Mergers can boost profitability, but only if the negotiating teams stay calm and stick to the plan
Merger is being considered by many law firms as a way of improving profitability. It is high-risk and not the most obvious way to improve profits, but it can do so. Success lies in the preparation.
Before contact between two firms is made at least one should have articulated a strong business rationale for merging, have a view of the criteria a partner needs to meet and understand why the firm it intends to approach has the potential to tick those boxes.
Initial discussions will establish whether the feeling is mutual. It is rare that two firms will be a perfect fit so early decisions are needed about the extent to which strategic requirements can, or should, be compromised. This may result in discussions being abandoned.
It is not enough for two and two to equal four: successful mergers always create added value, whether in a wider service offering, increased prominence within a sector, expansion of geographic footprint or otherwise.
If discussions progress the process itself demands rigour. This includes defining issues, assigning responsibilities, setting timeframes, addressing confidentiality and preparing for information leaks.
Once the process is set, agreement is required on a list of the areas to be covered in the due diligence each firm is to undertake. Due diligence should be thorough and the results recorded. At the end there should be no big surprises for either party. Throughout, the results must be tested against strategic objectives to ensure no major inhibitors have come to light.
The range of due diligence should be wide. Problematic areas include compatibility of remuneration systems and of cultures. If the former differ greatly this may signal a divide in the latter, a “clash of cultures” being a commonly cited reason for failed mergers. Another firm’s culture is hard for a potential partner to assess, since both firms are bound to be on their best behaviour during negotiations. This is where teams leading successful mergers spend time. They put a lot of the people in both firms together and watch closely. They know the potential advantages of the firms working together as one will never be realised if the aspirations, approaches or behaviours of the individuals charged with implementing the strategy are fundamentally different.
One of the last, but most important, steps in a merger involves each management team presenting the business case to its partners and achieving buy-in. Smart leaders will have been building consensus throughout, starting with the most influential partners and working out. No amount of salesmanship will substitute for a strong business rationale that is achievable in a reasonable timeframe
Successful mergers are characterised by a cogent business case coupled with clear-headed management teams with the courage to abandon the process at any stage.They are not for the faint-hearted.