Managing merger risks
Mergers can offer great rewards, but firms must be prepared to undertake due diligence, invest in a shared culture, and walk away if the risk is too high, advises Tina Williams
In response to a survey
last year, nearly half of
the UK's top 200 law said that they would consider merging in the following
two years. It can therefore safely be assumed that the recently reported merger
talks between CMS Cameron McKenna and Olswang are
not the only ones taking place.
As a means of achieving a strategic objective, a merger carries high risks. Like other high-risk investments, the rewards can be great. The
key is therefore to manage
Mergers are only for those with a strong business rationale. The wish simply to grow in size is not enough. At the outset, firms should have a clear
view of the criteria a merger partner needs to meet and understand why the firm to
be approached might tick
The strategic objective can include meeting client demand for, or realising the opportunity to provide, a wider service offering; consolidating prominence within a sector
of the market; expansion of geographical footprint to provide existing services to a bigger market; or combining resources with another firm to permit significant investment which neither firm could afford on its own.
It should not be forgotten that the recruitment of lateral hire partners or teams is another, less risky, means of achieving all of these strategic objectives, other than the last.
However, attracting successful partners away from their existing firms can be both challenging and costly. When partners move firms there is usually a hiatus before they can transfer or rebuild their practices - always assuming they can do so successfully. So recruitment is
a much slower way of achieving a strategic objective than a merger, where, overnight,
the partners can be in place without any disruption to clients.
Even the last strategic objective, the ability to pool resources, can be achieved through additional finance without the need for a high-
The chance of pulling off a successful merger is enhanced
if the process is implemented with rigour. This means defining issues, having a strong, focused negotiating team, assigning responsibility for each aspect
of the due diligence exercise, setting and adhering to
time frames, addressing confidentiality, and preparing
for an information leak from
Assuming that both parties carefully undertake due diligence regarding financials, business priorities, approach to risk management, professional indemnity claims record, premises liabilities, and other important matters, and that this provides the required comfort, the biggest risk in a merger is that the cultures of the two firms simply cannot be reconciled.
All partners involved in merger discussions are keen
to present their firm in the best light and culture is difficult
to gauge from the outside. Useful indicators include
how the partners remunerate themselves, how they treat their staff and each other, what their business and personal priorities are, what their negligence claims record has been, and how diverse the firm is.
Time should be invested in understanding the other firm's culture at all levels. Not only should a commonality of vision (on how each sees the world,
its challenges, and the way to overcome those challenges) exist between the two leadership teams, but there
also needs to be a strong sense at the level of each of the major practice groups that people will not only respect what others
can bring but will enjoy working with each other to achieve shared objectives.
With highly talented people,
it is often the surprisingly
small things that trigger either engagement or disaffection.
If the culture cannot be shared, the participant firms will always remain two distinct entities - legally merged but pulling apart and containing the seeds of destruction of the combined entity. The rewards of merger can be great but it should never be attempted at all costs.
Well-advised leadership teams constantly check back against those initial criteria which defined what a successful merger would produce. However much time has
been invested, and however emotionally committed they feel, they must have the courage to withdraw at any point if it becomes clear that
the strategic objective is not going to be achieved.
While it might be better
to try and fail than not to try at all, it is better still not to press on regardless once it becomes clear that the risk is unlikely to pay off.