6 Things Managing Partners Need To Know About Law Firm Mergers

Law firm mergers are often bad ideas; if you're going to do one, do it right.

I’m something of a skeptic when it comes to law firm mergers (as I mentioned yesterday). They sometimes feel like bad lateral partner hiring: poorly thought out, growth for growth’s sake, inadequate integration, overstated benefits. Many of the best law firms in the country have never done — and never will do — a merger with another firm.

But for some firms, especially firms facing challenges created by changes in the legal profession, mergers might be a necessary evil. They come with risks, financial and cultural and otherwise, but sometimes those risks are worth taking.

If you’re going to do a law firm merger, do it right. Here are some nuggets of wisdom from Biglaw leaders who have led their firms through successful mergers….

At last week’s Law Firm Leaders Forum, hosted here in New York by Thomson Reuters, the following panelists shared their insights on law firm mergers:

Here are some key takeaways from the discussion:

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1. Don’t use a merger to fix your firm’s problems; fix your firm’s problems before you merge.

Like a couple that decides to have a baby to save their marriage, some firms turn to merging to try and solve their preexisting problems. That’s a terrible idea, according to David Gaulin of PWC. Bill Perlstein of WilmerHale agreed, noting that the merger of Wilmer Cutler and Hale & Dorr succeeded in part because each firm righted its own ship prior to the merger. Wilmer improved its talent roster by hiring star lawyers like Jamie Gorelick and Seth Waxman out of the Clinton Administration, and Hale & Dorr rebuilt its client list after losing some to the dotcom bust. As a result, when the two firms started exploring a possible merger, they did so from positions of strength rather than desperation.

2. Pick the structure that’s right for you.

This point could be restated as: to verein or not to verein? As previously explained (by Edwin Reeser and Martin Foley), a verein is “an association of independent legal entities for specifically defined purposes — generally, marketing and branding in nature” — without financial integration.

Roger Meltzer said that the verein structure has been a very useful tool in growing DLA Piper. “My view is that you don’t need complete financial integration of the partnership as long as you are integrated in other ways, such as technology and business development.”

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But the verein isn’t right for every firm. Jerry Clements explained why Locke Lord decided not to go down the verein path. Even though she envies the structure for some reasons, such as the way it simplifies tax issues, it can be an impediment to recruiting talent: “Some of the people we wanted to hire did not want to be in a verein structure and wanted a common profit pool. We think not being a verein works best for us.”

3. Make sure your advisers have the right incentives.

Many law firms hire advisers — consultants, recruiters, accountants, and others — to help them decide whether and how to do a merger. But some of those advisers have conflicts of interest: they’ll get more income or future business if a merger goes through.

This is why Andrew Humphrey said that when Faegre hired a consultant (Lisa Smith, at the time with Hildebrandt), the firm retained her on an hourly basis with no success fee. This type of compensation structure does a better job of yielding honest advice on whether a deal is strategically smart or not.

4. Don’t defer the difficult decisions.

In the excitement of merger discussions, the firms involved will sometimes say, “Let’s deal with that issue later.” That’s generally an unwise strategy.

One common “kick the can down the road” strategy: naming “co-heads” for every department or office, with leaders coming from each of the legacy firms. It might make sense in a particular case to name co-heads, but firms shouldn’t do it just to avoid political discord or bruised egos, according to Jerry Clements. You are simply deferring a tough decision that will need to be made at some point — and, as David Gaulin put it, “The longer you wait, the worse it gets.”

Another tough choice: what type of partner retirement plan will you have? Prior to the merger with Hale & Door, Wilmer Cutler had a $27 million, unfunded retirement plan on its books. That had to be dealt with and cleaned up before any possible deal. As James Maiwurm of Squire Patton Boggs observed, “Unfunded retirement plans are the ultimate poison pill.”

5. Don’t overlook the importance of integration on the administrative or staff level.

Andrew Humphrey of Faegre Baker Daniels emphasized this point, especially regarding technology. Bill Perlstein echoed these sentiments, noting that it took six to nine months just to integrate timekeeping systems at WilmerHale.

“We’ve done multiple combinations, and we have really good internal people who are great at making systems talk to each other,” said James Maiwurm of Squire Patton Boggs. “It seems like a little thing when it’s actually a big thing.”

Perlstein encouraged the managing partners in attendance to think about the merger from the staff point of view. A merger often involves doubling their workload for a period of time, forcing them to work long hours under a lot of stress, then firing some number of staffers at the end of the process. If you’ve never done a merger before, don’t underestimate the challenges of administrative and staff integration.

6. Be willing to walk away from a deal — even at the last minute — if it’s the wrong deal.

“Deals are not for the faint of heart,” said Clements of Locke Lord. “They take courage, creativity, and commitment — including the courage to walk away from a deal if it’s not the right deal for your partners.”

In the golden age of Biglaw, according to Meltzer of DLA Piper, mergers were less risky and easier to execute: “As long as you could convince your partners you could make more dough, you probably had pretty good support for a merger.”

That’s not the case today; dangerous deals abound. Meltzer recalled how DLA Piper had the chance to merge with Heenan Blaikie in Canada (a market where, he revealed, DLA remains eager to do a deal). DLA ultimately concluded that the numbers didn’t work and backed out of the deal — at a fairly late stage, which angered some of the Heenan people. But it was probably the right decision, in light of Heenan Blaikie’s subsequent implosion. “Don’t stretch to do a bad deal,” Meltzer said, “because it will ultimately kill your firm.”

Another example: recall how Orrick considered merging with Dewey before ultimately walking away from the deal. With the benefit of hindsight, that was the correct call.

“Dewey wasn’t a failed merger for us,” said Ralph Baxter, who led Orrick at the time of the talks. “It was a merger we decided not to do. Dewey & LeBoeuf was a failed merger.”

Law Firm Leaders Forum [Thomson Reuters]

Earlier: Prior ATL coverage of the Law Firm Leaders Forum

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