The storied name of Wolf Block, thought to soon be a thing of the past given a potential merger with the larger Florida-based Akerman Senterfitt, looks to remain intact as the two firms announced Wednesday the talks were off. But Wolf Block has already seen departures of high-level partners and some wonder what is next for the firm after two failed merger deals in less than two years.
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 last month, 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 agreeing to stay on at the firm for a set number of years in order to pay back Wolf Block if it 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 $426 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 who 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.
Akerman Senterfitt Chairman Andrew Smulian declined to comment beyond a statement his firm issued Thursday. The statement said only that client conflict issues became an impediment to the deal and both sides determined it wasn't in their best interest to move forward. The firm, according to the statement, is committed to growth both organically and through acquisitions.
Alderman 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 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 opposition to the deal came mainly from individuals, rather 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 support wouldn't be attained.
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 had both political and financial implications 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 when both firms agreed 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, 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 firms' 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 of 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, a firm that represents a number of 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.
Cozen said he couldn't say on a hypothetical whether $10 million to $20 million in business could be a deal breaker in this type of merger. It is dependent on who the attorneys are who are affected and what removing those attorneys or clients would do to the culture of the firm, he said.
Larry Silverman, a former Akerman Senterfitt partner in Miami who recently left to start his own firm, said he was not surprised that the merger was off.
He said the firm's explanation that conflicts between Akerman Senterfitt's substantial insurance defense practice and Wolf Block's "prominent" insurance plaintiff practice out of Roseland were to blame sounds accurate.
Thomas Clay of consulting firm Altman Weil said if a firm's strategy is to just be 800 or 1,000 lawyers for the sake of sheer 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.
WHAT'S NEXT FOR WOLF BLOCK?
Now that the merger is off, Alderman said the firm will go back to concentrating on finishing out its 2008 fiscal year and will then refocus in February on carrying out its strategic plan.
The plan hasn't changed, but the implementation might, he said.
Alderman said he isn't concerned about seeing partners leave over the failed merger because the deal was entered into collectively and called off collectively. While there wasn't a partnership vote, he said a significant number of partners beyond just the executive leadership were involved in making decisions.
"There is a tremendous collective commitment to the firm and to the strategy and we are going to move forward together," he said. Alderman said he has no regrets about selecting two merger partners that were larger than Wolf Block and were corporations instead of partnerships.
"Of course the arithmetic matters," he said, "500 versus 300 makes it harder to do a merger of equals, but we managed that in both of our discussions. Neither [fell apart] over equality."
The firm's strategy remains focused on substantial growth. A merger may still be the best way to accomplish that goal, but it's not the only way to do it and it's not necessary for the firm to survive, Alderman said.
Clay said firms can run the risk of losing attorneys after a failed merger, but it is hard to tell what the effect might be. "They risk losing people who were overinvested in getting the deal done [and who] felt like it had to happen for the future of their practice or the firm," he said.
There could also be a loss of confidence in the firm's direction, Clay said, so leadership will need to inspire the remaining attorneys and assure them the firm is on the right path.
While firms might have work to do internally after a failed merger, it has less of an effect externally than one might think, he said. In Wolf Block's case, for example, there might be gossip and some firms might question whether it's worth entertaining merger discussions with a firm on its third attempt. But Clay said firms aren't going to write Wolf Block off. Companies walk away from acquisitions for good reasons all the time, he said.
However, there can be bit of a perception problem when firms can't seal the deal.
"It's like they can't even get a date to the prom after they've told everyone they're not wearing underwear," one attorney familiar with the Wolf Block deal said.
Frank D'Amore of Attorney Career Catalysts said the failed merger talks present a challenge for leadership in keeping morale but said it's definitely doable for the firm to prevent a mass exodus. He said it's a real test, but it's possible.
When merger talks start gaining traction, attorneys start to think about the "what ifs" in terms of how the merger could help their practice. With a deal not coming to fruition, it could hurt morale, he said.
Firm leadership needs to keep its attorneys focused on the strategic goal of the firm and their practices, D'Amore said. He added, however, that it becomes "triply difficult" to get people enthused during the next potential merger.
Mergers, however, aren't the only option for Wolf Block from here.
Pepper Hamilton, for example, has gone through two failed merger attempts, first with Arent Fox then with Nixon Peabody. The firm has come through seemingly unscathed, and has focused its efforts in the past two years or so on a significant number of lateral recruits. The attorney familiar with Wolf Block predicted lawyers might start leaving the firm as some did after the Cozen O'Connor talks ended. The attorney said the firm isn't in danger of going out of business but said there have been staff layoffs. Another source also pointed to secretary layoffs and the departure of other support staff.
Alderman said he couldn't give a number, but said the firm has been in the process for months of bringing its secretarial ratio down to average industry standards. He said most of it was done through attrition and retirement and none of it was related to the merger. There were also rumors that Wolf Block had plans to let go of a certain number of attorneys, particularly out of the Philadelphia office, regardless of whether the merger went through. Alderman said the number suggested, 30, was "absurd" and that there is no program in place to reduce the number of attorneys.
He said the firm would most likely see a lower headcount next year after retirements, attrition and performance-based reviews. While the firm is still hiring, it is not actively seeking to fill vacant positions. Alderman said the number of losses in each of those three categories is significantly less than 10 attorneys, and probably about half of that.
Julie Kay of The National Law Journal contributed to this report.
