Case study: Merger mystery

It is generally accepted that merger can be a high-risk strategy for growing a business. TLT adopted an open and communicative structure throughout the process to retain talent, but found a little bit of luck doesn’t hurt either…

By David Pester, managing partner, TLT Solicitors

In a fragmented legal market, mergers and acquisitions represent one way of securing the talent and expertise needed to remain competitive and meet client demands. But if you bring two firms together without a clear rationale or an effective business and integration plan, you risk creating chaos instead of a common purpose.

The current shortage of talent in the legal market is inescapable. Clients, meanwhile, are demanding both more specialisation and a wider range of services from their law firms. Squaring this circle and building up critical mass to meet client demand is vital.

Mergers and acquisitions are not the only option. You can look at developing your own people – an obvious route and advisable anyway – but it’s a long process and organic growth alone may not be sufficient in the current market. Lateral hires remain an important part of the mix, but star performers and teams who are available are often highly sought after.

Hiring a team of lawyers is probably the most straightforward way of growing. The need to reconcile differences and ensure integration is less than when acquiring an entire firm, but it is still important. Again, finding the team that represents a perfect strategic fit does not happen very often. Competition is often fierce in securing such a hire, so acquiring a firm could be the most effective way of achieving radical growth.

This is particularly the case in the current market, which is more fragmented than ever before. Even among the top-100 firms, and particularly in the case of numbers 50 to 80, differences in size and turnover are marginal. But most of those firms are looking to grow and develop. For proactive firms, this means the chance of finding a like-minded firm of a similar size to merge with or acquire is reasonably good. Whether the business rationale for such mergers exists is a different question.

TLT is the product of merger. In 2000 two long-standing Bristol firms joined forces to create TLT. The second was carried out five years later, acquiring a presence in London through a merger with banking boutique Lawrence Jones. This experience shows that where the strategic rationale for a merger makes sense there can be significant gains.

The risk of a wrong move

Desktop research is an obvious starting point for identifying targets, but firms can also get to know each other by working on common projects or through common clients. There are agents who get paid for matchmaking, but don’t overlook the part that luck plays. Simply being in the right place at the right time may be the key.

In TLT’s case, personal contacts and good market intelligence helped. Efforts to ensure a strong profile in the market also ensured that any potential target firm had a clear understanding of what the firm was trying to achieve.

The risks, however, are great. Embark on a merger for the wrong strategic reasons and you can lose more than you gain. Choose the wrong firm and the clash of cultures may never be resolved. Get bogged down in technicalities and you can easily get distracted from the core responsibility of managing the firm and its staff. In each case, the danger is that key people will become disaffected and leave. Clients will at best raise an eyebrow; at worst they will move to a competitor.

Building the business case is highly important. Growth for growth’s sake is not necessarily the path to follow. Although there has been much debate about growth by simply bulking up, it is better to look for complementary strengths. Most importantly, firms should have a clear idea of what the combined business will deliver, without prejudices or assumptions.

Case study: TLT and Lawrence Jones

TLT’s merger with Lawrence Jones in 2005 was prompted by banking and financial-services clients who felt it would be helpful if the firm had a London presence. Around 60 per cent of the business was coming from outside the South West, so it made sense to be able to extend capabilities outside that region. The firm began an exercise to identify different ways that might be achieved.

One option was to set up a new operation in London. Another was to take serviced office space and put some of the firm’s own people in. Although existing clients could have been served from a new office, it would have been difficult to bring in new business quick enough to grow and develop. Everything pointed to an acquisition or merger – especially as the firm was also looking for new talent and additional banking and financial-services sector expertise.

A number of firms were met and opportunities explored, but there was still an element of luck in how TLT met Lawrence Jones. In the event, a third party that knew both practices suggested a meeting might be in the interests of both. Lawrence Jones had a well-established banking practice, with a respected client list. The firm’s expertise in banking and a number of other areas overlaid TLT’s own, providing a clear rationale to further explore the possibility of a merger.

The firm first took the time to talk to clients on both sides, however, to assess their views. In spite of time pressures and concerns about confidentiality, it is my experience that it is possible to talk to clients in this way and get a clear idea of their intentions. Would a merged firm meet their needs? That was the crucial question.

Convergence concerns

Simply growing without paying attention to profitability is a mistake. On the other hand, profitability isn’t everything – there are ways of structuring deals to bring together firms of differing profitability to allow convergence over time.

The convergence of cultures is key to long-term success; and that begins with a realistic assessment of what those two cultures are. Why is it that people want to work for you? What are their values? What do clients value? Audit these values and then compare them with those of the target firm. As with clients, consultation with staff on the plans can be restricted because of time and the need to maintain confidentiality, but it can be achieved. In my experience, people respect confidentiality when it’s asked of them. Even with the deal done and a coherent development plan in place, it’s not enough to sit back. Never underestimate the importance of cultural issues and the need to reconcile them.

It is very unlikely that two cultures will be identical. They need to be integrated over time. When TLT was created, it was thought the fact that both firms were the same size and based in the same city, meant they were the same. We soon found out we weren’t and learnt to adapt and grow together. Crucially though, and despite the difference, we were both clear about heading in the same direction.

Certain practical steps can also help. Techniques for client-relationship management can vary considerably from firm to firm. Harmonising them early on can make a big difference both internally and externally. Terminology used should also be consistent – for example deciding between bill report or billing guide. I’d suggest coming up with something completely new instead.

Retention risk

Nevertheless, it’s entirely possible – and sometimes desirable – for one culture to be dominant, meaning integration has to be carefully managed. Be sensitive with people’s concerns about being integrated into something larger and possibly threatening.

People are sometimes uncomfortable with growth. The organisation will inevitably change and you might not be able to take everyone with you. Some people may leave, but the trick is to hold on to those you really value; those who are critical to achieving your new plan.

TLT’s experience is that if you are open with people, they will understand what you are trying to do. That applies to external and internal communications equally. The firm has been recognised for its open management style and I try to talk to as many people personally in the firm as I can – at all levels and as often as I can.

The intranet also helps with communications. It carries news and features, profiles of senior management and new appointees, and it is regularly updated. The open-plan office layout fosters good communication too, ensuring that senior people are always accessible to anyone in the firm.

Continuous monitoring of cultural issues post-merger is also vital. Occasionally those who seemed most enthusiastic at first will then find it hard to adjust. People can become uneasy, feeling unsettled many months down the line.

Results

With the right approach to assessing culture – having a clear plan but maintaining sufficient flexibility to amend it where necessary and continuous monitoring – the right result can be delivered. Up to 90 per cent of the people who joined TLT in London are still with the firm after nearly two years post-merger. There are also new opportunities for recruitment as a result of the merger. The firm has added 20 people to the London office, including two new partners in the last 12 months. Overall the firm now has 56 partners, over 350 lawyers, and over 600 employees in total. This compares with a staff of just 250 in 2000. Existing clients have provided more work; new clients have been won; and market perception of TLT has improved and developed.

An obvious measurement of success is profitability. In May 2006 the firm found profit per equity partner (PEP) grew to £300,000. In context, PEP has increased by 270 per cent over five years. Turnover increased by 34 per cent in the past 12 months, from £21.5m to £28.75m. Current growth continues apace, but I’m certain that none of the development could have happened without the skills and talent both mergers brought to the new firm.

Change and change management can be challenging but also beneficial. Mergers have helped TLT to grow and develop as a practice. It has improved the way things are done, which has been rewarded with better financial results; helped expand the specialist services offered to clients; and helped to recruit and retain talented people.

As for the future, the firm is very clear about its goals, but certainly isn’t rigid in how they are achieved. Lateral hires are another option for growth, and this is the time to consider such moves. When everyone’s doing quite well the temptation is not to pursue opportunities. But it’s easier to take what are often tough investment decisions now, than be left scrambling for options when times inevitably get tougher.

David Pester is managing partner of TLT Solicitors. He can be contacted at dpester@TLTsolicitors.com