaller firms.

There is a clear view that the UK market needs to and will consolidate. Law firms of all sizes feel threatened by differing aspects of market deregulation. Some of the fear is well founded and some is not but the effect has been to create a frenzy of “discussions”.

Selling the business can seem an easier option than solving a strategic challenge. Let it become someone else’s problem. We have seen one or two large mergers clearly driven by this attitude. What is clear is that firms are now more open to the idea of discussing merger than they were before the recession. It is also the case that firms are becoming more open to the idea of merging with something larger than them. That should pave the way for a lot of merger activity. So why are so many conversations going off the rails?

Some discussions should never have started in the first place because there is clear incompatibility between the firms. Others go awry because one or both parties do not have the skills required to progress them to a successful conclusion. Putting 2 law firms together is a complicated business. Aside from a range of business and financial criteria to consider there are massive human elements and a wide range of vested interests and constituencies to satisfy.

Very few firms have the skills and resources to evaluate and process a successful merger without using skilled external advisers. In order to improve the ratio of discussions : mergers it is important for firms to recognise that and get help.

A DIY merger is like a large DIY plumbing project. You can, but why would you? Get the experts in. They can do the job quicker, at a known cost and without you having to pay to have your DIY efforts undone and then redone.

If you are a firm which is considering combining your business with another then how can you best prepare and execute?

Be clear and honest about why you are doing it

You may have clear objectives and a strategy in place to take you towards them in which case a merger could be a way of executing the strategy. You may need rescuing. You may lack particular attributes in your business and be looking to add them. Any one is valid but make sure you know why and are willing to share the reason.

If you don’t know where you are going any road will take you there. If you are not clear what you are looking for and why it is easy to be distracted and end up in talks with the wrong firm which at best leads to wasted time and at worst leads to a failed or bad merger.

Whatever you decide to do, do not pay to be put on a marketing list or a list of firms for sale. You have more chance of selling your week of timeshare in Torremolinos. You will just end up poorer and miserable.

Don’t just talk to people you know

Most law firm mergers used to be started on the 14th tee and sealed in the club house between partners from different firms who knew each other. Bad idea. There are a lot of firms out there and even in small markets you will not know or understand all of them. Firms need to do proper market research to help them understand who is out there who might fit what they are looking for.

If you are taking the initiative use a professional intermediary to make the approaches. Being turned down can be embarrassing for both sides. An intermediary can make a discreet approach without revealing your identity. Once a basis of interest is established a confidentiality agreement can be signed and things can move forward. Avoid being the subject of market gossip for as long as possible. It is probably better to avoid registering domain names until you know the deal is going to happen.

Have a clear process

Make sure you know in advance what information you want to exchange and at what stage. Make sure that at your end the key stakeholders know what the discussion and approval process will be and support it. One of the major cause of merger discussions failing is a loss of focus and direction part way through. One or both parties lose their way and the discussions run into the sand.

Don’t be like George Bush

Aside from being a good piece of general advice, the meaning in this context is you need to think about what is going to happen after the merger is done. How will it be implemented. What are the key roles? Who will fill them? What systems need to be in place? How will you accommodate the big beasts on both sides of the deal?

As soon as you know the deal is going to happen set up an Integration Group to project manage the post merger integration of systems, work and people. If you do this well you can realise the synergies and benefits of the combined business. If you do it badly then you will find that 1+1=1.5 (or less).

It goes without saying that you need the good people in both firms to commit to the combined entity rather than leave. Communication, inside and outside the business is vital.

See and Seize the Opportunity

In the corporate world the statistics show that something like 75% of all mergers destroy shareholder value. Not that it seems to deter would be billionaires from engaging in the activity. Good companies with strong merger methodology have improved the figures to a point where 60% of mergers add value.

Law firm mergers in the current market are largely about combining the skills, experience and clients of two groups of people who are each fairly loosely bound together and uncoordinated in the first place. They are unlikely to be realising the true value of the business they have at the moment.

Combining two businesses can be an opportunity to release inherent value in a number of different ways. A merger creates pressure for change and willingness to accept change that would otherwise not be there. It creates opportunity to move people around in the business and to resolve issues of leadership. It can also create an opportunity to change culture. A good attitude to take is that the firm coming out the other side of a merger will not be the same as either of the firms that went into it. See that as an opportunity not a threat.

And Finally…

More and more firms are coming to see opportunity and potential in merger. They are becoming more flexible in what they are prepared to consider. While that is exciting it makes it more important to do it right. The huge gap which presently exists between the number of conversations taking place and the number of deals being done suggests that firms have a way to go yet in learning how to identify the right merger partner and then learning how to go through a process to deliver the deal.