Building Bridges: A New Way to Merge

Offshore law firms Mourant and Ozannes merged this month, but have opted for a much less adversarial approach than usual. Both parties turned to the same practice for advice, explains Richard Linsell, head of professional practices at Addleshaw Goddard.

The recent merger announced between Mourant du Feu & Jeune and Ozannes, the leading law firms in Jersey and Guernsey respectively, has caused me to reflect, not for the first time, on what is best practice in this area, and on how firms like mine, with leading reputations, and with many clients that we know are looking at merger, can assist in bringing about what for many management teams is a quite a formidable goal.

Before drawing some favourable lessons from the proposed Mourant- Ozannes merger, however, it is perhaps first worth reflecting on some examples we have seen that illustrate how not to go about this.

There are mergers that fail because negotiations simply drag on and on, with no real impetus and investment of energy by the parties. The lesson here is simple. Clear the decks and commit resource. Be dynamic, and even if it fails, try to reach a result before your clients, staff and competitors are already aware of your merger option and can try to destabilise it.

Other mergers fail because the parties are not being realistic in aspiration and/or merger ‘fit’. The amount of due diligence you can carry out on merger targets today is much greater than was the case on some of the larger mergers I advised on in the 1980s and 1990s. Awareness of disparity of profits is mostly overcome by LLP accounts or other sources. You can read accounts audited to UK GAAP standards, client conflicts are much easier to spot, joint panel appointments to major clients are essentially public, and the stability of the partner bases in each firm, cultural aspirations and values are usually easy to gauge and assess too.

There are ways in which differences in these areas can be bridged, but a bridge is finite in terms of engineering, and you should not aspire to merge with the unobtainable, or to merge if you act for Coca-cola and your merger partner has Pepsi. There have been examples of this mismatch and unattainablility recently, and the damage it does to brand and confidence is profound. Legal recruiters move in on the partners they suspect are now disillusioned, and the parties, particularly the one perceived as having been weaker, face two or more years of battle to convince their various stakeholders that they are viable ‘alone’.

There are organisations that can assist in finding and researching merger targets of course, and they or others may have experience of helping facilitate mergers. We have worked with many of these, and can see value, particularly if a third party is needed to facilitate the process, helping the parties to address issues they might want to avoid but that have to be ‘crunched’. If they don’t these can destroy the merger and all will be wasting their time.

But I am convinced that the best way forward is for the respective clients to ‘own’ as much of this process as possible. This way it is they and not their advisers who engage, which gives it added dynamism. It helps them to explore what it will be like working together. It builds trust, respect and tolerance – all virtues you will need to get the merger done and to obtain the value sought.

Knowing your dues

Readers will then say that with all this risk there must be extensive due diligence, and to an extent I agree, but do not overcomplicate this area. Professional practices are simpler businesses than many appreciate. They do not make combat aircraft or leading-edge pharmaceutical products. On the Mourant-Ozannes merger, the parties broadly did their own due diligence against a template they agreed and we commented upon. It was a good template, and the framework of what they had already investigated mutually before agreeing that merger looked viable. That was added to by work from KPMG, their mutual accountants. It was not due diligence at the M&A level. Premises were simply that, and rental levels, breaks and reviews were a given. Just occasionally we have seen premises core to merger – usually where the merger is facilitated by a lease coming to an end. There dilapidations will be material, but managing partners should know what is essential and what is not.

Process and precedent

So you are now looking at a merger that is viable, you have basic due diligence supporting the viability and the absence of blockers. What next?

This is where we came in to advise. We knew Mourant and had drafted the new partnership agreement they were to adopt on leaving the Mourant Limited Group, of which the law firm had been a part for five years. Ozannes saw that agreement as part of their due diligence as well, and alighted on many aspects they also liked. I suggested we all met in London in the late summer to talk about mergers and the issues and work out how best to proceed.

It was during that meeting that I started to feel comfortable with adopting a somewhat novel role in the merger. I proposed to both parties that they should agree a full conflict and confidentiality waiver and ask Addleshaw Goddard to advise them jointly on ‘their merger’. Our role would be to facilitate and advise on issues they bought to us, to establish processes and documentation that would achieve their objectives, and to be available to present to their partnerships why certain issues were resolved the way they were on the merger. Most important of all, we would tell them where we knew market practice was on various issues we had warned can bog down mergers.

This was not the first time I had done this. Rowe & Maw advised both the French accounting practice Mazars & Guerard and the UK firm Neville Russell, as they then were known, on their 1998 merger. The French firm was not known to me but there was a well known merger broker involved, with whom I had worked many times. After considerable reflection Rowe & Maw agreed to be advisers to the merger, and not strictly to either party, with the various merger issues resolved by the two parties, helped by the merger broker. The result taught me a great deal. It is an exacting role. You need a lot of experience and must be absolutely trusted, but it gets mergers done, cuts time and is cost effective.

Mourant and Ozannes bought into the idea and were model clients. We drafted the key heads of agreement from which the merger was announced. We drafted the combined firm’s partnership agreement. We advised on the offshore structure to adopt and the related risk issues. They are very familiar to my team, and Aster Crawshaw, who worked with me on the merger, had his own merger experiences from advising at Linklaters, and then in-house at Ernst & Young. Together we had seen all the issues the two law firms needed to discuss, and despite our having a longer and deeper relationship with Mourant we bent over backwards to be even handed. There were also issues we helped on based on the mergers that made up Addleshaw Goddard, and one area we will be working on with the merged firm in future is partner performance management.

A joy of the Mourant Ozannes merger was the way some of the trickier issues were dispatched by the parties. There was no argument about the name. Governance was discussed in some detail, but again, solutions were quick in being agreed and are not fudges. Profit sharing and performance were pretty close to alignment, and IT platforms were already the same.

This new way (at least new to me in 1998) will not suit all firms, but it worked here and it will work in future. Where advisers are pitted against each other you will inevitably get some adversarial behaviours, and even if they are mild they will cause delay. Once the logic of merger and its viability is agreed, I advocate the parties jointly owning their problems and jointly solving them.

– richard.linsell@addleshawgoddard.com