Of the 358 firms that we have visited during the past four years, 92 per cent have stated that, if they were to merge, they would prefer to merge with a smaller firm. While this is understandable (control, culture etc), it does mean that the chances of finding the ideal merger partner are somewhat limited.
About a year ago, EJ Legal director Simon Janion and I attended a partners' meeting at McGuinness Finch to discuss the merger market and what the firm's strategy should be. The firm had become a victim of its own success. It had a property department with a skills base and with clients that were the match of most sizeable firms and yet it could not adequately service the corporate needs of these clients. Indeed, one partner, Melville Rod-rigues, had recently left the firm for Rowe & Maw because he felt exposed without the full complement and support of legal services at his disposal.
Many managing partners feel that there are a number of teams or smaller firms out in the marketplace that would be willing to talk to them. They are often disappointed. The McGuinness Finch partners initially felt that a merger with a niche corporate firm of a similar size and quality to itself would be the ideal. We knew of only two such firms that fitted the bill, neither of which was looking to merge at the time.
When the ideal is not found, it is important that firms do not lower their sights and merge with a firm just for the sake of merging. We knew of some smaller firms that would have been interested in a merger with McGuinness Finch but which would have diluted its quality.
It is common, at the stage where a smaller merger partner cannot be found, for firms to lose interest in the merger process. However, it is important that they remember the reasons why they thought that it was sensible to consider merging in the first place. In the short term, McGuinness Finch may well have continued successfully on its own, but in the medium to longer-term, more partners may have left and clients may have opted for firms that could provide an all-round service.
As it was, McGuinness Finch felt it needed to consider a merger with a larger firm. When such a decision is taken, it makes sense to look at a sizeable cross-section of the players in the market. Both Colin Kearney and Henry Minto, partners at McGuinness Finch, took part in the initial meetings with seven firms. First impressions are vital. Six firms wanted to pursue the talks but McGuinness Finch wanted to continue talks with only three.
The thought of a merger into a larger firm can be unsettling for many people. The loss of autonomy and the feeling that you are becoming a small cog in a large wheel can be disconcerting. There were some concerns among the McGuinness Finch partners that a larger firm would be less tolerant of individual quirks. While it is true that the larger the firm, the more it has to rely, for management purposes, on the participation of partners and fee-earners (for instance, in the recording of chargeable hours), it is also a fact that larger firms are more tolerant of certain eccentricities, especially if those eccentricities help towards the success of the individual.
When a smaller firm merges with a larger firm, issues will arise. The trend is for quality work and higher profits to gravitate towards larger firms. This is borne out by the fact that the average profits per equity partner for London firms in the top 50 for 2000/2001 were more than 100 per cent higher than for the other London firms in the top 100. The higher profits for the larger firms are a result of a combination of better quality work, stronger partner gearing ratios and economies of scale.
While the fact that McGuinness Finch was partner-heavy had to be addressed, the quality point was a non-issue. The firm's property work was easily the quality of a top 50 firm and there were no weak links among the partners. But problems often arise when a larger firm makes an approach to a smaller firm.
At the same time as advising McGuinness Finch, we were also advising a 15-partner firm which had been approached by a top 100 firm. The approach to the smaller firm was triggered because of the reputation of its property department. But problems arose when the larger firm did a little due diligence on the rest of the firm and found the quality a little patchy in other areas. While the partners in the property department wanted to progress with talks, partners in the other areas did not. This was not surprising because the property department was effectively subsidising the rest of the firm.
The decision has left the firm in a precarious position. It may well lose some of its property clients if there is a demand for a one-stop service. A bigger risk may be that the property department, if it senses a risk to its work, will leave the firm. So, in the short term, inaction may benefit the weaker partners, but in the longer term things may be different.
McGuinness Finch had narrowed down its choice of merger partner to Osborne Clarke and another top-50 firm by mid-February. Osborne Clarke was a natural choice because the partners in the respective firms knew each other. However, negotiations with the other firm were progressing at a quicker pace, and it even reached the stage where Kearney contacted Osborne Clarke's managing partner Leslie Perrin to put the talks on hold, as a merger with the other firm looked likely.
Perrin then went into overdrive. There was a great need for a quality property team to link with Osborne Clarke's London office. Perrin knew that he needed to act quickly. A month later, the decision had been reversed in Osborne Clarke's favour, the deal was signed and the firms merged on 1 June. n
Ian Mouland is a chartered accountant and is a director of EJ Mergers