According to the Wall Street Journal (sub. req.), small law firms have adopted the mantra: merge or die. Indeed, the number of law firm mergers is staggering. “At least 60 mergers occurred in the U.S. and abroad last year, the highest level since 2008 and a 54% jump from 2010, according to legal-industry consulting firm Altman Weil Inc. Industry experts expect the figure to rise this year.”
Why the up-tick in mergers? The economic downturn has caused a shift when it comes to legal service providers: it is a “seller’s market for the first time in 20 years.” In other words, law firms are not able to raise rates in order to increase profits. So, small firms turn to mergers as a way to increase their revenue and allow them to compete with all-purpose, larger firms. Randall H. Miller, who as managing partner at Denver-based Holme Roberts & Owen LLP helped engineer its acquisition by Bryan Cave, explained that “[l]ittle by little, our ability to service our clients’ needs ha[d] been limited by our smaller size,” which was why he pushed for the merger.
Yet, small firm to large firm mergers are not the answer for all small firms. The article featured several potential problems….
First, unsurprisingly, merging a formerly independent small firm into an established larger firm is expensive. Among other costs, the newly merged entity has to expend money to integrate the new employees, real estate, and computer systems. And in some instances, these high costs are not offset by the income coming in through the new clients and increased billable hours.
Second, those in power in the small firm want to maintain their level of power in the newly merged entity. Yet, often times, they are reduced to small fish swimming in a large pond. This leads to partners competing with others and arguing over compensation.
Lastly, as with any merger, due diligence is never perfect, and there are bound to be surprises about the formerly independent companies. The article cited an example of a merger wherein “‘[t]o the surprise of the other party, the acquired party had a huge unfunded partner-retirement obligation that they had assumed would be picked up by the buyer,’ [an Altman Weil consultant] says, estimating that the obligation was 5% to 10% percent of the acquired firm’s annual revenue.”
This is not to mention what would appear to be the biggest problem that may occur when a small firm merges into a bigger firm: the small firm is no longer a small firm. The reasons that lawyers become small-firm attorneys — easier ability to bring in clients, more substantive experience, opportunity to develop and sharpen their entrepreneurial spirit, etc. — are gone. These mergers negate the fact that many small-firm attorneys avoided Biglaw because they wanted a different type of practice.
I heard from one reader who had a similar experience following the merger of his small firm into a Biglaw firm. He wrote: “I was living the dream before. Now, it is like a suit that fits wrong. It bunches in some wrong places. I had the résumé for Biglaw, but did not want to do it.”
Are there small-firm attorneys that lived through a merger who share these sentiments? Or do you think that the merger was a good decision? Why? I want to hear from you. I thought the answer to the question of whether all small firms truly want to become big firms was a resounding “no.” Indeed, many of you told me that. Are we wrong?
Stark Choice for Lawyers— Firms Must Merge or Die [Wall Street Journal]
When not writing about small law firms for Above the Law, Valerie Katz (not her real name) works at a small firm in Chicago. You can reach her by email at Valerie.L.Katz@gmail.com and follow her on Twitter at @ValerieLKatz.