The merger prenup

Business integration expert Paul J Siegenthaler reveals what merging law firms can learn from the successes and failures of M&As in the corporate sector.

While up to 80% of mergers and acquisitions fail to deliver their initial business case, corporations that pursue an aggressive strategy as ‘serial acquirers’ are far more successful at integrating their new businesses. This proves that not all is random when it comes to the art of integrating businesses: there are lessons to be learnt.

Much has been written on the pros and cons for law firms merging rather than forming an alliance or joining a network. For the purpose of this article, we shall assume the decision has been made to proceed with a merger or acquisition, and that the objective now is not whether to merge, but how to succeed in delivering the merger’s strategic aim.

Till death do us part

Just like a marriage, a merger is intended to be pretty much irreversible. Getting it wrong can be very costly and causes firms to lose commercial focus as they spend their energy resolving internal problems rather than satisfying customers’ needs.

It took Cadbury Schweppes 14 months to demerge in 2007-2008, at a cost exceeding £1 billion. At the time of the demerger announcement, analysts believed that breaking up the merger would raise the total value of the individual companies by some £3.4bn compared to the value of the merged business. Such is the magnitude of the value destruction that can result from a poorly thought-through merger.

Law firms tend to merge to achieve critical mass in a particular practice, expand geographically or offer a broader range of services. But is this added value perceived purely in the minds of the partners of the two law firms that are about to unite, or does it actually represent a tangible benefit for their current clients or improve the firms’ attractiveness to future clients?

Bigger does not necessarily mean better. As a client, I might prefer a specialised practice that knows the topic inside-out rather than a more generalist law firm. Therefore, there needs to be absolute clarity on the overall vision regarding what the merged law firm wants to be, what type of clients it aims to attract, and why those clients would find the merged firm more attractive than it is currently.

Almost the way you are

United Distillers (UD) acquired Germany’s leading premium brandy Asbach in 1990 as a base for a strong commercial platform to gain market share in the newly-unified German market. But this golden opportunity came with many strings attached: a sales organisation based on independent distributors, two Calvados distilleries in France, long-term contracts with local apple growers, a distillery in Italy and a subsidiary company in Austria. This resulted in UD having to break up a joint venture already in place in that country and, closer to home, a chocolate factory, a print shop and… a laundrette.

The ‘free add-ons’ that are tied onto most mergers or acquisitions, even if small compared to the core of the business, can be a huge distraction and cause loss of focus, leading to suboptimal business performance and serious erosion of the value of the acquired company or the combined merged business.

The Asbach brand was sold off in October 1999, after less than a decade of repeated attempts to realise the vision developed when United Distillers acquired it.

Similar situations could arise for law firms: there will almost inevitably be a part of the other firm which you would prefer not to have because it does not fit with the strategic focus areas that are set out in your merger vision. Take an honest and rational view to ascertain that the benefits of the merger will outweigh those pitfalls, and accept the fact that, if they don’t, this will mean having to embark on another potentially long and painstaking search to identify a better-suited merger candidate.

People and things

Linpac Handling Materials, which enjoyed a high market share in north European markets, decided in 2006 to expand southwards. It acquired the Paris-based Allibert company for its strong position across Benelux, France, Iberia and other Mediterranean
markets. The merger gave the combined company and its products a pan-European presence.

From the client’s perspective, there is an essential difference between tangible products such as Linpac’s plastic crates and intangible services which depend on personal experience. Law firm clients seek consistency of quality, but can only be guided by reputation or recommendations from trusted sources.

But who will the client trust? Would a British client needing support with employment law issues in Italy feel more comfortable being referred by his usual UK employment law firm to a well-regarded specialist law firm in Italy (almost unbiased advice), or to the UK firm’s own Italian employment law practice, with which it merged some years ago? (the ‘obvious’ recommendation).

Unfortunately, reputation cannot be transferred, it needs to be earned and demonstrated. Law firms contemplating mergers, particularly when their aim is greater geographical reach, should ask themselves how they will expand their reputations: this will only happen if they can be perceived to be remaining accountable for the consistent quality of their service across their entire new practice.

One vision

Exercising strong inspirational and motivational leadership may come more naturally to a team of senior executives of a large corporation who feel like ‘citizens’ of that corporation, than amongst the partners of a law firm who may, deep down inside, feel more like a group of entrepreneurs working together and sharing common resources.

The consensual team approach may work well in a relatively stable environment, but every example of successful mergers rests on strong leadership and an executive team closely aligned with the leader: in word, in spirit and in observable behaviours.

Before even beginning their integration voyage, successful mergers have a clear definition of how the organisation will operate, what it will feel like, and what will be different compared to how things are today. That depiction might not please everyone, but it has the advantage of clarity and allows those who do not find the journey and destination appealing to step off before the train gathers too much speed.

To achieve this level of alignment, law firms will need to nail down a number of key decisions before the merger deal is even signed; if any of the following items appear insuperable, the merger should not proceed as it is bound to fail.

As a bare minimum, the list of topics to be clarified should include:

· Who will call the shots, who will fill the other top roles, what does the management structure look like?

· What is the appointment process that will define how the rest of the organisation is populated?

· How will the newly-combined law firm market itself?

· What remuneration base and systems will be used for partners and staff?

One soul

Even very large corporations can get this wrong.

Chrysler and Daimler-Benz merged in 1998. Daimler-Benz’s CEO Jürgen Schrempp hailed it “a merger of equals, a merger of growth, and a merger of unprecedented strength”. Three years later, Schrempp was quoted by the Süddeutsche Zeitung as asking: “What happened to the dynamic, can-do cowboy culture I bought?” The value of DaimlerChrysler had eroded by the equivalent of Chrysler’s value at the time of the merger. The company demerged in 1997 after nine very difficult years.

One cannot ‘buy’ culture. Culture must be defined, nurtured, lived and expressed in daily behaviours. Daimler-Benz and Chrysler had appended their names to form the group’s new name, DaimlerChrysler, and maintained two parallel management structures under co-CEOs located at separate headquarters.

In fact, the organisations never merged, but merely coexisted side-by-side, like water repels oil in one same recipient. There was no benefit for the customer, and therefore none either for the company’s shareholders, nor its employees – quite to the contrary.

Blending cultures or, better still, re-inventing a firm-wide culture, requires a constant effort, a statement of values and behaviours that reflect those values, and the avoidance of ‘us’ and ‘them’. It requires the use of ‘we’ and reference only when absolutely needed to either of the former companies by their former names, but certainly never by ‘they’ or ‘you’.

In addition, it requires a mindset and environment that encourages everyone to focus on commonality and looking together in the same direction, forwards, towards the customer, rather than internally at each other to highlight and exacerbate differences. This provides continuity, a common sense of purpose, motivation and resilience, to achieve a successful integration.

One face to the customer

When Guinness and GrandMet merged in 1997 to form Diageo, the then deputy CEO Jack Keenan told his startled team of senior executives and country managers: “Merging is like pulling out teeth: you can do it slow and painful ... or quick and painful. We shall do it quick and painful.”

Speed matters, because firms embarking on an integration are vulnerable during the early stages of that voyage. Unless clarity on structure, processes and ways of working is restored rapidly within the firm, valuable employees may leave, competitors may benefit from the company’s temporary vulnerability, and commercial performance may begin to decline.

The first goal must be to present ‘one face to the customer’. When two law firms merge, they will immediately be perceived as being ‘bigger’ and therefore possibly having more strength and resources in core practice areas.

But the key to success will be the ability to present a one-firm image to the market, bringing everybody together and aligning them in one common vision, so that clients perceive them as one seamless entity, using the same processes, systems and work style, rather than a coalition of two parts. Rapidly achieving ‘one face to the customer’ means you afterwards have more time to integrate the rest of the firm’s systems and processes which do not interface directly with clients.

Checklist for successful mergers

Where is the value added by your merger? In what way will you be more attractive to the types of clients you are targeting? Be brutally realistic about this – no wishful thinking!
What would your ideal merger partner look like, and how different is that compared to the law firm with which you are about to merge? What will you do to close that gap? Is there any real urgency to complete a deal, or can you afford to seek a better-suited merger partner?
Which clients are you (or your merger partner) likely to lose as a result of the merger, either as a result of conflicts of interest, or because your merged firm will become less attractive to those particular clients?
What will be the look and feel of the newly-merged law firm, and how different is that to the two current firms’ cultures? How certain are you that you will retain your key people?
Can you articulate the future merged firm’s vision in a way that is concise, yet sufficiently specific to give it some uniqueness compared to the rest of the market? (This needs to include a statement of why clients should chose your firm rather than any other.)
Are you clear about who will do what among the new team of CEOs, chairmen, and/or managing partners?
How will you transfer or extend reputation: do you have a detailed survey of client perceptions of your firm and the merger partner’s firm, and have you shared the conclusions of that survey? What will it take to bridge any gaps in perceptions and reputation?

· Do you have a clear plan as to how you will rapidly achieve ‘one face to the client’?

– paul@psiegenthaler.com