Merge; merge; merge. It’s all we hear about from law firms these days.
But corporations do these things in both directions: Corporations do acquisitions, but they also do divestitures. Corporations merge, but they also de-merge.
If it occasionally makes sense for a corporation to divest itself of a business unit, or to split itself in two, then it surely also makes sense for law firms occasionally to divest themselves of practice groups or split themselves in two. But we almost never hear about those things. (A reader of this column tells me that he googled “law firm” and “de-merger” and found only this five-year-old announcement about a firm in the UK.) (Don’t complain about my shoddy research. That’s more spadework than goes into a typical one of these columns.)
So here’s the idea: You have a global mega-firm that combines a fine M&A practice with a great litigation practice. Just as corporations sometimes think that combined business units would have more value if pulled apart, the law firm decides that everyone would prosper if the litigation firm were spun off from the transactional practice.
Divestiture! It’s not a dirty word in the corporate world; why is it never spoken among law firms?
Here’s one possible reason why law firms can’t do corporate-style spin-offs: When a corporation spins off a business unit, shareholders of the parent company often receive stock in NewCo. Thus, if the separated entities create more shareholder value, the shareholders of ParentCo share the profits.
There’s no analogue to that in law firms. If Bigg & Mediocre spins off its litigation practice, which then becomes wildly successful, the partners in the litigation boutique may become rich, but the partners left behind (at Smaller & Still Mediocre) don’t get a penny. Corporate shareholders can thus profit from spin-offs and divestitures in ways that law firm partners cannot.
Moreover, it’s possible that law firms do spin off practice groups, but they just don’t talk about the spin-offs too much: “We formerly did immigration [or trusts and estates, or family law, or whatever] work as an accommodation for our big corporate clients, because corporate officers sometimes need that help. But that’s low-value, commodity work, and the pricing structure didn’t really fit in our firm. So we eliminated that practice, because it couldn’t carry the freight.”
Or maybe the divestitures are of smaller groups, such as individual partners who are shown the door or unprofitable offices that are let loose.
But there must be other situations where law firm de-mergers would make sense. A strong group of litigators, for example, might set out on its own, severing ties from Bigg & Mediocre. The litigators would be freed from conflicts of interest created by a corporate practice and might thus become far more profitable. It’s true that the litigators would be forgoing referrals they might otherwise get from their former corporate colleagues. But it’s easy enough to weigh the benefits of eliminating conflicts against the costs of forgone referrals, and surely that trade-off makes sense for at least some litigators. (Think, for example, of Quinn Emanuel or Bartlit Beck — litigation-focused shops that are, to all appearances, getting along quite well.)
I’m not sure how the calculus works on the corporate side of this equation. Whether litigators refer matters to, or create conflicts for, associated corporate practices, probably varies by firm. If the M&A guys run the firm with an iron fist, then “those litigators will sue an investment bank over my dead body!” And the litigators then create no conflicts. But if the litigators are at the helm, perhaps the litigation side of the shop does create conflicts for, or refer business to, the transactional folks.
I realize that my lens is small. I’ve heard rumors that some large European firms are now de-merging, with specialized boutiques breaking away from firms that previously acquired them. And I certainly understand that, at least historically, increasing leverage was the key to law firm profitability; it was heresy to consider shrinking a firm. But perhaps times have changed, and law firm leaders will now start thinking like corporate leaders do: Although acquisitions are one possible route to success, divestitures are another.
Mark Herrmann is the Chief Counsel – Litigation and Global Chief Compliance Officer at Aon, the world’s leading provider of risk management services, insurance and reinsurance brokerage, and human capital and management consulting. He is the author of The Curmudgeon’s Guide to Practicing Law and Inside Straight: Advice About Lawyering, In-House And Out, That Only The Internet Could Provide (affiliate links). You can reach him by email at [email protected].