Why firm mergers go wrong: golden rules for success

As the covid-19 crisis starts to ease, weaker firms, for the last 18 months propped up by government funding, emerge as targets ripe for takeovers.

Well run, financially stable firms, on the other hand, are in a good position to take advantage of acquisitions opportunities in what is a buoyant legal services market.

The availability of cash and low interest rates is already fuelling a M&A boom and in recent months we have seen a flurry of activity from publicly listed firms such as Knights PLC (with revenue increase by over £100m in 10 years), and smaller acquisitions from regional players like Yorkshire firm Switalskis (with two acquisitions in six months).

Amid this wave, it’s worth asking whether merger really is the right way to go. Empirical research shows most M&A often fail, yet firms still do deals which could be bad news for them.

Others are persuaded not to acquire due to fear of failure, potentially missing out on successful growth.

So how can firms protect themselves from a merger going wrong?

The sector is very different to others, particularly due to our heavily regulated environment. There are, however, some golden rules for partners and firm owners when they start to think about M&A strategies for growth.

Rule one: Don’t sacrifice finances over strategy

Too often, I hear partners telling me “It’s all about the strategy”. I do understand, but not when the financial case is so weak it could cause immense damage to the acquiring firm.

Due diligence can sometimes be no more than a box ticking exercise when the underlying financial model is inherently flawed. As Peter Drucker once stated, “deal making beats working”. Dealmaking is the exciting stuff, whereas working requires “grubby detail work”.

Why does this happen? One reason is lawyer/partner hubris. They get carried away with the momentum of a deal and rarely ask the simple question: why are we doing this?

If the business case cannot be explained in a few words, rather than in complicated, visionary, language, you know there will be trouble ahead.

Rule two: Consider what you are bringing to the table

In a number of deals, it became apparent the acquiring firm needs to consider what they can bring to the table in terms of leadership and strategy. Always ask yourself this question rather than simply assuming all will be well.

Rule three: Ensure you have the resources to make it work

Bolt-on acquisitions where a firm acquires a niche business can work well without huge effort at management level. Larger acquisitions which increase debt levels and pressure from day one, however, can get off to a bad start.

Recently, I saw a management team walk away when they realised how much more of their time would be required to make the deal work and how this would affect the running of their existing practice. An already stretched practice can be tipped over the edge by an acquisition.