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special to the national law journal Richard J. Zakin is executive managing director of Strategic Legal Solutions, a legal consulting firm in New York, where he works with law firms considering possible mergers. He was formerly a partner in the New York office of Minneapolis’ Dorsey & Whitney and, before that, the resident managing partner in Bryan Cave’s New York office from 1997 to 1999. The article is based, in part, on his personal involvement in several law firm merger discussions while at Bryan Cave. Law firms contemplating a possible merger too often do the wrong due diligence at the wrong time in the wrong order with the wrong personnel. Doing the right due diligence at the appropriate time with the right personnel is too often a matter of luck and not of deliberate planning. This article will attempt to streamline the process, to suggest appropriate and efficient ways to complete the due diligence process in the most efficacious manner possible. At any given moment, many New York firms are contemplating the possibility of either a law firm merger or a breakup. Perhaps a major rainmaker has left or a lease renewal is to be decided on soon. Some firms become desperate to merge; others are always on the prowl. Yet despite the supposed professional cachet in implementing a law firm merger, not to mention the “remarkable” effect that such a merger will have on a firm’s bottom line, law firm mergers truly have what is at best a largely unknown success rate, characterized more by anecdotal stories of success than by objective post-merger facts. It is rare that much publicity results post-merger when a completed merger encounters difficult times, partners are jettisoned or the merged firm fails. Avoiding the wrong mergers is the key, and the key to avoiding the wrong mergers is the right due diligence. The right due diligence should begin and continue immediately after the initial discussions have taken place about the possibilities of a merger. It is at this point that the right due diligence, done properly and efficiently, can enable a law firm to complete the right merger as quickly as possible, or alternatively, avoid the wrong merger, and in either case, ensure that while discussions are continuing, major rainmakers do not leave for other law firms’ purportedly greener pastures. Law firm merger discussions typically begin with a call from a law firm consultant with an idea (or two), or possibly in reverse, with a firm reaching out to a law firm consultant to identify possible merger candidates. Managing partners from each law firm may quickly get together for dinner to explore issues of chemistry, complementary practice and overall profit margins. Most such meetings never advance to a second and more far-reaching get-together. But what happens if there is a mutual desire to advance to the next stage? What issues should be addressed promptly and which can be left for later? One key consideration that managing partners sometimes forget is that there are few secrets in a law firm partnership-no matter how sustained the efforts at secrecy are, word travels very quickly to all partners. Thus even the consideration of a possible law firm merger will force partners immediately to ask themselves whether they will be better off leaving if any merger were to take place. This can immediately weaken the partnership, as both “stronger” partners, worried whether their influence on decision-making will be diluted, and “weaker” partners (who might nonetheless be important to the overall success of the firm), worried about whether there will be a place for them in the new law firm, consider whether they should leave. Most importantly, it creates a feeling of uncertainty among partners, which affects their billable hours and billings, which, in turn, affects the bottom line. Several considerations The first and most important consideration to address in any prospective merger is the issue of conflicts. While firms might feel uncomfortable exchanging confidential client lists after one or two initial meetings, a well-drafted mutual confidentiality agreement covering the top 50 clients at each firm will enable the heart of any merger discussions to take place early in the process. These top 50 client lists should be analyzed closely, not perused. The most serious, most conservative partner should be placed in charge of determining whether conflicts and/or apparent conflicts exist and, if there are apparent conflicts, whether the conflicts can be waived or controlled by means of an ethical wall. Any conflict among the elite of those top 50 clients on either side, if the practice areas of those clients are important either to the individual firms or to the potential merged firm, will likely pre-empt any further merger discussions, thus saving untold future amounts of time, energy and intellectual analysis among senior partners. The next most important consideration to address is whether the merger will lead to the accretion of earnings or not. Too often, firms involved in merger discussions are reluctant, due to lack of trust or other reasons, early in the process to exchange the key financial information necessary for each side to make an informed decision. It is critical that specific financial information be exchanged and analyzed-many software programs will compare pro forma numbers based on different assumptions and different facts. It is relatively simple to exchange revenue-per-lawyer numbers, which, in a proposed merger context, is a more important determination than profits per partner. Sometimes ignored in this exchange of numbers is a three-year listing of collections for the top 25 clients for each of those three years and the practice areas from which those fees were generated, which will determine whether the respective practices are fluid and dynamic or static and which practice areas are rising and which are falling. How have those numbers fared in the previous three years? Based on those numbers, will the proposed merger be accretive for both sides? As a next step, what is the average length of time each firm carries accounts receivable and work in progress? Are associates working to capacity and, if not, will combining firms help? Finding out that the numbers do not make sense is best determined early in the process. Three facets of the partnership compensation process should also be analyzed early in the process. These examinations will not be unduly time-consuming and will give great insight as to how well the firms will mesh as an integrated whole. The first facet is factual, and will probably be handled by the managing partners at their initial meeting, or soon thereafter: Is the compensation process prospective or retrospective and is it subjective or purely “by the numbers”? Next, how wide is the disparity between the annual compensation for the most junior and the most senior partner? Too large a ratio may indicate an underappreciation at that firm for the service partners; too small a ratio may mean that the most highly compensated partners are, in fact, undercompensated. These determinations are like quick accounting ratios, which are not necessarily dispositive to determining the financial status of a given company, but are clearly of value. Finally, each firm should identify 10 partners of similar backgrounds with similar statistics-these should be compared. If there is a great disparity in the way they are compensated, there will likely be major problems post-merger. The next consideration is to determine whether the cultures and management structures of the firms can be meshed, and if so, how. The appropriate due diligence here is not in identifying the structures of decision-making on each side, but in detailed and parallel discussions among the major rainmakers of each firm and the senior individuals on the management and/or executive committees. Firms contemplating mergers too often leave these senior-level discussions to a much later date when, in actuality, it is these discussions, early in the process, that will largely determine, on a cultural level, whether the merger is likely to be a successful one. Sometimes, merger discussions are aborted prematurely after these meetings, when there are ways to satisfy both firms, either by a promise to ensure that decision-making authority includes partners from both firms or by a definitive agreement for succession plans when the current chairperson of the acquiring firm completes his or her term. In many ways, this is the most critical due diligence-the results of these meetings will largely determine, in an expedited manner, whether a merger will be consummated, and if so, whether it is likely to be successful. Ongoing top-level management meetings are helpful but pale in comparison to having the leading practice group heads, who will be the direct implementers of any merger, hold parallel meetings to ensure that there will be no overwhelming personal conflicts. It is practice group leaders who, in many ways, have the best perspective on what is likely to happen at the micro-level in their group after a merger. It is the job of the managing partner to integrate the individual micro-perspectives (which can only be obtained through face-to-face meetings) so as to obtain the macro-perspective on the proposed merger. It is here that law firm consultants-but only those who do not have a financial stake in the success of the merger-can play a very useful role. Some practice group leaders, for whatever reason, might be disinclined to explain fully to a managing partner any hesitations that they might have about a prospective merger. However, it is critical that managing partners hear in detail about each of these meetings, and not just in writing. An unvarnished view of the process is critical at this stage. If managing partners don’t have the time, it is incumbent on them to involve outside law firm consultants who will give them an objective view of the process. These consultants should be paid hourly as consultants, because too often law firm consultants are paid only if a merger is consummated and thus they, even more than the practice group leaders, will not give the managing partners the complete, objective story. In contemplating a law firm merger, due diligence will never be neglected. The key consideration for firms on both sides of any proposed merger is doing the appropriate due diligence as early in the process as possible to help close those mergers that should be closed and stop those that should be stopped.

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