In an economy in which revenue is hard to come by, mergers are increasingly viewed as a way for firms to capture market share. But merger discussions could also lead to lost revenue opportunities, making them a tricky proposition for firm leadership.
“The amount of time that goes into this stuff, even the ones that don’t happen, it is just massive,” said Frank D’Amore of Attorney Career Catalysts.
The costs in terms of lawyer time not being billed and travel expenses can be in the hundreds of thousands to millions of dollars, Altman Weil principal Ward Bower said.
“The opportunity costs involved are staggering,” Bower said.
In one deal Bower recently worked on, which didn’t ultimately result in a merger, there were a handful of meetings between the two firms with an average of 12 to 15 partners from each firm at those meetings all set in different places across the country.
“That one cost millions,” Bower said.
D’Amore noted that the further along discussions go, practice group leaders and key rainmakers get involved in the discussions, taking away the time those lawyers can bill or pitch for new business. The average partner may also start to wonder whether his firm’s leadership is spending too much time on merger discussions when most consultants say nine out of 10 don’t result in a merger. That is time firm leadership could be helping on client pitches or crafting a strategic plan for a practice group, D’Amore said some partners might argue.
But for many law firms leaders, merger discussions are viewed as a main component of their role, with some firms demonstrating that to the partnership by creating a position dedicated to strategic growth initiatives. And Bower noted managing partners often feel they have a fiduciary duty to their partners to entertain an overture from another firm.
Ballard Spahr Chairman Mark Stewart worked for years to find the right partner in New York, finally reaching a deal last year to acquire litigation boutique Stillman & Friedman. A similar scenario happened in Atlanta when the firm acquired IP boutique Needle & Rosenberg in 2008. And Ballard Spahr has experience with failed merger talks too, unable to close a deal in 2005 with Phoenix-based Fennemore Craig. But the firm hired a few partners from Fennemore a year later to open a Phoenix office.
“The costs are significant, so you make a decision, and I sort of make a decision early on as to, assuming this plays out in the best possible way, is it worth it, but then, frankly, you know, the percentages are against you for most of them,” Stewart said. “My philosophy here is, nothing ventured, nothing gained.”
Stewart said he never finds talks to be a total waste of time because, even if they don’t work out, he always learns something about the firm, the market or what motivates people.
Michael Pollack, who recently stepped out of his longtime role as global head of strategy for Reed Smith to take over as the firm’s general counsel, agreed that merger discussions can prove valuable regardless of the end result.
His firm certainly sees the value in mergers, being very active in the merger market over the past decade or more and creating Pollack’s former role, which is now held by partner Edward J. Estrada.
“The process, while there may be cost involved, it could also validate or not validate a particular strategy you have,” Pollack said. “So even though there is a cost involved, there is a return to that cost.”
Reed Smith had merger discussions with Texas-based Thompson & Knight as part of Reed Smith’s longtime efforts to enter the Texas market. While those talks ultimately failed, they reaffirmed the goal to enter the market and created a degree of momentum for the firm to find another way in, Pollack said. That led to Reed Smith diverting from its typical strategy of entering a new market through larger acquisitions or mergers to opening the office with a combination of several partners from a number of firms.
“Other times a merger failed because the strategy was not validated, so while cost was incurred in the failed merger, there were many dollars saved in not pursuing a strategy that might fail,” Pollack said.
Bower recommends firms have a protocol in which they would only talk to firms that meet a certain profile regarding economics, geography, head count or practice area, for example. If talks go beyond an initial meeting or two among managing partners, there should be a predetermined number of people on the merger team with the goal of keeping that number as small as possible, Bower said.
Pollack said his firm looks to limit merger costs by making sure a deal is highly likely before getting too many people involved. Still, there are several people from senior management as well as some accounting people and those who run conflict checks that have to be involved at the outset. There is a cost there, Pollack said, but it is pretty limited.
Talks start getting more expensive when they go beyond that stage, he said, noting it’s a time drain more than anything else. It is also important to keep the potential deal from the general partnership until there is really news to share, Pollack said, because it can be a distraction that is ultimately for nothing.
“For us the goal is to incur the opportunity cost in stages as a way to protect against a deal going too far too fast and finding ourselves in a situation where we don’t really have a deal that is possible to get done,” Pollack said.
He said there were only two deals in his 14 years in his role that got far along and ultimately failed.
For Stewart, the concept of a merger of equals is an “enormous undertaking” with little chance of succeeding. He said he has focused his time on acquiring smaller firms.
“There aren’t these blockbuster discussions as much as there used to be,” Stewart said of the overall merger market.
The cost of mergers is higher for the smaller firm on a number of fronts, those who spoke to The Legal agreed.
“The resources you have available to devote to the process are more limited,” Pollack said of smaller firms. “For every meeting we’re having, it’s a much smaller percentage of our total production than it would be for the smaller firm. It’s a more expensive proposition for them.”
It can also be riskier for the smaller firm if talks progress but a deal ultimately doesn’t come to fruition. The firm could be viewed as being up for sale and partners could be poached, Pollack said. Partners could also have become excited about the prospect of joining a larger firm and look to do that via a lateral move when the merger doesn’t happen.
Bower said he always recommends to clients that a nondisclosure agreement that includes a nonpoaching clause be signed before significant amounts of information is turned over.
Managing the costs of mergers, expectations of partners and the need to grow revenue is a constant push-and-pull for firm leadership, D’Amore said, noting management needs to be “judicious” in how they approach merger talks.