It’s now ancient history, but in 2002 Chicago-based Mayer, Brown & Platt (850 lawyers) joined with U.K-based Rowe & Maw (250 lawyers) in a law firm merger that seemed breathtaking. Today, combining firms has become a universal business strategy. Fourteen law firm mergers in the third quarter of 2011 alone brought this year’s total to 43.
Evaluating these ultimate lateral hiring events — wholesale combinations of independent enterprises — is a two-step process: first, defining success and, second, allowing sufficient time (measured in years) to observe results. Senior partners orchestrating such transactions have vested interests in making them look good. So do the management consultants cheering them on. Once they undertake a merger strategy, leaders take herculean steps to vindicate it. Their spin can distract from the downside, but it’s there.
Management and its outside consultants often define success in deceptively simple terms: getting bigger and growing equity partner profits. That can be superficial and misleading.
Growth alone doesn’t create value. Recently, Minneapolis-based Faegre & Benson and Indianapolis-based Baker & Daniels announced the creation of Faegre Baker Daniels. Whatever economies of scale exist in the delivery of legal services, firms the size of Baker (320 lawyers) and Faegre (450 lawyers) seem large enough individually to have triggered them long ago. Will their 770-attorney firm operate more efficiently than two components half that size? Doubtful.
But this is certain: combined firms face more potential client conflicts than if they’d remained separate. That results from the interaction between the Rules of Professional Responsibility and arithmetic.
Some leaders promote a “bigger platform” as a way to entice prominent laterals. But bringing in seasoned outsiders makes preserving any firm’s culture even more challenging.
Then again, maybe there’s little culture to preserve after most significant combinations. Baker & Daniels is in the Am Law 200; so is Faegre. Together they’ll move into the Am Law 100. Is that a good thing?
Merger leaders always proclaim their determination to preserve each firm’s culture. But, those attending the first Faegre Baker Daniels partnership meeting won’t know half the people in the room. Likewise, being one of 100 equity partners is different from being one of more than 200 — and not in a way that enhances collegiality or a sense of community. Looking for a central identity or a geographic core from which senior partners working together can produce common principles? The new Faegre Baker Daniels firm won’t even have a national headquarters.
In the end, most merger proponents pander to the simplistic hope that synergy of the combined entity will produce value greater than the sum of its partner profits parts. If that happens, it’s a good deal economically for the survivors at the top. But many others may find themselves on the wrong side of a merger’s “restructuring opportunities” — a euphemism for shrinking the new equity partnership.
According to the latest Am Law listing, Baker & Daniels’ partnership has two tiers (equity and non-equity) and an equity partner leverage ratio of 1.71. Faegre has a single equity partner tier and a leverage ratio of 1.09. Something’s gotta give.
Faegre’s chairman Andrew Humphrey, a transactional attorney who will serve as the combined Faegre Baker Daniels chief executive partner, said the new firm would have a “unified compensation structure.” He plans to manage “partner expectations” and “incentivize people the right way.” I don’t know what he has in mind, but some current partners probably won’t like the results of that exercise.
Likewise, mergers put pressure on leaders to push everyone harder. They want to cite increases in billings, billable hours, and leverage as proof that the new institution is better. Never mind that no one will ever know what the base case — no merger — would have produced for either firm independently.
Even a short-term increase in partner profits doesn’t prove the long-term value of the transaction. For example, Howrey’s merger and lateral hiring binge began in 2001. Seven years later it had record profits, but by early 2011 the firm was gone.
I know, I know — Howrey was different. As I warned at the outset, beware of that spin-thing.