I was speaking with the managing partner of an AmLaw 200 firm a couple of weeks ago.  He casually mentioned that, year in and year out, he spends about 25 percent of his time involved in merger discussions.  I thought he was kidding but he assured me he was completely serious and had the non-billable time entries to prove it.  The firm had offices in desirable locations and strength in a specific corporate transactional area that made them a merger target.  And, as managing partner, he felt it was his obligation to follow up on every contact and referral.  His question to me was, “How do you identify a worthwhile merger opportunity?”

His question is not surprising in a legal environment where many law firm leaders take a sort of laissez-faire attitude toward mergers.  A typical merger scenario is that partners from two law firms, who are working on a case together, decide that there firms are similar in that they both have good lawyers who are nice people and should, therefore, consider a merger.  Then the firms’ management meets and, if they like each other, seem to have similar compensation systems and no apparent conflicts, they begin work to develop a business case.  That is, they start with the assumption that they are going to merge and then see if they can backfill a business justification for the merger.

Often, in situations like this, the firms will spend months talking to each other in countless meetings that involve dozens of partners from every practice group.  Eventually the merger goes through based on its own momentum or talks are broken off because both sides realize that the proposed merger does not generate any benefits other than creating a larger firm.  If the talks have become publicized — as they often do for larger firms — a reason for calling off talks is found, such as the sudden awareness of a conflict or the discovery of some previously unknown liability of one of the firms such as an unfunded partner pension plan.  In truth, everyone knew about issues like these from day one, but it is much more comfortable to say “we can’t merge” than saying, “we don’t want to merge.”

At the same time there are some consultants going around the country like little Johnny Appleseed’s, introducing firms to each other and encouraging them to merge.  The concept is that consolidation is occurring, bigger is better and if you don’t jump on the bandwagon now, all the good merger partners will be gone.  They seem to be especially eager to have firms with profitability problems or that are located in economically depressed areas merge on the theory that there is strength in size.  Unfortunately, basic economic truths prevail.  There are no easy fixes or silver bullets.  And, most certainly, the merger of two dead horses does not create one live horsei.

Here’s the deal.  Mergers are a tool.  They are a tactic that a firm may use to achieve an end.  That end may be to move into a geographical area or to gain strength in a specific practice.  But mergers are not an end to themselves.  Therefore, if a law firm is attempting to achieve a specific end and is pursuing strategy toward that end that can be fulfilled through a merger, then the merger is strategic and makes sense.  The difference is that, instead of considering a merger and seeing if a business case can be built around the merger, the firm starts with the business case it is attempting to pursue and, if appropriate, seeks a merger that fulfills that business case.

Case Study
We worked with a firm whose goal was to focus on a highly profitable aspect of its healthcare practice that involves the intellectual property, corporate and securities work for emerging medical device technologies developed within university hospitals.  Their strategy was to leverage the volume of devices they would present to investors to a position of dominance in the industry.  Unfortunately, the competitive conflicts among hospitals in their city limited their ability to grow.  Instead, their strategy was to grow through mergers with firms that had similar practices in cities with large university hospital complexes.  By focusing in this manner, they discovered that their were 20 firms that met the criteria but about half of them were large general practice firms for which medical device creators represented only a small part of their client base.  However, they were then able to identify nine firms with highly compatible practices.  Further investigation revealed that two of the firms had other complementary practices and clients justifying the initiation of merger discussions.

Creating a Vision
Of course, the scenario above makes more sense than having merger discussions with whomever crosses your path but it does require some discipline.  Primarily it requires that the leadership of a firm be able to articulate a vision of where the firm is going.  But that may not be as easy as it sounds.

There are three things that must be present in a functional visionii.  First, it has to express some form of objective – the end the firm is attempting to achieve.  But there also has to be some form of scope attached to it.  Being a dominant corporate transactional law firm in the Midwest connotes an entirely different vision than does being a dominant firm in Columbus, Ohio. And becoming dominant within three years involves a much different strategy than doing it in ten years.  The third aspect of a vision is some indication of the advantage the firm is going to pursue to accomplish the end.  If a firm is going to be dominant in corporate transactions are they going to do it by being the biggest, being the best, having relationships with a specific kind of client or some other means?

The objective could be expressed in terms of size, specific practice strengths, geographic locations, competitive position or any of a variety of other characteristics. It could even be expressed as a comparative.  For a firm to have an objective of wanting to be the most profitable may seem obvious, yet we all know lots of firms for which profitability competes with lifestyle and a variety of other cultural issues.  And certainly being the most profitable is quite different than being the largest or the best recognized.  For example, the vision of the firm discussed above was client-base oriented.  They wanted to be the dominant firm representing developers of medical device technology.  It was their hope that this would lead to good profitability and growth but the driving feature of their vision was the client base.

Scope, on the other hand, is effectively a modifier.  It is the adjective of the vision and brings clarity to it by adding a timeframe or perhaps a geographical reference.  For example, the law firm focusing on medical devices wanted to be dominant in the Southeast and set a time perspective of five years to accomplish their objective.  Oftentimes the scope defines where the firm wants to be in its markets in relation to competitors.

The advantage aspect of the vision is the action part that hints at what the strategy is going to look like.  For example, a firm that says it wants to be the most profitable law firm in Memphis within the next five years has to have some indication of how they are going to go about it.  They could do the most sophisticated work to achieve the highest rates or they could be the hardest working.  They could use technology, lots of low cost timekeepers and tight cost controls to dominate specific commodity markets.  But there has to be some thought about what the means will be to accomplish the objective.  With the case study firm above, their advantage was to be located in university centers where medical device technology is being created in medical teaching centers.

The Punch Line
There are clearly some visions where merger is an appropriate and effective strategy.  Certainly if growth or geographic scope are involved, mergers make a lot of sense.  By the same token, there are an equal number of visions where mergers are actually deleterious to the objective.  The keys, quite simply, are:

1. Think through your vision.  To quote the saying, “If you don’t know where you are going, all roads get you there.”

2. Define the universe of merger partners that can best help you achieve the vision.  It is probably a much smaller number than you think and there is no sense wasting time on the others.

3. Use the vision and the process you used to select the firm you are approaching as the driving feature of the merger discussions.  The right firm will be intrigued by the vision and will be eager to be a part of it.

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i  I’m pretty sure I found this saying in a book by Gary Hamel.  I just can’t remember which one.
ii  I lifted the three features making up the concept of vision from ”Can You Say What Your Strategy Is?”, an article by David J. Collis and Michael G. Rukstad in the April, 2008 issue of The Harvard Business Review.