Law firm mergers: what are the ingredients for success?

Posted by Geoff Zindani, Managing Director of Legal futures Associate Acquira Professional Services

Zindani: Culture is like an iceberg

There have been some big mergers in recent weeks: Weightmans and RadcliffesLeBrasseur have completed their combination, strengthening their presence in London and Leeds. The combined firm will have 225 partners and a total workforce of more than 1,400 people.

Clyde & Co has completed its merger with BLM, creating a £700million insurance services leviathan. Like RadcliffesLeBrasseur, BLM is losing its name in the process, perhaps a reminder that — like most mergers in the legal industry — one company is the dominant party.

Partly because of this imbalance, merger deals won’t always go smoothly, so it’s worth thinking about the ingredients of a successful merger or acquisition.

It goes without saying that there must be a clear financial record, but the pursuit of income or scale by itself cannot be a sustainable business strategy.

Success or failure?

If people buy from others, it is the individuals they associate with who will ultimately make it a success or failure.

Knights PLC, an AIM-listed law firm, is an example of a firm that has grown rapidly through a merger.

Around 10 years ago it had offices in Stoke and Chester, 150 professionals and an annual turnover of around £9m. On paper, it’s a healthy regional operation able to pay market-appropriate salaries.

Fast forward to the present and several acquisitions later, we have a top 50 law firm with a turnover of over £120m and 19 offices.

It was very easy to see why regional companies that felt they couldn’t compete with regional heavyweights might want to join the club and be acquired by Knights. Perhaps that was the allure of the buyout for law firm owners.

In March, however, we saw a dramatic drop in Knights share price from a staggering 365p to a staggering 165p. In its trading update to the London Stock Exchange, the company cited Omicron as sickness among staff and a weakening in business confidence causing a slowdown in corporate work.

The fact that Knights is struggling at a time when the legal industry is generally showing healthy profitability and resilience reminds us that mergers aren’t always straightforward.

Mix cultures

Cultures must adapt for a merger to work. If they don’t, over time the lawyers walk away and take their clients with them. Financial partners are however happy to put up with a culture they don’t like if it unquestionably gives them a lot more money through a favorable transaction structure.

But what about junior partners and associates who are here for the long haul?

If the larger company has a full onboarding policy in its culture that sees the acquired company immediately lose its identity, with its website and email addresses replaced, this may be viewed negatively by employees. Such a change must be managed with care and will be much more difficult if the cultures do not match or were not taken into account before the merger.

In my experience, the biggest mistake in law firm mergers isn’t negotiating a deal, it’s mixing cultures. As the great American business guru Peter Drucker once said, “Culture kills strategy for breakfast.

This is developed further by the insightful Professor Michele Gelfand, in his book Rule Makers, Rule Breakers: How Narrow and Loose Cultures Connect Our World.

Professor Gelfand has conducted extensive research on 6,000 major mergers in more than 30 countries between 1980 and 2013. What she demonstrates is that cultures can be tight and loose, and that simply merging two companies or law firms can lead to serious failures if they are diametrically opposed.

She also looked at international agreements where there was an additional layer of cultural difference to contend with. Sao Paulo is not the same as Singapore, nor is Leeds London.

For example, how many times have we seen an individualistic, high-billing employee who simply doesn’t fit in because the company they joined is more collaborative and people-centric? Or a company with strict systems and processes and an autocratic managing partner, contrasted with a creative and laissez-faire type of practice? The list continues.

Professor Gelfand may be right when she says that culture is like an iceberg, hiding perils below the surface.

A strategy of integrating more and more law firms quickly can lead to a large-scale firm, but underneath lies the cultural iceberg ready to strike.

For those embarking on an M&A adventure in the legal industry, the numbers will only get you so far – and experience is usually wrong. So, before any deals are struck, it’s worth spending more time understanding the cultural differences of the two companies to see if there’s a cultural fit before it’s too late.

Valerie J. Wallis