Profiling merger partners: Tools to improve merger due diligence

 

Rather like Tudor marriages, contemplated with the aim of securing the dynasty or furthering political ambitions at home or overseas, law firms have been merging in order to stay at the forefront of their market, expand their service offering, achieve security and continue to serve client needs in harder economic conditions.

However, the business of merging law firms is a delicate undertaking. Significant mergers over the past five years show that the process is lengthy and complicated, casualties are to be expected along the way and success is not guaranteed. As with any merger, there must be a due diligence process that consults all available resources.

An interesting aspect to mergers today, compared to those that occurred ten to 15 years ago, is the way in which the array of knowledge resources has grown, both online and offline. This article considers how law firms that are in the throes of merging may profile each other before a merger is proposed, during the merger process itself and after it has completed.

Frame of reference

When a firm has set its sights on a potential candidate, its aims are normally to improve its position in the marketplace by, for example, expanding into new markets and sectors and attracting new clients.

One of the main objectives will be to combine without compromising brand reputation, quality and cultural values. Such ambitions need to be kept firmly in mind throughout the assessment process and there must be a clear vision of what the combined firm will look like upon completion.

This is the frame of reference that senior management will return to time and again, to decide whether a completed merger or acquisition with the target firm will lead to the success that they were originally trying to achieve.

Assessing suitors

Once it is decided that a merger is the right way to go and a range of potential suitors has been identified, there begins the gradual process of intelligence gathering, to help qualify those firms that are worth pursuing.

Such initial research is likely to be focused on the general suitability of each potential candidate for a merger or takeover and look at factors like geography, expertise in particular sectors or practice areas, profitability and partner profiles.

The research tools available to those managing this type of due diligence are reasonably wide and accessible. For example, much will be drawn from general knowledge of the competitive landscape. This can be easily supplemented by information that is available on the websites of target firms, as well as specialist publications, the legal press and industry-specific databases.

Coupled with a programme of approaches to senior individuals, it is possible to not only gauge cultural fit, but also a target firm’s appetite to merge. Open dialogue is therefore a critical source of intelligence to help evaluate the prospects of a successful enterprise.

Flushing out risks

Assuming that preliminary talks produce a commitment to explore a potential merger, the parties may begin a more detailed round of investigations. At this level, such inquiries would be focused upon determining potential risks or issues that could threaten the success of a merger.

As the firms continue to engage in open discussions regarding how they might integrate, they might consult outside specialists to assist with their research, as well as continuing to use online search tools.

Social networking sites such as LinkedIn, Twitter and Facebook could be empowering sources of information. Professional bodies such as the Solicitors Regulation Authority of England and Wales also offers searchable resources to help determine whether there are any decisions relating to conduct which might influence assessments of suitability.

Regardless of whether an individual directly maintains an online identity, there is usually ample information that can be interrogated if, for example, he has been mentioned in news reports, press releases, blogs or status updates. Other online resources can help to establish a view of the profitability of the target firm, its structure, vision, clients and any potential conflicts of interest that would need to be addressed.

Getting the right information at the right time can mean ?the difference between a merger’s success and failure, so at this stage a deep review of publicly-available information ?can be supplemented by the use of an elite network of independent contacts.

Continued engagement between the parties will produce information that the other may wish to verify. This type of intelligence can be gathered using a multidisciplinary team with skills ranging from investigative journalism to legal, accounting and other professional skills.

For example, if it is theorised that a merger will ‘buy in’ ?certain expertise, that theory may be tested by contacting independent sources to enquire about the range of skills ?available and any limitations.

Such sources may include former employees and other professionals with relevant knowledge, in order to form an objective view of the true value of any proposition on which the merger is to be based.

Building trust

When fusing two partnerships together, it is important that the merging parties establish and maintain mutual trust. A critical measure of commitment will be the way that each party responds to information requests from the other.

Such information requests may seek, for example, to determine whether there are any liabilities or obligations to be managed. As a matter of good faith, some parties may be prompted to conduct internal reviews prior to the merger, in the interests of determining whether they have any skeletons in the closet that they ought to declare.

Fast forwarding to the completion of the merger, it is a good idea for the combined firm to conduct (as part of the integration process) further reviews of information in its possession and control and be ready for potential issues that may arise post-merger.

Information governance

Any responsible law firm should be aware and in control of the risks that it could face as a result of a merger, including regulatory issues, potential disputes with clients and potential schisms within the combined firm, raising potential intellectual property concerns.

To be ready for such issues, the combined firm should have a policy to ensure that information which could be relevant to an audit or investigation is identifiable, adequately preserved and readily accessible.

The electronic data landscape, rather like tectonic plates, moves constantly, so it is important to ensure the information management policies of the new firm are regularly updated to keep up with developments in technology.

Access to information stored on computers and other electronic devices presents a web of challenges for a firm seeking to protect itself, its employees, intellectual property and clients. Management have the arduous task of balancing the needs of the firm with the rights of the individual, while enabling the new organisation to function effectively.

On coming together, the legacy firms will have a corpus ?of electronically-stored information stored across many locations and devices. Such information will include client ?data, accounts, know-how, employee records and expert databases that will require centralisation. In reality, any of this information could be subject to an information request or be exposed to potential misuse, particularly while the new firm is finding its feet.

Post-merger investigations

When intelligence gathered through the merger and integration process suggests that the firm has a potential issue, it may be necessary to perform targeted investigations.

Such investigations or audits could be performed in relation to high-risk individuals and may look at selections of correspondence by email, instant messaging systems or text messages, in order to assess whether there is any substance to a suspicion or allegation.

Selections of such data may be loaded into purpose-built document review software, providing the capability to rapidly perform keyword and concept searches on text documents and even to search audio documents by keyword.

As a matter of compliance, the combined firm may wish to make such audits part of the routine until the firm has completed its transition to business as usual. A comprehensive programme of checks over a sustained period might rely on current technologies that are used to rapidly identify relevant information from larger data sets.

Such technologies include computer-assisted review (often used in litigation, the computer learns from human review decisions in order to suggest further relevant documents) and topic grouping (the computer analyses text patterns within documents, to automatically group them by relevant themes).

Advances in data processing mean that regimes of this type can be incorporated into the firm’s management procedures in a cost-effective manner that is proportionate to the context of the firm’s general operations.

Post-merger fallout

Following the merger, it is somewhat inevitable that parts of the new firm may break away to join or form a competitor practice. In some cases, this happens during the merger process, while in others it can take months before individuals decide to move on.

When departing individuals are influential partners, they may also take fellow team members, know-how and clients with them. So, it is important that the firm has the means to identify whether a team move is being orchestrated and whether information is also being taken in breach of confidence, in order to establish how it should respond.

Upon the departure of an executive employee, it is prudent for many reasons to take a snapshot of their data estate. Imaging for preservation is a procedure that ensures that you have a copy of information stored on a person’s computer in case it is needed for future interrogation. When examined forensically, the hard drive image may reveal important correspondence (such as that intended to persuade other team members to join a mutiny), even if it has been deleted. It may also reveal whether documents have been accessed and copied to external media devices, such as hard drives, thumb drives, iPhones and other similar storage devices.

Many organisations are now routinely performing this process for key positions and departments that are considered to be of particular risk, so similar processes could be valuable to a newly-combined firm.

Information is pivotal

In contemplating a merger, there is so much information to comprehend. Good intelligence will help to achieve the right outcome. Bad intelligence could undermine the merger, causing it to collapse or, worse still, fail after completion.

Merging firms should consult information in the public ?and private domains and from human sources, and give appropriate weight to each source. Future success relies, in part, upon early and proactive due diligence and continued ?due diligence after completion.

So, merging firms should plan to maintain an information infrastructure that supports a best-practice approach to ?self-regulation.

Above all, the merging firms should be sure that they ?have the correct teams in place for each stage of the ?merger process and that due consideration is given ?to the use of technology.

Robert Jones is a legal consultant at Kroll Ontrack UK ?(www.krollontrack.co.uk)