Making mergers and acquisitions work
For a transaction to be successful, it cannot just be about the numbers: personnel, firm culture, and project management also play a part, advises Helen Clayton
Some of the challenges facing the UK
legal profession in recent years include succession and exit planning, gaining market share and competitive advantage through mergers or acquisitions, and dealing
with the financial and other related impacts of regulatory changes. This applies from the largest firms to sole practitioners.
As firms continue to develop into businesses with much more of a corporate feel, more thought is being given to the future, the threats and opportunities available, and therefore how a firm's strategy is developed.
Acquisitions often form part of a firm's medium or longer-term strategy, whether through the acquisition of a firm, in whole or in part, or simply through the acquisition of assets such as work in progress. Being part of a firm's strategy is one thing but making mergers and acquisitions work successfully in the short and longer term is a
real test. They will inevitably bring financial and personnel challenges. It cannot just be about
the numbers and the theory that two plus two
Culture and people
Research shows that almost half of all transactions fail to meet expectations for cultural reasons.
So, perhaps it is not about the firm but about the people. A firm is a people business, whether through the ownership and the people employed or through the end user of its services. You cannot ignore the people element of a transaction - what they need in order to be able to contribute to making an acquisition successful, on both sides
of the deal.
Communication at every stage will be critical. Whispers and rumours will be afoot and heading these off in advance can only help smooth the transition. A key risk will be loss of people, including leadership and management: this can create great uncertainty for employees and they could follow. Whispers in the profession can lead to competitors seeing an opportunity to sweet-talk clients.
It is important that all involved understand
the combined culture of the firm. Do the cultures currently align? If not, which firm is the dominant one and should it be this culture that wins through? Who will make this work and how?
Change can be a barrier for people, especially
if they feel vulnerable. Getting them on side early enough will be important; however, depending on the people involved, the stage at which they are made aware of the proposed or impending transaction will also matter.
There will be a need to address up front who will form the future leadership and management team. Do shared roles - for example, two managing partners - really work? The partners need to like and respect each other, understand their reporting responsibilities, and lead by example. Will there be a board and how many from each side will be on it? When it comes down to it, people have pride in their titles and this can be a sticking point. Further, the name of the combined firm will be high on people's agendas. Dealing with the politics at an early stage will avoid unnecessary time and cost at a later date, when it can inevitably lead to a total breakdown in negotiations.
If there are multiple sites post-transaction, how will the reporting work? How will the culture align across the various offices?
Detailed due diligence is critical to achieving a successful transaction, and not just for financial reasons. Getting to grips with the reasons for
the transaction will drive each side's focus for diligence. These might include competitive advantage through market share or wider service offering, geography, and client relationships, among other reasons.
Financial reasons will always be up there,
driven by the ongoing desire for increased profit per equity partner, although these should not be the focus. Understanding the financial impact will still be important, however.
Going back to why a firm wants to enter into such a transaction - if the firm is struggling in some way, then it is also likely to struggle to
have a significant voice at the boardroom table
moving forwards. If there are internal issues to
be resolved, then these should be dealt with before due diligence commences as they will be highlighted and used as a mechanism for driving down 'price' - for example, old debt or work in progress that holds no value, internal disputes,
a poor claims history, and so on. When I refer to price, often in firm transactions there is no price unless it is a clear exit mechanism; however, resulting equity points, for example, could be reduced compared to others.
One consideration, which may depend on
the size of the transaction, will be who actually performs the diligence. There should be financial and non-financial diligence performed, with experts carrying out the work. It may be that an element of this can be performed in house, but
I suspect that a great deal of due diligence in
such transactions is performed by professional advisers. In a scenario where both firms have the same advisers, there will need to be a discussion about how this conflict is resolved.
Throughout, from the initial conversations to the due diligence process, the day of the transaction, and beyond, project management should never be underestimated. There are so many stakeholders - and therefore an increasing amount of internal politics - that a formal project management team with a respected leader is essential.
Initial conversations will need to be confidential and managing that process will always prove difficult. Meetings will need to be held off site
but not in a local hotel or coffee shop where
other professionals and clients may meet. Risks will need to be considered at every stage of
Agreeing on timelines, deliverables, accessibility, and availability will be vital to being able to progress as both sides wish. Ensuring there is commitment to delivering will be key,
but it should not detract from the day job of managing the existing firms and delivering
The team will, of course, require a variety of skills other than project management, in areas such as IT, infrastructure, property, and finance. These roles need to be assigned early in the process, skill gaps identified, and resources sought to fill them. Undertaking such a project in the right way is not inexpensive.
While I believe that financial reasons should not be the driver for a transaction, understanding the financial impact will be important.
There is the risk, through management being distracted, of not focusing on each individual firm in the lead-up to completion, which could result in a loss of clients, income, profit, and key talent. This would undoubtedly change the structure of the deal on the table and shows the need for a focused project management team who can oversee and deliver the transaction alongside
the day job.
Funding will be an issue at some stage and will need to be addressed. Do the combined financial forecasts indicate a requirement for additional funding in the short to medium term, and where is this going to come from? If the same bank is involved on both sides, understanding the appetite for the combined firm going forward
will be vital.
Referring back to partners working together, understanding each other's personal financial position will also be important for a transaction
to be successful. Whether partners have savings or equity to inject could become an issue.
If the transaction doesn’t materialise, it’s simply back to the drawing board on strategy. Understanding why this transaction didn’t work will be important to be able to draw experience, make changes, and establish guidelines for future potential transactions. Reverting back to the drivers for entering into such a transaction should not be overlooked.
If the transaction does happen, hopefully everyone, including clients, is on board as to what the combined firm is able to deliver, matching the initial reasons that the respective firms entered into this deal, which no doubt will have taken months, if not years, to get over the line.
The hard work now begins in ensuring it does deliver. The project management team will still be vital to provide focus on this, enabling the leadership and fee earners to focus on quality service delivery and financial results in what may be a new office with a new infrastructure. Settling in time can be minimised through an effective project management team.
In conclusion, there are so many aspects to consider in striving to get a deal over the line and make it successful, delivering all that was hoped for. Communication is the one word I would use
to facilitate all of this - at all levels, internally and externally - but this needs to be managed by a skilled project management team. SJ
Helen Clayton is a corporate services partner at PM+M