We recently asked Peter Scott for his views on the merger process and some key things to consider. Have a read of what he had to say….
Take a merger reality check
Recently figures were published showing that last year there were 170 mergers between law firms in this country. However, how many of those mergers will achieve their objectives or were entered into for the right reasons? I am a strong advocate of consolidation in the legal sector having been involved in a number of mergers both as a managing partner and as a consultant, but I would always advise any law firm contemplating merger to first take a reality check to avoid making potentially disastrous mistakes.
Merger is not a strategy but merely a means to an end – to gain a competitive edge. Merger is also not a panacea for solving a firm’s problems but it can provide two firms coming together with a better platform for focused competitive growth which neither on their own could achieve. If a firm realises that it cannot achieve its ambitions on its own because it lacks the resources to do so, then consolidation in some form is likely to be required.
What are the key things a firm should consider before thinking about merger?
When considering merger it is sensible to first develop a vision of the kind of firm you wish to create, in order to identify criteria for potential merger targets, including –
- Relative sizes and strengths
- Reputation, people and culture
- Business fit
- Financial case
What are the ‘good’ and ‘not – so – good’ drivers for merger?
Unfortunately the legal market is littered with merged firms which often came together for the wrong reasons including –
- “We are not able to sort out our problems ourselves so we will find a firm which will be able to”
- “If we double our size then we will be better off” (if you put two underperforming firms together but without taking steps to make the merged firm more competitive then you end up with an even larger underperforming firm).
On the other hand, there are some very good reasons to merge, such as “merger will help us to –
- better provide our clients with what they want, by developing specialisms and by filling gaps in our service offering;
- retain, increase and improve our client base;
- create meaningful points of differentiation from our competitors;
- in the medium to long term improve profitability by economies of scale, more efficient use of people and more premium income from higher value work; and
- improve the quality of our management and infrastructure, our recruitment and retention potential, the management of our risks and access to more capital for investment.”
What are the regulatory and insurance issues to watch out for?
The merged firm is likely to become the ‘successor practice’ of the two legacy firms for professional indemnity insurance purposes. Both firms should, at an early stage, discuss with their brokers and insurers the potential implications of this (including any possible uplift in premium or refusal of cover). Careful due diligence will be required by both firms of the other in relation to their claims records and how they manage their risks.
From a regulatory viewpoint, each firm should carry out a detailed ‘compliance audit’ on the other to ensure that each is compliant with SRA and other regulation, otherwise the merged firm may find itself subject to future disciplinary action by a regulator arising from compliance failures in the past by one of the firms and potentially involving heavy penalties and loss of reputation.
For the future, the merged firm should put in place effective risk and compliance management to achieve Principle 8 from the SRA Handbook.
Are there any common pitfalls in the process?
- Do not lose momentum, otherwise the process can come to a grinding halt
- Sort out ‘deal breakers’ at an early stage
- Always take the best possible professional advice
- Do not avoid taking necessary tough decisions before completing the merger – afterwards it may be too late
- Avoid taking your eye off running your existing business
- Do not focus on the differences between the two firms but instead focus on their compatibilities
- Do not fail to communicate – particularly internally, and once the merger is in the public domain, with clients and the market place.
What are five things successful mergers have in common?
Successful mergers often seem to have these characteristics –
- 2 + 2 = 5 in terms of a strategic vision, culture, business fit and a financial case
- Those managing the merged firm understand it is the beginning, not the end!
- Integration of the two firms is implemented at every level (particularly the people) as quickly as possible
- Performance issues in the merged firm are managed and the quality of management capability, systems and people are upgraded and enhanced to support the size and goals of the merged firm
- The energy and ambitions released by the merger are harnessed to help build the merged firm’s competitive edge.
Peter Scott is a solicitor and former Managing Partner of Eversheds London and European offices. He acts as an advisor to many law firms in the UK and abroad in relation to their partnership issues, with particular focus on helping clients to improve their competitiveness through effective performance management – www.peterscottconsult.co.uk