A marriage of true minds

Everybody is talking to somebody about merger plans - or so it sometimes seems. A recent issue of the Law Society Gazette devoted four pages to the topic and listed no fewer than five firms across the country that had merged in the preceding weeks.

A survey of professional firms by the accountants Smith and Williamson revealed that all those interviewed had at some time been in merger or acquisition talks, and a third were considering such a move. So what is behind this sudden outbreak of merger fever? Financial constraints, fear of the big boys or a feeling that there is security in numbers?

"We have seen far more defensive mergers recently," says Jonathan Glass, of Longbridge Consultancy. "Sometimes it is a case of the banks insisting that something is done or they'll pull the plug. There are obvious savings to be made in property and administrative costs. The immediate benefits can be substantial - perhaps pounds 2m a year saved on two firms with a pounds 10m turnover each. But in the long term, finances cannot be the reason for a merger: it must be for the benefit of existing and potential clients."

It is the medium-sized firms that are the most active. The Smith and Williamson survey revealed that among professional firms of between 11 and 49 partners, nearly half were actively considering a merger or acquisition. Squeezed between the large City players and the small niche practices, these firms are feeling vulnerable.

"The 30- to 40-partner firms are asking themselves what they have to offer," says Mr Glass. "They have always claimed they have the depth, but what happens when their client needs 10 lawyers and they are all tied up on another deal? It could take five to 10 years to expand sufficiently by organic growth and by that time they will be out in the cold. A merger is much quicker - if you can find the right firm."

Michael Johns, managing partner of the City firm Nicholson Graham and Jones, predicted in 1991 that his own firm would grow from 23 to 40 partners by 1996, and saw the prophecy fulfilled last year when it merged with the West End practice Brechers. He believes the trend from fragmentation to consolidation in the profession has a few years to run.

"Size is pretty important," he says. "We have had a reputation for acting for dynamic companies. The danger is that they get bigger and you don't, so they move on. A lot of our clients have grown in the past five years and we have stayed with them. We are able to attract work from major companies when in the past we would have been overlooked." The freedom to wed is another prerequisite. "Everybody wanted to move, and we were both able to get away from our lease commitments without any cost," says Mr Johns. "The sooner you can get everybody together, the better."

There is a great deal more to a successful merger than finding a firm of the right size with no lease around its neck. All merged firms talk smugly about their component practices being "complementary" and about the "chemistry" being right. Presumably, Messrs Donn and Conn, of Manchester, also felt the omens were good for their recent merger, which lasted all of 26 days.

Michael Simmons, a partner with Finers and a consultant on professional practice problems, is in a better position than most to comment. The author of a book on mergers, he found himself in the embarrassing position of watching his own merged firm, Malkin Janners, crash soon after takeoff - due partly to personality clashes but mainly to the unpredicted collapse of its foreign banking work.

"The real problems arise from differences in culture: you cannot merge an `ant' firm that never goes into overdraft and whose partners buy their own cars, with a `grasshopper' firm that owes the bank pounds 2m and where the partners give themselves new Porsches every year.

"Firms should ask whether their philosophies are compatible before they start looking at figures. When they start talking money they get on a roll and forget the other things. It's like getting engaged. Sure, she picks her nose but she'll change when you're married. And when you're married you find she not only picks her nose but bites her nails as well. The trouble with lawyers is they don't like giving too much away."

Too many firms make the mistake of entering into a merger simply because a candidate has presented itself. As Alan Hodgart, of consultants Hodgart Temporal puts it: "A merger is not a strategy but a means by which strategic objectives might be achieved. Before embarking on a search for merger partners, it is essential that the firm be clear about its current status in the market place and the strategic objectives it is hoping to achieve over the next three to five years."

This means looking at the range of services the firm intends to offer and the depth of specialisation it will provide as well as its likely client base. What kind of size does it need to be to achieve its objectives?; when does it want to reach this size and what is the best method of growth?

The recent incorporation of Mackenzie Mills into Withers was part of such a process. Withers' 1992/93 five-year business plan identified the need to develop further the corporate and litigation sides of the practice to balance the firm's established private client, family law and property work. "Taking in Mackenzie Mills was very much part of a long-term plan rather than something we stumbled upon," says the business development director, Philip Hall.

"Mackenzie Mills fitted the bill in two respects. They were a close fit in terms of style and personality and there was a complementary between the work of the two practices. For example, we had a small banking practice; theirs was larger. Their asset-tracing skills will complement the cross- jurisdictional work we do in family law and other areas. We are now the leading commercial Italian practice with 20 fluent speakers. The merger led to interlocking specialisms rather than vast armies of people doing the same thing."

Opinion is divided on whether firms should use the services of a third party. Mr Glass says they have a role to play in strategic planning, selection of candidates and as facilitators in keeping the momentum going.

"A third party can find solutions to problems that might bring the whole thing down. For example, if there is a part of the practice you are merging with which really should be axed, it is easier for the consultant to spell that out than for a partner to do it."

And once a possible candidate has been identified, what then? Alan Hodgart suggests that firms ask themselves four questions. Will the merger help in achieving your strategic objectives? Does it offer resources that will bring a competitive advantage? Are the two cultures similar? And would you be happy to be taken over by the other firm?

"If the answer to any one of these questions is a strong `no', the merger is not likely to be successful."