A merger can bring in more clients, give the firm a presence in a new geographic area, and add depth to an existing practice area.
It can also be the downfall for the merging parties, says Allan Hodgart, a strategic development advisor and managing director in the London office of Huron, an international management consulting organization.
To be successful, both parties need to evaluate factors from money to client potential to who’s going to be the new boss.
First, the strategy
The starting point is whether the merger will make it possible for each side to achieve its strategic objectives.
Hodgart gives the example of a marriage proposal between a finance practice and a corporate practice. On the surface, it looks like a bonanza for both, because they can cross market their services.
But look at the type of clients and the type of work each side has to offer. One may have a strong corporate practice with large client companies while the other has a strong financial practice but with midsize client companies. It’s not likely the new firm will be able to sell its midsize-focused financial work to the large corporate clients.
Or suppose the objective is geographic expansion. A corporate practice has offices in five U.S. cities but sees clients in the U.K. using American attorneys and so wants to have an office in London. If the merging London group adds depth to the practices of both sides, the outcome could be a strong corporate practice. But if the London practice is too small to attract large corporate business or has a different type of client base, the expansion will be for naught.
Then to the money
The financials are obviously of great interest in a merger, but don’t stop at “oh yeah, the numbers look fine.” Examine the details.
For example, look at the per-partner and per-attorney revenue and profit. The two firms may be making the same overall profit, but one may have a per-attorney profit at half what the other has.
Look at the ratio of associates to each equity partner. If one firm has, say, three attorneys per partner and the other has 12, the partners with the lower count are doing more work than the others. A merger may mean those others will have to take on more work.
Merging means the new firm has to combine two different business models, and some of the clients may not like the new model the merger produces. If they’ve grown accustomed to having a partner handle their work, they may not stand for a compromised version where most of it gets passed down to associates.
How many managers?
Another question is whether the two firms can agree on a single management structure.
In trying to blend practices, firms often keep the peace by setting up “duel heads for everything.” It’s not unknown for there to be two managing partners in practice groups and boards double in size.
“All those people clog up the decision-making process just at the time when the firm needs to move quickly,” says Hodgart. “What’s more, when there are two heads of this and two heads of that, the firm gets the worst decisions.”
Expect to be forced to do some tough management trimming and risk losing a few people, he says. And expect the tension and hurt egos “to trickle down to everybody.”
But Hodgart’s advice is to do as little compromising as possible. “When there are two different heads, the risk is the us-versus-them mentality.” And just as bad, the more people there are in the decision making, the less clear the decisions will be.
What do the clients have to say?
Another element to evaluate, and one that often is not evaluated, is how the major clients on both sides view the potential merger. If they don’t like the idea, they may move on.
Talk with the clients toward the end of the merger discussions, he says, and make it one of the final cards to be played. Meet with a dozen or so of the top clients, tell them about the merger plans, and ask “do you know this other firm?” And if the answer is yes, “what are your impressions of it?” The response may be “I wouldn’t touch that firm with a 40-foot barge pole.” If so, rethink the merger.
But if the response is favorable toward the other firm, see how the client reacts to the strategic goals of the new venture.
Explain the objectives, perhaps that the firm is trying to increase the size of deals it handles from the current $100 million to $250 million, and ask if the client would be willing to use the new merged firm for deals of that size.
If yes, good news. If no, that needs to be made part of the merger discussions. And if “yes, but,” find out what it’s going to take to get that client’s business, he says. The provision might be “yes, but only if we get to keep Partner A as our primary contact.” Or maybe “yes, but only if the other attorneys provide the same level of personal service we are getting on that business now.” Or there might be comments about the billing.
Are the cultures a fit?
Culture plays an important role as well. And that’s more than both sides getting along at a dinner party, Hodgart says. It’s the way each side gets things done, and both sides may vastly prefer their own systems.
Culture isn’t easy to define, he notes. Each side just has to look for differences and similarities in the small and large things and see where it is willing and unwilling to make compromises.
At the bottom are things such as how vacation time gets requested.
It goes up from there.
The compensation formula may be diverse to the point that one firm has a lockstep payment system while the other follows an eat-what-you-kill rule.
Or one office may have a small management team that’s empowered to make significant decisions while the other “is severely micromanaged” and takes everything back to the full partnership.
Or one side may pride itself on being work-life balanced while the other requires every attorney to bill 1,900 hours a year.
Many cultural differences can be solved amicably, he says. The lifestyle firm, for example, “might need a shake up.” But in places where the culture gap is wide, “some of the partners aren’t going to be shaken up—they’re going to leave.”
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