Merger discussions between Wolf Block and Akerman Senterfitt have ended, marking the second time in two years Wolf Block has unsuccessfully attempted a merger with a larger firm.
Talks had been on the rocks for a few months and the firms came out with a rare statement a few weeks ago that a conflict was holding up the deal, which is what they said ultimately killed it.
As reported in The Legal Intelligencer a few weeks ago, others in the community had pointed to tax difficulties with merging the partnership of Wolf Block with the corporation of Akerman Senterfitt. Wolf Block partners would have been double taxed in the year the merger went through. People familiar with the deal had said partners at the firm were resistant to taking the hit or signing a deal to stay on at the firm for a set number of years to pay back the firm if Wolf Block took out a loan on the partners' behalf to pay the taxes. Wolf Block's unfunded pension liabilities were also a commonly raised concern.
An attorney familiar with the deal had told The Legal Intelligencer the party line in the firm had been that its Roseland, N.J. office, which represents several medical institutions and doctors, was in conflict with several insurers represented by Akerman Senterfitt.
Wolf Block, with 305 attorneys, had $173 million in gross revenue in 2007 and Akerman Senterfitt brought in $253 million with 464 lawyers. The more than $425 million deal was called off, according to Wolf Block Chairman Mark Alderman, over about $10 million each in insurance work for both firms.
Alderman said there was talk about one of the firms giving up their practice to help the deal go through, but in the end neither side was willing to do that. He said the failure to resolve the conflict was not over a lack of support from certain attorneys within the respective firms that would have been affected by the conflict. He said it wasn't allowed to get that far.
"It's just arithmetic," Alderman said. "Neither side in this economy was prepared to sacrifice double digit millions in revenue and the potential for growth" in the respective practices.
He has said since the days of the firm's failed merger talks with Cozen O'Connor in 2007 that Wolf Block is not for sale. That mentality, many have said, caused him to fight for leadership positions for himself and other members of management to ensure Wolf Block had a say in a combined firm, even though both Cozen O'Connor and Akerman Senterfitt were significantly larger than Wolf Block.
"Governance issues were resolved on day one and never revisited," Alderman said, adding that it never caused a ripple in the negotiations.
He said he and Akerman Senterfitt Chairman Andrew Smulian would have served as co-chairmen of the combined firm and each firm would have had an equal number of directors on the firm's board.
As with the governance issues, Alderman said the tax and pension concerns were resolved months ago. He said they never went to a partnership vote, but a package was worked out that would have been presented to the partnership had the conflict issue been resolved.
"We built overwhelming support for this potential transaction," he said. "Of course it wasn't unanimous. Of course there were those who were less enthusiastic than others, but it was never a material factor in any of our deliberations or negotiations."
Alderman said it was more individuals who were unsupportive of the deal than groups of attorneys who felt their practice or office would have been adversely affected.
One source familiar with the firms' discussions had said a partnership meeting was called at Wolf Block to gain support for the deal and was canceled when it was clear that wouldn't happen.
Alderman said there was "never, ever a partnership vote that was delayed because of any concern about what the result would be." He said a vote was delayed twice because the deal wasn't ready to be presented to the partners.
The pension issue was both a political and financial issue for the firms, Alderman said. Pension liabilities don't buy current business and opportunities like some other expenses might and that was a challenge at one point. But he said, without going into much detail, that it was resolved through a "shared responsibility."
The tax issue was resolved through the willingness of both firms to switch to a Dec. 31 fiscal year. Currently, Wolf Block has a Jan. 31 year and Akerman Senterfitt has an Oct. 31 year. Alderman said Wolf Block partners would have been double taxed.
At the time of the Cozen O'Connor merger discussions, he said, Wolf Block wasn't prepared to give up its fiscal year. He said the firm learned its lesson and was willing to do that with Akerman Senterfitt. It was purely conflicts that killed the Akerman deal, he said.
When asked why the conflict came up so late in the game, Alderman said it was part of the firm's agreed upon strategy.
"Because of the difficulty of the conflict issue, we made together a strategic decision to resolve everything else first if we could, because if we couldn't resolve everything else we wouldn't need to reach the conflict issue," he said.
Alderman said he has no regrets for taking that approach. He did say that he wishes he could have seen how the deal would have come to pass in a better economy. One of the firms may have been willing to lose the $10 million in a better economy, he said.
Stephen A. Cozen of Cozen O'Connor, which represents several insurers, said his firm's talks with Wolf Block didn't hit snags over conflict issues. He said they were willing to work around the existing and potential conflicts.
Cozen said his firm does represent health insurers, but possibly not to the extent that Akerman Senterfitt may have conflicted with Wolf Block's New Jersey office.
"What I find significantly strange is the thesis that the economy played a huge role in derailing this," Cozen said, adding that it "just doesn't ring true to me."
He said everyone has known about the economy for months.
Tom Clay at Altman Weil said if a firm's strategy is to just be 800 or 1,000 lawyers for the sake of shear size, that is not a smart move. But if there is an underlying reason as to why it would benefit the firm to be larger, then a firm should plow ahead with potential mergers even if it has failed in the past.
"If it's a rational, sane strategy, you keep plugging," he said. "The problem is, there's some fatigue that comes about in these things."
Clay pointed out that conflicts are generally the first thing firms will look to handle in these types of mergers.
"It's very unusual to get to this late in the game and have a conflict sort of stall it out," he said.
Read more about it in Friday's Legal Intelligencer.
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Wolf-Akerman Talks End, Leadership Cites Conflicts in Bad Economy
The Legal Intelligencer
September 4, 2008
