Ed. note: This is the latest installment in a series of posts on lateral partner moves from Lateral Link’s team of expert contributors. Michael Allen is Managing Principal at Lateral Link, focusing exclusively on partner placements with Am Law 200 clients.
Alliteration aficionados are bemoaning the tongue-twisting fusion of Squire Sanders and Patton Boggs into Squire Patton Boggs. I prefer the feudal-esque Squire Boggs, but then again, I was not on the naming committee. Aside from this rebranding exercise, Squire Patton Boggs makes it clear that mergers (or acquisitions) are easier to execute in principal than reality.
Many of the firms in the Am Law 200 are the result of previous mergers including WilmerHale and DLA Piper. Most of these mergers were consummated before the recession, and since then, the parity between Am Law 200 firms has been dwindling.
The race for supremacy in the legal market has created a system with far less parity than before and consequently, a greater degree of difficulty for mergers. For example, the spread of Profits Per Partner in 2003 is right-skewed — and this will likely always be the case — but overall, there is little variance in spread of PPP in 2003 when compared to the spread in 2014…
Now why is this important? Law firm mergers — and by mergers I mean two firms of comparable sizes reforming into one — depend on a myriad of conditions and factors, such as PPP, RPL, office locations, equity to non-equity ratio, culture, profit margins, and bill rates. These conditions must be met for a merger to be successful.
WilmerHale’s merger in 2004 is the epitome of this concept. The two firms were nearly identical. Every category (except Net Operating Income and Number of Equity Partners) was within 6% between the two firms and therefore close enough not to derail the conversation.
Just because two firms have similar metrics does not mean that the result will be profitable (does the name Dewey & LeBoeuf ring a bell?). The two firms were similarly well matched on the surface. The downfall of Dewey & LeBoeuf was not simply the consequence of their merger, nonetheless it shows that while a merger might look good on a spreadsheet, the real life implications are far more complicated.
Although financials are something, they are not everything. The glue that holds a firm together is culture and strong leadership. Like with herding cats, mergers have the potential for disruption if the cats aren’t playing nice together. The New York Times recapped the dysfunctional practices that ran Dewey into the ground: lewd emails, partner conflicts, and rampant paranoia. These were seeded into Dewey’s culture and after the merger, massive compensation packages and skyrocketing debt all led to the culmination of the poisonous decisions that brought Dewey down.
Now to the meat. The financials, such as bill rates, leverage, profit margin, RPL, PPP, and more, are necessary for two basic reasons. One, you can’t raise bill rates on your clients and expect to keep the business. Two, you can’t cut the compensation of your partners and expect to keep them post merger.
While several mergers were successfully consummated in the early 2000s, the increase in financial variance has made it more difficult to successfully execute mergers. In the last year alone, we have seen several mergers falter after initiating conversations.
In the post-recession market it has become more difficult to find a financial match. We can see here the standard deviation of PPP has nearly doubled from 2003 to 2014 — meaning the Am Law 200 firms are much more spread out compared to 11 years ago. This is just one indicator, but nonetheless, even if a firm can find a cultural match, it is now much harder to find a financial match.
Although there are several firms that could greatly benefit from, and have the compatible infrastructure to combine, there is one potential combination that would stand heads and shoulders above the pack. The legal world would quiver at the creation of a firm called “Wachtell Irell”. Each firm dominates the top half of the Am Law 100. Both have similar leverages and high profit margins and are top ten for PPP and RPL. The firms run lean and profitable given low costs and high rates. Their strengths would complement one another’s weaknesses in practice and geography. A merger of the two firms would create a well-rounded powerhouse anchored by Morgan Chu and John Hueston on the West Coast and David Neff and Edward Herlihy on the East Coast.
The operation and metrics of these two firms are the gold standard and the combination of the two top seeds would result in an unparalleled powerhouse.
In a perfect world, firms merge to cut the fat and keep the muscle. In reality, the impetus for mergers is often financial difficulties and when it is not, the fallout of a merger is largely unpredictable — you could end up losing the meat altogether.
Previously from Lateral Link:
• Working Overseas: Asking The Right Questions Before You Take The Plunge
• Clouds Parting For Junior Associates
• When The Revolving Door Slams Shut
• Unlocking The Black Box Of Partner Compensation
• The Women’s Biglaw All-Star Team Of 2014
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