Mergers: does size matter?
Daniel Sutherland of corporate law firm Fox Williams considers whether mergers deserve their popularity among law firms and some of the difficulties involved.
With rumours of a potential merger between Olswang and CMS Cameron McKenna coming hot on the heels of numerous reports of mergers and merger discussions (see, for example, Haynes and Boone, DLA Piper and Addleshaw Goddard), it seems that mergers remain an attractive prospect for many law firms. Notwithstanding their enduring popularity, the question is often asked: why?
On a superficial level, the size of a law firm can imply success, but the truth is that few clients require a large law firm to service their needs. Fewer still would view size as the deciding factor when faced with a choice between a firm with 3,000 lawyers (such as a merged Olswang /CMS) and one with 800 (such as Olswang alone).
We can only guess at why Olswang and CMS Cameron McKenna are considering a tie-up, but we know why, in general terms, firms decide to merge, as it was a question that over half of the top 200 law firms answered in 2015. At that time, the view was that ‘growth’ is the key driver for mergers, followed by a perception that mergers allow firms to compete more effectively, to operate in more practice areas and to achieve cost savings through economies of scale. Brexit, the major development of 2016, seems unlikely to have radically altered the perceived benefits of a merger, although firms will now have to factor in its effects.
It is clear there can be a compelling case for a merger, but when it comes to the particular pairings of Firm X with Firm Y, the process of choosing a suitor seems more haphazard. That same survey revealed that over half of respondents would look to word of mouth and general market reputation when choosing a merger partner, which seems a very subjective approach to such a major decision.
An unwelcome truth is that merger talks more often than not fail to produce a merger. For US law firms, where partners often have notice periods measured in days and no restrictive covenants, a failed merger discussion can lead to a firm facing a series of ruinous partner exits. The failure of talks between UK firms tends not to cause much more than minor embarrassment, although managing partners are understandably wary of announcing mergers that are unlikely to go ahead. The failure of a firm to successfully conclude a merger can lead to speculation there are skeletons in its closet, or that its management team is inept.
This speculation is often unfair. The execution of a law firm merger is a tricky affair, with any merger that cannot pass the ‘what’s in it for me?’ test for every partner potentially problematic. Otherwise viable mergers may fail due to a key partner or practice group choosing not to follow the management’s lead.
Even where everything lines up on paper and the approval of the wider partnership is forthcoming, the effort involved in getting a merger over the line can be enormous, with plenty of landmines along the way to derail discussions. Even experienced M&A lawyers will struggle to be objective when it is their own firm’s future they are negotiating. They will have to look to their fellow partners in the eye day-after-day in a way that they don’t with their usual clients. Typical issues might involve matters such as real estate liabilities, regulatory hurdles, client conflicts and the personal chemistry of those leading the merger teams. Backing away from a merger may be unpleasant, but the consequences of seeing risks and ploughing on regardless are self-evident. The spectacular failure of the acquisition of Quindell by Slater & Gordon is a recent high-profile example.
Cross-border mergers at first glance may seem to have bigger challenges than intra-UK tie-ups, given the different cultures and markets of the participants. But how much does it really matter whether a firm is open plan in Utah but cellular in Paris? Those kinds of cultural difference can be left alone when hundreds of miles separate the offices, but are much more salient when space-planning the new London office where lawyers from both firms will be sitting side by side.
Firms for which mergers fail, whether before or after they have concluded, can take some comfort from the fact that law firms are finding growth, and success, from many angles. It would be foolish to assume that the most successful law firms in 20 years’ time will simply be larger versions of the firms we see today. Growth through investment of time, money and energy in new business models and technology may prove to be the better bet than mergers alone.
Daniel Sutherland is a partner in corporate law firm Fox Williams’ professional practices team.