Consolidation on an unprecedented scale is taking place in the professional services sector. There is much talk of multinational and multidisciplinary partnerships.
Many small and medium-sized firms are embracing the perceived advantages of operating under the umbrella of a larger organisation with global reach. Many do so because the world is getting smaller by dint of facility of communications with the result that more clients are carrying on business internationally. Firms feel the need to get bigger to serve their clients' expanding needs and expectations.
Whatever the driver, the merger phenomenon is not about to go away. Some mergers will be successful; others will fail, at least for a proportion of the partners involved. A number of steps can be taken to minimise the risks of a merger not achieving the two firms' aims or, even worse, resulting in the need for a demerger.
The success of a merger is often closely related to the degree of preparation undertaken even before the first approach to a potential partner is made.
Any firm considering the consolidation that is occurring in the marketplace should first examine its own business objectives and their continuing validity in that changing marketplace. For example, the firm may wish to attain quickly the ability to service a wider range of client needs (to stop others gaining an entree to its clients) but is that new work area profitable? Once clear about its business objectives, the firm should review in some detail the different courses of action capable of achieving those objectives.
Of all action, merger possibly carries the highest risk because it constitutes explosive growth of the organisation. Assuming the initial phase of preparation has resulted in the firm concluding that merger is the best option, the firm should proceed by establishing a small committee (the smaller the better, to preserve confidentiality) charged with implementation. The committee should comprise partners sufficiently freed from fee-earning work to be able to devote a concentrated period to achieving implementation.
It must be clear about when and how to report to, and consult with, the general body of partners. The committee must then undertake careful research of the marketplace and assessment of target merger partners.
If initial approaches have been welcomed, conducting in-depth due diligence on the other firm and giving access to information to the intended merger partner are key to establishing that both firms' objectives can be achieved and confirming compatibility of structures, profitability, remuneration and cultures.
A legal format for the merger must then be chosen. A common form is the dissolution of one firm, with the partners in that firm joining the other practice. Although often driven by tax considerations, this can, if mishandled, result in the merger being perceived as a takeover. Among the issues that can assume great importance are the choice of name or the extent to which the partnership agreement of the firm being joined is altered to reflect the structures of the dissolved firm or to reflect an entirely new structure devised by the two firms together.
Alternatively, the merger might proceed by a dissolution of both practices and the formation of a completely new firm. Such a merger is more readily perceived as a merger of equals.
It can encourage partners to shed old habits in favour of new methods of doing business which combine the best attributes of both parties. In mergers of any size there is generally fall-out of some partners. It is essential to handle the departure of those partners sensitively.
Sometimes, the divisions between partners in one firm are so deep that the constituent parts of the business have to be split between several groups, thereby freeing one group to implement the merger. In these cases, issues relating to employees, leases, contractual commitments and potential claims can prove complex. In a surprising number of cases the inevitability of such a rift is not foreseen.
The result is often the merger partner backing out completely - because the scaled-down firm with which it is to merge is no longer capable of delivering the benefits originally anticipated - or cherry-picking selected partners. Following the implementation stage, the work of making a merger successful has only just begun.
Integration of the two distinct parts must be achieved as soon as possible. One mark of success is if even the participants no longer regard themselves as hailing originally from one or other of the merger partners. Careful preparation including identification of objectives and in-depth due diligence, early identification of a tax-efficient legal structure and close integration following the merger will not by themselves ensure the success of a merger.
This can only come from the validity of the underlying rationale and the will of the participating partners themselves to make it work. But they will go a long way to minimising the risk of failure. - Tina Williams is a founding partner of City law firm Fox Williams. ?:
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