Gearing up for growth

With firms increasingly looking for ways to grow their businesses, Caroline Poynton asks Rowan Williams and Jeffrey Nedas, partners at BDO Stoy Hayward, about the strategic value of mergers, alliances and networks.

What is your view on the current level of merger activity among law firms in the UK?
Rowan Williams: Merger activity is certainly on the increase as practiceslook to grow and develop. This is the case across all sizes of law practice, but the reasons for a merger can vary tremendously.

Larger practices are tending to look to achieve greater market share and particularly to expand geographic reach both within the UK and overseas. There is a desire to build specific areas of expertise within these firms and to become market leaders in their chosen fields. General market share and geography can be achieved by merging with another sizeable practice, whereas growing a specialist area is often more likely to be achieved by attracting teams of individuals with the relevant sector expertise, rather than by merger.

At the other end of the scale there are the smaller practices of up to four or five partners where merger activity is happening with a greater frequency, but for different reasons. These practices are tending to look for mergers to help with succession issues. A link with another small practice with a different age profile can help here, but finding the right match will often prove difficult. These practices can also struggle to recruit fee earners, a situation that can be helped by achieving greater critical mass. Smaller practices that do not operate in a niche area of law need to be competitive on price and therefore if a merger can result in cost savings for the combined practice then this can be beneficial.

However, it is perhaps in the mid-tier practices, where we are now seeing the greatest level of merger activity and, again, the reasons for this may be quite different to the larger and smaller practices. Unless operating in a niche area of law, the mid-tier firms cannot often compete with the larger practices on ability to service the larger clients and equally cannot compete on cost with the smaller practices. Mergers are often sought in these circumstances to widen the areas of technical offering a practice can provide. A merger with a similar size or smaller practice operating in a different area of law can be beneficial. Practices can still achieve similar results through a combination of organic growth and lateral hires, but the right merger will accelerate the process.

How do you view the growing number of US firms entering the UK/European market via merger activity?
Jeffrey Nedas: With truly international clients requiring seamless global services it is inevitable that the number of transatlantic mergers will increase. These are not always driven by the wish of US firms to enter the UK and European arenas: UK and European firms have their own ambitions.

Whether driven from the US or UK these mergers are only likely to be of interest to firms with serious international commercial clients.

What chief advice would you give to firms considering a merger?
JN: A merger should be seen as implementing a properly thought out and endorsed strategy, not as a universal panacea.

The most important factor is to be very clear about the strategic reasons for wanting a merger, and to have investigated other ways of achieving the aspirations of the practice. A merger can be a difficult process and it must be done for the right reasons if it is to be successful. A merger should not be sought to provide a quick fix to a problem – there must be long-term benefits.

Why do you think so many mergers fail?
RW: First, because of the failure to first agree the strategy. If a proper review is not carried out and all the options fully discussed, the wrong route may well be followed. In some instances, a de-merger rather than merger may be appropriate.

The culture of the merging practices must fit and there must be a clear desire from both sides to make the new combined practice work. Often, not enough work is carried out pre-merger to ensure there are real benefits to be achieved in the long term for both parties. However, more of an issue can be what happens post-merger. This can be the most difficult phase and real efforts are required by management to ensure there is proper integration of staff going forwards. We have often come across situations post merger where staff will still identify each other as belonging to the previous firms and where each practice continues to adopt its own systems. This situation cannot be allowed to develop if the merger is to be successful.

A merger may bring about some particularly difficult personnel challenges, from ill-fitting practice areas to management differences in the leadership of the combined firm. How would you suggest tackling such issues?
RW: Leadership and communication are crucial in these circumstances to ensure there is a positive message going out to personnel about the merger. Difficult issues often arise from a lack of communication and people feeling threatened by change.

Where there are overlaps in responsibility, discussions must take place with the key individuals affected. Just because either staff or partners have held positions of authority in their former practices does not necessarily mean that they should hold similar roles going forwards. There needs to be a reassessment of the roles required within the new combined firm, which directly tie in to the strategy. Consideration then needs to be given to who is the appropriate candidate for each role. In terms of senior management, a model where, for example, there are joint managing partners does not tend to work in practice. It is therefore important at an early stage in the merger discussions to decide on key management roles for those senior individuals involved.

How far do you think networks and/or alliances are viable alternatives for firms looking to offer extended capabilities to clients?
JN: Experience suggests that alliances and networks will only work if the parties – or at least the key parties – are prepared to invest both time and money in developing them. To create an international network providing high-quality services and looking after members’ clients in a consistently appropriate manner is a medium to long-term play.

Networks and alliances can work well – again it is dependent on the strategy of the firm. Becoming part of a network will help to create a good referral network and increase geographic reach. Access to technical specialists within the network is also an advantage.

Although not a model for growth, belonging to such a network will provide some of the benefits of critical mass, and allows each firm to retain its own culture and management. It is still important though to ensure that the network selected is compatible in terms of type and style of practice. n

Jeffrey Nedas and Rowan Williams are partners at BDO Stoy Hayward LLP. They can be contacted at jeffrey.nedas@bdo.co.uk and rowan.williams@bdo.co.uk respectively.