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Blissful union?

1 May 04

Solicitors with experience of successful practice mergers, and one for whom it didn't work, talk of the essential elements in each case

by Roger Mackenzie

The recent merger of Mowat Dean with Anne Hall Dick repeats a familiar pattern of east meets west, two firms coming together to widen their geographical and practice reach.

But what’s the secret to a successful merger and can it ever really succeed when two firms punching the same weight join forces? Takeovers or amalgamations cloaked as mergers for the sake of keeping face are one thing, but making a genuine coming together of equal partners work is quite a different challenge.

When niche employment law practice Mackay Simon merged with Maclay Murray & Spens, the two firms’ respective sizes could have been more indicative of a takeover. But Maclays’ need to establish itself in the critical employment law market and Mackay Simon’s reputation as the leading practice in that field, ensured that in negotiations and the merger process which followed, this was a genuine merger, and not a sell-out.

So why do firms engage in the inherently risky merger strategy? Malcolm Mackay, founder of Mackay WS which became Mackay Simon, insists merger can never be an end in itself, it has to be a way of delivering something as part of a clearly defined strategy.

“We started by looking at where we as a firm wanted to be a few years down the line. We looked at our market place and how it was going to change, and we looked at our existing clients and what their requirements were and what we could do to deliver more to them.”

Their conclusion was that as a niche firm seeking to grow and move on to the next stage they had to broaden out from their niche base to avoid standing still.

“I think a lot of law firms as businesses tend to be relatively static. Sometimes it can be the right thing to stay in that niche, but as the relationship with clients developed and opportunities arose to develop other specialist needs around employment, such as pensions, which was never one of our specialisms, it became clear we had to look at other ways of servicing that niche. But I suppose the biggest driver was looking at how to have a place in the European and global marketplace.”

To take advantage of emerging markets, it made sense to join up with a firm like Maclays which had the scale, corporate expertise and a degree at least of international reach. While other firms could have offered that also, it was the cultural fit between the two firms that convinced Mackay that Maclays was the right partner.

A clash of cultures

Indeed all who have been through the merger process agree that the key to it succeeding is in having cultural compatibility. A merger is most likely to fall apart if that is lacking from the outset.

Mackay says you have to spend a lot of time getting to know people, cement relationships and agree on the same objectives.

For the ill-fated Morison Bishop, it was the lack of cultural fit that eventually led to the premature termination of an ambitious merger which began with the grand plan of establishing a firm capable of challenging the big four.

Alasdair Fleming, managing partner of the Bishops firm established following its demerger with Morisons, says that when he joined the firm in 1998 extensive talks had already taken place. Talks lasted 18 months before things started to get underway, which in retrospect, suggests Fleming, was indicative of a degree of uncertainty and should have served as a warning sign that it might not work.

“It’s essential to do your homework, coupled with having a shared vision and determining a clear purpose for the merger”, says Fleming. “You have to ask why are we doing this and where will we be in five years, and what strategy do we have for implementing this vision. I would concede that we probably didn’t get to know our partners very well at the outset.”

It became apparent, said Fleming, that there wasn’t a uniformity of vision and culture and that the merger goals were too general. Coupled with a failure to define the issues and obstacles, in a sense it was doomed from the start.

“Choosing the leaders and the right leaders is crucial, and being objective about having people with the appropriate skills, rather than having a compromise to appease both sides. In hindsight, it may have been preferable to bring in outsiders without historical alliances. Inevitably there is a different ideology and I think there was a reluctance to embrace change. The merger should have highlighted the opportunity to get into new areas of business and there should have been a culture inculcated into the partners to embrace the entrepreneurial spirit. If the passion is not prevalent then there tends to be a lack of willingness to press on with change. What then happens is people become entrenched because they fail to integrate and that probably came down to a lack of communication and leadership.”

Fleming says the goal was clear; that cross-fertilising the talents could have led the combined firm to challenging the big four firms and “sitting round the table with the biggest clients”, but that ambition faltered with the lack of integration. He acknowleges geographical factors might have been a factor which meant the dynamics of change rarely surfaced.

The loss of the firm’s highly regarded pensions team to Biggart Baillie proved the catalyst to recognise that the merger hadn’t worked.

“In fairness there were some positives that came out of the merger – we streamlined some of our processes and systems and improved our IT and practice management systems dramatically.”

The courtship ritual

Testimony of the success of Biggart Baillie’s “coming together” with Steedman Ramage in 2001 can be found in the firm’s recent award of Firm of the Year at the Cuthbert Legal Awards.

Like all successful new alliances it had as its driver a strong and strategic mutual benefit. For Glasgow-based Biggart Baillie it was the desire to grow its Edinburgh presence, and for Steedman Ramage the opportunity to offer additional services to their traditional strength in commercial property.

“The coming together was a strong strategic fit. We approached Steedman Ramage and they were looking to expand”, explained Biggart Baillie’s managing partner Derek Ellery.

“The arrangement fitted our medium term goal of giving a wider range of offerings to our clients.”

Ellery agrees that “something has to change” and there has to be a “spirit of willingness to communicate”.

“At some point in the negotiations you have to sit down and look into the whites of each other’s eyes and decide these are individuals I can do business with. In many ways it’s a fickle process up to that point, what you might call the mating dance leading to the discussions that will eventually result in full blown merger talks.”

Secrets of a happy marriage

Ward Bower, a US based consultant with Altman Weil specialising in law firm mergers, says the approaches are usually made informally over drinks between partners of firms who know each other. But the better approach is for one firm to have a strategy which then leads them to select and approach other firms. Sometimes he is approached to act as an agent to discreetly target other firms without specifically identifying the client, and thereafter making the introduction.

In his experience, negotiations which will lead to a successful merger will usually be completed in three to six months. Anything longer and it’s an indication that the merger isn’t going to happen.

“I don’t believe one can do a thorough job of negotiation and due diligence in less than three months except for very small firms. And if they drag past eight or nine months momentum is usually lost”, said Bower.

In the case of Mackay Simon and Maclays there was no formal approach, just a process which evolved from discussions where it became apparent that there was a strategic fit to benefit both firms.

For Malcolm Mackay personally it has also provided a challenge to reinvigorate him. “I’m now developing international work and that’s given me a much bigger enivronment in which to develop. While starting a practice and developing it is exciting, running it often isn’t.”

Where mergers go wrong, in Mackay’s opinion, is when they’re driven by the desire to share costs, because in the short term mergers can often incur costs.

“You have to have a real sense of purpose shared by both firms, a clarity of what is going to be achieved, a good quality of individual relationships, working with people with mutual respect and common goals.”

Typical sticking points, according to Ward Bower, tend to be the name of the firm, off-balance-sheet liabilities such as unfunded obligations to departing partners, debt on balance sheet and debt philosophy, client conflicts, slotting for remuneration purposes and policy for centralisation or decentralisation of management authority.

Logistically, “discussions should be driven by a small group from each firm authorised to explore the merger by other partners. If the initial business case is made and major terms agreed to, partners should meet each other both formally and socially while due diligence is moving forward. Ultimately a prospectus setting forth the business case and terms of agreement should be distributed to partners of both firms in preparation for a vote on merger”.

Bower says the secrets of a happy merger are synergy in the form of increased profits and partner remuneration, usually resulting from increased revenues rather than reduced costs, and successful integration of financial, cultural, marketing, IT and HR aspects of the running of the new firm.

So what would he advise to look for when courting a new partner?

“Compatibility first and foremost, then complementary practice areas in terms of the merger objectives, in scope or scale. You should also be satisfied with the merger partner’s integrity and ethical practices as well as being content with the economic and cultural aspects of the arrangement. ”