Strategic manoeuvres - Diana Bentley

Despite fewer law firm mergers recently, Norton Rose is joining forces with Ogilvy Renault of Canada and Deneys Reitz of South Africa. IBA Global Insight assesses the key considerations when taking such major strategic moves.

Though the merger market has been active for some time, Hildebrandt Baker Robbins, the US-based legal industry consultants, reported that completed mergers involving US firms were down in 2010. But Lisa Smith, head of Hildebrandt’s law firm strategy and Tony Williams, principal of Jomati Consultants, both remark that interest and discussion is increasing: ‘From the instructions I’ve got, I expect increased merger activity in 2011 and 2012,’ Williams notes.

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But the merger market is also changing. Stephen Denyer, regional managing partner for Europe at Allen & Overy and Chair of the IBA Law Firm Management Committee, says the committee is seeing a wider range of mergers occurring. ‘Several years ago people were focused on the mega mergers between large international players that were expanding their practices due to the liberalisation of markets, and you still get those. Now we’re seeing more mergers at all levels, which I think is the result of the markets becoming more competitive. Firms are positioning themselves in the best way they can in their market – say in a particular practice area or in a local or regional sense.’ The economic downturn has prompted some new configurations of practices too. Consultant Laurent Marliere of law consultant Scipion’s Brussels office reports that in Belgium, Spain, Italy and France, small groups of partners have been leaving large law firms and establishing their own practices – and Marliere foresees some mergers between these new firms to create larger organisations.

In-house power

Solid business considerations fuel interest in mergers. One looming large is the desire to achieve a greater geographical spread. ‘In the US there’s been a growing recognition in many large and mid-tier organisations, that the higher growth is going to be outside the US. So US firms will be looking to merge with firms in other countries,’ says Tony Williams. ‘And firms are also being more tightly controlled by in-house departments keen to secure better service and cost control, and panels of lawyers are being reduced. The greater a firm’s spread in terms of geography and practice areas, the more likely it is to remain on a panel.’

The globalisation of business was a big factor in the merger that produced SNR Denton, says partner Howard Morris. ‘We have a large financial practice in the UK and in the Middle East but the missing element was New York. The question was, could we build our financial practice without a presence there? Generally our clients could only give us work where we had offices. If we didn’t have offices in all the places where they do business, we were leaving money on the table. And we didn’t have the bodies to put in any new office we might open. We’d opened an office in Singapore and it had been a struggle to find the right team.’ Conversely, for Sonnenscheine Nath & Rosenthal, he says, the lack of a London office and a presence in the Middle East was an issue. ‘Clients want to see that you’ve got the resources to run a number of big deals at the same time.’


‘Several years ago people were focused on the mega mergers between large international players... Now we're seeing more mergers at all levels which I think is the result of the markets becoming more competitive,’
Stephen Denyer
Allen & Overy; Chair of the IBA Law Firm Management Committee

 

James Bateson of Norton Rose also says the need to expand internationally has fuelled his firm’s three mergers. ‘The legal services market will be transformed in the future,‘ he says. ‘The market is changing dramatically with the increasing globalisation of business and the shift in the balance of power that will come with the rise of the Asian economies. Although we may not end up with a “big 4” as you have in the accounting profession, there will be a defined number of truly global firms to service international clients.’ The firm looked at where countries like China were investing, which included Australia, Canada and South Africa. But these were also developed legal markets, says Bateson, and building your own presence in these places can be challenging. Lovells and Hogan & Hartson also both shared an ambition to be at the top of the international market, says Hogan-Lovells co-chair John Young. ‘For this to be a reality both firms had to look at having enhanced critical mass in a wider range of jurisdictions, new clients and increased business opportunities.’

Economies of scale can also be achieved through mergers and there are other advantages, says Stephen Denyer: ‘A bigger firm can compete well in the recruitment market and invest more in support services, get more people with leadership skills who can take the firm forward and create a bigger brand.’ A key consideration too is the speed with which firms can grow through mergers as opposed to organic growth. ‘You can significantly enhance your competitive position quickly,’ says Lisa Smith. It’s also a matter of money. As Norton Rose and SNR Denton assessed, opening your own offices is expensive and you have to wait for the business to grow. ‘If you’ve done your due diligence properly, when you merge you should know what you’re getting. Lateral hires can be expensive too and you’re not so sure what they can deliver,’ says Smith.

 

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Time wasters

A merger is not a strategy in itself, consultants and lawyers insist, and it needs to be underpinned by a compelling business case. Firms should first decide where they want to take their organisation, then identify which firms meet their criteria. Some of the questions they can ask themselves when looking for possible merger partners include what level of cultural understanding there will be between the firms, whether the practices are compatible or complementary, what conflicts may arise, whether the merged firm will be able to provide a seamless service for clients and what the financial and managerial arrangements may be. ‘Most firms are aware of these tricky questions but the rigour with which they need to be addressed may come as a surprise,’ notes Tony Williams.

Before merging with Sonnenscheine Nath & Rosenthal, Denton Wilde Sapte discussed the proposal with some clients, which Howard Morris says was a good idea as firms can lose sight of the fact that the merger is for the ultimate good of the client. Most firms will start merger discussions after entering confidentiality agreements to protect them in any exchange of data. They then adopt a phased approach. ‘First assess the strength of the business case for the merger, then your ability to get the deal done. You need to ensure there aren’t significantly different views on all the deal points. You can withhold exchanging some information until you assess if the deal is achievable. Then you can assess the balance sheets and do an in-depth analysis,’ says Lisa Smith. Firms also have to consider the possible impact of the merger on the referral process as they may have outbound and inbound referral arrangements that can be disrupted. This is particularly so in international mergers where vital regulatory, accounting and tax issues must also be addressed.


‘The market is changing dramatically with the increasing globalisation of business and the shift in the balance of power that will come with the rise of the Asian economies’
James Bateson
Norton Rose

 

There is normally no payment involved in a merger. Differences in remuneration between the partners of firms can be handled through the compensation system or by having different profit centres. James Bateson of Norton Rose reports that his firm uses the Swiss Verein structure, a legal structure that can be used to organise professional business associations that are based in different countries. ‘It’s a very flexible system and means that you can have different profit centres in different countries,’ Bateson advises. ‘You can combine business operations quickly so you can focus on developing your services.’

Many firms can benefit from having an external adviser who can provide research and experienced, detached comment and advice on a proposed merger. Dentons sourced research on the US legal market from a consulting company. ‘In the last few years we’d been approached increasingly by US firms. We decided that we didn’t know enough about the US market and the research helped us decide if we were interested in the market and what firms would meet our criteria there,’ recounts Howard Morris. ‘Firms can be flattered if they’re approached to do a merger but even if a merger is a good idea the approaching firm mightn’t be the best candidate,’ advises Tony Williams. ‘You can ask a client if there’s enough excitement in it for them to really want to do the deal and stop them getting carried away. Some people don’t want to back out as they fear it would be a waste of the time already invested. You can encourage them out of that.’

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Bad publicity

Many firms start managing a merger with a small, focused team. ‘You need a dedicated group regardless of the firms’ size made up of key opinion formers with a clear agenda and allocation of responsibilities,’ advises Stephen Denyer. ‘You should agree with the other firm on the ground rules for mutual due diligence and for the proper disclosure of clients, financial data and other issues.’ As discussions progress, the circle can be broadened as more people will need to have a stake in the deal if the merger proceeds. Although Dentons spoke with clients about a possible merger, Howard Morris stresses the importance of keeping plans confidential as discussions can be affected if they are subjected to comment in public and aborted plans can generate negative publicity.

In SNR Denton’s case, the merging firms began with a series of talks and when they met no significant obstacles, partners were then brought in to test the proposition and see if it should go forward. They then began the due diligence process and the examination of financial data. ‘You must generally assess if the firm is well managed and if their information is reliable,‘ says Morris. ‘But the most important matter is culture and that’s hard to subject to due diligence. You need to see if you have the same values and attitudes. Sonnenscheine Nath & Rosenthal was collegiate in its style and had people we could get on with, and that was crucial. Then we reached out to each other and got to make connections before the launch.‘ James Bateson at Norton Rose also confirms the importance of the cultural fit. ‘You have to understand your own culture first. Then see how the potential merger partner deals with its clients and staff. How are they perceived in the market?‘ In the HoganLovells merger, early discussions between members of both management teams sought to identify areas where the firms could work together while practical issues were also explored. Management and other members of the firms met and presented to each other at partners’ meetings in London, continental Europe, Washington DC and New York as well as by video conference.

Integration is also a vital phase that determines the success of the merger. Time and good management skills are needed to implement mergers effectively. ‘You can spend as much energy on integration as on the merger itself,‘ remarks Lisa Smith. ‘This hasn’t been so well appreciated but now firms are getting better on integration planning.

This includes nuts and bolts work like merging technology and shaping new websites, joint client visits and marketing.’ Agreement on the post-merger managerial roles will have to be made. Hogan Lovells has opted to have two co-CEOs, one from each legacy firm and its elected supervisory board is also co-chaired by people from each firm.

At SNR Denton, Howard Morris says integration has been key and good communication is essential. The merging firms went public after partners had approved the merger. Then deadlines were set with certain things having to be achieved by given dates. Efforts were made to help clients feel comfortable with the new brand. Inside the firm says Morris: ‘People get used to things being the way they are so change can be hard. But when we were looking at what procedures to adopt and we found that we did things differently, we didn’t consider who was right or wrong. We focused on best practice and that was a good way to find a solution. There may be a new paradigm you need to follow.’ Norton Rose have allowed themselves plenty of time to achieve their mergers. Two announced last year will be completed this month, evidence of its belief that a realistic time scale is needed to complete the work the mergers entail.

Nothing is risk free. Staff and clients are the assets of a law firm and both can abandon the merged organisation. Some mergers fail. The business case may not have been as strong as it should have been, culture clashes can occur and unchecked egos can cause disruption, the execution of a merger may be weak and the two merged firms may continue to operate as two entities, which is not healthy. But whatever the pitfalls, many mergers appear to be successful. ‘We can now provide a full service for clients that we couldn’t do before. We’re getting work now that we would not have got before too. Denton Wilde Sapte was in the top 20 in the UK, the merged firm is in the top 25 in the world,’ says Howard Morris. Thankfully, for the firm managers, Morris says: ‘Everyone in the firm believes in the good sense of what we’ve done.’

 

Notable mergers announced or completed in 2010

Hogan & Hartson (US) and Lovells (UK) = Hogan Lovells

Hogan & Hartson and Lovells merged on 1 May 2010. Post-merger the firm has 40 offices, 826 partners and 2,100 other lawyers and fee earners, which takes it into the top ten global ranking. Now the US accounts for 46 per cent of its total billings, Continental Europe 24 per cent, London 24 per cent and Asia and the Middle East six per cent. But the firm has plans to grow in several markets including California, Asia and the Middle East. Sonnenscheine Nath & Rosenthal (US) with Denton

Wilde Sapte (UK) = SNR Denton

These two firms merged on 30 September 2010 and the estimate for their combined turnover was then US$750 million. The combined firm now has 60 offices in 43 countries. Since the merger there have been 40 new lateral partner appointments and it is now one of the world’s top 25 firms. Norton Rose (UK) with Deacons (Australia), Ogilvy Renault (Canada) and Deneys Reitz (South Africa) = the

Norton Rose Group

Norton Rose merged with Deacons (Australia) on 1 January 2010 and the merger with Ogilvy Renault and Deneys Reitz has been effective since 1 June 2011. Before Norton Rose’s merger with Deacons the firm had 30 offices, a total of over 1,800 lawyers, including 432 partners. The combined firm has 38 offices, over 2,500 lawyers including over 740 partners. Turnover is also being boosted by the mergers. After the merger with Deacons the group’s turnover for 2009/2010 was US$670 million while the turnover for the enlarged group is estimated to be US$1 billion. It is now one of the world’s top ten firms.

Hammonds (UK) and Squire, Sanders & Dempsey (US) = Squire Sanders Hammonds

This merger took effect on 1 January 2011 and resulted in a firm with combined revenues of US$625 million. More than 95 per cent of the partners of the firms voted in favour of the merger, which has resulted in a firm with 36 offices in 16 countries, 460 partners and a total of 1,275 lawyers worldwide, taking it into the top 25 in the world.


 

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Diana Bentley is a former practising lawyer. She can be contacted by e-mail at dianab@dircon.co.uk.

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