The Law Firm Merger: A Leader’s Guide to Strategy & Realisation

Published by ARK Group
April 2014

THE LEGAL services market has undergone unprecedented change over the last decade. The Great Recession has been a catalyst to accelerate the pace of this change. At its core are structural changes in the profession and the deregulation of the legal services industry, leading to a fundamental reshaping of the competitive landscape.

One feature of this paradigm shift has been the consolidation of the sector, driven through mergers and acquisitions. This activity has emanated both from within the profession – with firms merging or being acquired (whether as part of a strategic plan or because they are distressed) – as well as through external investment into the sector. It is this rise in merger and acquisition activity and the drivers for it that is the subject matter of this report, along with the creation of a route map for leadership and successful merger realisation.

The Law Firm Merger: A Leader’s Guide to Strategy and Realisation is a guide for leaders and the leadership team with a clear focus on strategy through the lifecycle of the merger process. It sets out to describe the role of the leader as visionary, strategist, and the driver of change in the firm.

This is not a technical guide on the mechanics of documenting a merger: finalising the legal agreements or completing the financial and operational due diligence. These are areas in which legal professionals are well versed. Indeed, therein lies a danger as many law firm leaders look at a merger through the lens of the professional adviser rather than as a business leader. It is not uncommon to meet managing partners who have very high levels of confidence that they, or one of their trusted partners, know how to ‘do’ a merger. However, they are talking, in the main, about the technical expertise to execute the legal aspects of a transaction. In this respect, they are quite correct – they do indeed know how to ‘do the deal’ – but delivering a successful merger is so much more than this. From inception to realisation, a host of leadership skills are required, with business acumen drawn from a wide range of disciplines and strong interpersonal attributes needed which must sit alongside intellectual rigour.

Crucially, a merger or acquisition is a means of achieving a strategic objective. It is a mechanism by which a firm may realise its vision, or at least accelerate its journey towards that vision. It follows that, in order for a merger to be properly targeted, analysed, shaped, and executed, there must be clarity as to what the firm’s ultimate vision and strategic objectives are. This is the first job of the leadership team and everything that follows, both in strategy and execution, flows from it.

This report starts by considering the drivers which are shaping the legal services industry and how these may be better understood using some simple yet insightful analysis frameworks. It is only through a considered appreciation of the way in which these macro and micro economic and competitive pressures will impact the sector that objectives can be set and a strategy effectively shaped. In turn, this forensic analysis of the drivers of change in the market allows for scenarios to be developed which consider the twin factors of criticality and uncertainty in their impact on strategic choice.

With the expert input of Zoe Holland (of Zebra Legal Consulting), this report explores the impact of private equity and new entrants (including those operating under an ABS arrangement) on the legal market. This also highlights the changed commercial reality introduced by these new investors, with due diligence now being more multifaceted than the historic narrow focus on finance and risk, including the introduction of specialists to undertake specific due diligence duties.

This will allow us to consider why a merger might be considered an appropriate strategic option, and also to clarify what the profile of an ideal merger candidate firm might look like. By adopting a structured approach, it is possible to develop a merger scorecard which can then be used to analyse prospective firms, produce gap analyses, and identify the best fit from the available options.

The need for vision and leadership in the merger process is explored in depth and, in particular, the role of the leader in developing the firm’s vision and ensuring that strong focus is maintained on the client rationale which is driving the merger.

Culture is key in any merger and this applies both to the negotiation phase and the alignment of cultures as part of the integration process. Understandably, therefore, both of these areas are explored in depth within the report. The cultural and emotional intelligence of the leadership group is also important in terms of how they engage with partners (and in due course with the wider firm) in order to build commitment and win hearts and minds for any proposed union.

A review is made of some of the practical issues which may be encountered in initiating discussions and the identification of issues in the negotiation process, the building of the merger business case and, in particular, creating opportunities to realise merger dividends with a particular emphasis on the client opportunity.

The financial and accounting issues which may be encountered in a merger are discussed by Robert Mowbray (of Taylor Mowbray) who brings his extensive experience and highly- regarded expertise to bear in illustrating both the financial factors which need to be considered in advance of any merger, as well as approaches for valuation in both merger and acquisition scenarios.

The report then moves on to outline a framework for implementation and highlights a number of issues which need the attention of the leadership team; both immediately post- announcement of the merger and then during the initial integration period. These include the importance of clear, frequent communication with all stakeholders, as well as practical issues concerned with right- sizing the merged firm. Of course, at its core, any merger is about change and creating a competitive position for the new firm that neither of its forebears could have achieved alone. It is therefore appropriate that there is a headline review of the principles of successful change management projects.

The focus over the final chapters moves to outlining some of the approaches which have been successfully used to fully capitalise on the opportunities created and to realise a ‘merger dividend’. These centre on initiatives such as aligning culture, defining values appropriate to the vision of the new business, using programmes which are client- centric to unify the new firm and drive revenues, understanding service quality issues, and building cohesive and effective teams. The importance of a clear integration plan which enables fast and decisive actions in the first six months following a merger cannot be over- emphasised.

Unsurprisingly, given the focus of this report, the role of strategy and leadership is a recurring theme. These are the two core factors which run through any merger – being clear about why you have chosen this option to develop the firm, and displaying the personal qualities to deliver the merger in practice.

This article was published in April 2014 by ARK Group magazine. To read the original article click here.