By Steve Nelson
In the process of advising one large law firm on merger possibilities, one of their senior partners recounted to us how merger talks, now stalled, had been initiated with a large multicity firm. “One of their partners had talked to me about going over to their firm. My response to these calls always is, ‘well, why don’t we consider a merger.’ ”
While this may be just an extreme example, it is typical of how many law firms approach the idea of merger. The approach is reactive: field calls from friends and acquaintances (and headhunters), and begin at least preliminary discussions because it’s the thing to do. The concept of strategic planning appears to be absent in the current urge to merge, or at least the current urge to talk about merger. Most large firms have at least one merger discussion going on, and boutiques are constantly fielding and evaluating calls. But if you probe beneath the surface, these participants realize that many of these discussions are unlikely to lead to anything serious. Meanwhile, while these fruitless discussions are going on, other management issues are being ignored, and billable time of multiple partners are being lost.
Instead of reacting to overtures in the marketplace, firms should be approaching the issue of merger from a proactive basis. I have heard a number of managing partners comment that “we’d be interested in talking about merger, but none of the other firms we’ve talked to have been able to tell us what’s in it for us.” No firm should go into merger discussions with the idea that it’s the responsibility of their merger partner to tell them what’s in it for them. Moreover, with few exceptions, most firms should not enter into any merger discussions at all unless it has already evaluated the advantages and disadvantages of a combination, and has agreed on the criteria for an appropriate match. Law firm mergers are not the legal equivalent of fantasy baseball, where a manager can put together a mythical powerhouse team consisting of Pedro Martinez, Sammy Sosa and Barry Bonds, but where the teams don’t have to actually play the games. It’s a serious business decision, and the repercussions of failed negotiations can tear apart the very fabric of an existing firm. Conversely, failure to seriously consider the merger option while a firm is in a position of strength can also lead to ultimate disintegration.
As a starting point, the merger option should be viewed as a part of the strategic planning process. Firms should already have gone through the process of crafting a vision statement, a mission statement, and a strategic plan to achieve those aims. This strategic plan should address several issues that are key to determining the need for a merger.
Where does our existing client base come from? A key component here is billing rates. Do your clients come to you because your rates are attractive, or because of the high quality of your services. If it’s the former, merger with a bigger, more national, player makes little sense, since there will be the inevitable pressure to raise rates. Another question relates to how much of the client base comes through referrals of other lawyers. We have advised a number of firms, and not just boutiques, who tell us that a significant amount of their business comes large New York or multicity powerhouses who don’t view the referred firm as a competitive threat. A merger in this instance could very well change that perception.
Are we doing all we can do to serve our existing client base? Boutique firms are often challenged by the fact that they have clients who only use them for extremely specialized needs. These firms often have a wide, but not a very deep, client base. For example, firms that work with a lot of emerging, nonpublic companies often report to us that it is extremely difficult to hold on to these clients once they go public. At that point, issues relating to public offerings and financing begin to dominate the thoughts of management, and it becomes easy for the jack-of-all-trades advisor to become forgotten. In these cases, mergers present the opportunity to solidify existing client relationships.
An analysis of this issue must include an evaluation of what the competition is doing. Over the past 20 years, the national law firms have clearly started to dominate what heretofore were regarded as boutique practice areas, such as international trade, immigration, and most significantly, intellectual property. It would be foolish to think that this trend won’t continue. If competitors, particularly the larger multicity firms, can make a credible argument to the clients that it’s in their interest to extend the work they’re doing into your niche specialty, than that’s a consideration in favor of merger. But that doesn’t mean that every hot practice area will be dominated by the larger firms. For example, a number of in-house lawyers from biosciences companies tell us that they make a conscious decision to refer their food and drug regulatory work out to firms that don’t handle their corporate work, for cost and other reasons.
Are we having trouble extending our client base, and if so, why? This really requires an evaluation of the business trends that affect your clients. Are you serving the needs of a dying or a flat industry? Are clients in that industry being funded in a different way now than before? Do you have any expertise in today’s critical practice areas, like intellectual property? Do you have effective business developers within your firm? Answers to these questions, and others, will help answer whether a merger can be a viable solution.
Are we facing increasing challenges in marketing to new clients. This has been a constant problem in recent years for boutique firms, where a lack of depth makes it difficult to attract new clients while trying to service existing ones. It appears that many smaller firms are one client defection away from real trouble. In the meantime, there has been a marketing revolution within the law firm establishment over the past 20 years, and larger law firms have devoted much more resources to business development than in the past. A merger may provide the opportunity for a smaller practitioner, not only to tap into these resources, but to find other practitioners to handle existing business so that he or she can spend more time on business development.
Once these (and many other) issues are analyzed, there are two critical steps that still must be taken before embarking on any course of action. First, it must be determined whether the firm is solidly behind the concept of merger. Human dynamics prevents an organization from merely gathering in a conference room and hashing this out. Strong personalities inevitably dominate such discussions, and undercurrents of dissatisfaction or trepidation are often swept under the rug. A consultant should interview all the partners and report on the level of consensus. Again, as stressed earlier, failed merger discussions can tear a firm apart, and there’s no point on going down that road at all unless there is strong support from the partnership.
Finally, there needs to be an honest evaluation of what potential targets makes sense. Economics play a huge role here, and the underlying indicators, such as profits per partner and revenue per lawyer, need to be in the same ballpark. Before deciding to initiate serious merger discussions, firms should, with the help of a consultant, take a “vicarious tour” of the marketplace, and evaluate all potential partners. Not only will this provide the firm with a great deal of information about competitors they may know little about, but it might tell them something about themselves. If a 200-lawyer firm with a $500,000 profit per partner is holding out for Cravath, or Wachtell Lipton, then maybe they’re not ready for a merger at all.
Steve Nelson is Managing Principal at The McCormick Group, an executive search and consulting firm based in Arlington, VA. The firm has advised many law firms on various aspects of the merger process. Steve would like to thank Paul Rothenburg, Vice President of Business Development, for his assistance in the preparation of this article.
