martindale.com Blog by Martindale-Hubbell

The following post comes to us from the merry shores of England.  Our colleagues at Martindale-Hubbell UK put together this great article and we share it here in it’s entirety:

Is merger still a choice for a law firm? - The first principle towards mergers of law firms is that it must be considered as a means to an end. Merger is a scheme which allows certain aims to be fulfilled. These aims can be linked to growth strategy, gaining market share, approaching other types of clientele, strengthening the firm, ensuring economic stability, attracting new lawyers with a specific profile, pursuing competition or a number of other goals. Normally only international law firms are seen to be merging for mutual benefits.

We set out below the economic advantages and disadvantages linked to a merger:

Advantages of merging

• Revenues created by law firm A’s strengths compared with law firm B’s clients
• Revenues created by law firm B’s strengths compared with law firm A’s clients
• Revenues created by new clients that would be attracted to the new law firm created by the merger
• Strengthening of law firms A and B’s profitable clients through greater breadth of service
• Economies of scale with more efficient IT systems, marketing and communication libraries
• Communication opportunities created by the merger

Disadvantages of merging

• Loss of revenues linked to conflicts of interest between clients A and B
• Collateral damage in human resources (loss of certain associates)
• Loss of referrals of files by other colleagues
• Time needed to create a new culture and working methods between two groups of people
• Direct costs of merging- consultants, update of logos, communication tools, website, stationery, client info and more

Those who have taken part or experienced merging know that managing economic aspects is a key element in an alliance but it is not enough to ensure success. The notion of ‘risk management’ has to be applied to creating a merger because failure often leads to structure break down or a fall in partner and associate numbers.

The Red Thread

Methods exist for evaluating the likelihood of accepting the merging principle between two law firms. In a law firm, this falls under four categories:

• Capital
• Culture
• Added Value
• Profitability

Each merger will have to go through an audit taking these factors into account. At the end of the day, both firms will be able to negotiate, amend, correct, discuss various aspects, and in conclusion, accept or refuse merging. It would be better for the candidate firm to assess such a scheme about merging in order to make a final important decision.

A. Capital

Capital of a law firm is made up of:

1. Quality of lawyers
2. Quality of clients’ portfolio
3. The firm’s cash reserves

B. Culture

Each lawyer and each firm impart their own culture and values. The initial difficulty found in mergers is that each other’s culture is hardly understood by partners. In fact, this phenomenon of ‘masked business culture’ implies that partners are not so committed to invest or implement the mutual business plan.
Commonly, after financial issues, the problem with ‘culture’ is the second determining factor in success or failure of merging. Do the prospective candidates speak the same language; have the same work visions, the same approach to clients and the same ideas ethically?

Business culture between ‘them’ and ‘us’ has to be handled at a partner level to create a melting pot. Associates and secretaries should also be taken into account in the evaluation.

C. Added value

1+1=3 is the mathematical formula reached by merging, which is based on the perception of added value which merger firms can offer to existing clients, prospective or potential clients, partners, and associates alike.

Individuals initiating the merging process evidently have to question the market view with regard to merging. Merging within two niche structures will not be seen in the same way between a full-service international firm and a niche structure. In some cases, merging has almost no outside impact vis-à-vis the market structure.

Does merging have a limited impact in cities, regions and on a national or international level? The link between a firm in a capital city and a firm in a province will usually go through an acquisition instead of merging. A specific type of communication can be envisaged in a capital city and a metropolitan one.

D. Profitability

Generally, profitability of a task plays a dominant role in merging, but this is not always the case. If revenues are the foundation of an argument between negotiators, it is definitive not only because lawyers have an equal importance but also because it is an issue backed by figures and therefore easier to compare.

Four Key figures to study in the merging sector are:

1. Hours worked by partners
2. Timetabled hours
3. Margin calculations
4. Partner/associate ratio (leverage)

Firms often less capable of merging with other firms due to managing issues, legal matters, finance and psychological- elements which govern the success of a business plan. Sorting legal aspects of merging or acquisition require special advice.

The assessment set out is not infallible. However, it is highly advisable to collect as much objective data as possible in order to avoid working on the basis of an emotional process. An assessment of this nature constitutes a useful way of getting candidates to co-operate. At a time when everyone is watching each other’s moves, it is important to embark with a compass on board.

At Martindale-Hubbell.co.uk, a lawyer locator service, we continuously try to provide useful information for international law firms. Contact us today at +44 (0)20 7347 3700 or international2@martindale.com to get listed with us.

Share your opinion about whether merger is still a good choice for a law firm in the comments below.  Connected members can discuss this in the community in the Law Practice Management forum.

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