Editor’s Note: The author of this article is a law firm consultant with Fairfax Associates.
By Kristin Stark, Principal, Fairfax Associates
In an effort to grow in a relatively low growth market, firms continue to invest substantial leadership time and energy in pursuit of merger. Yet, the success rates are low. The vast majority of law firm merger discussions never come to fruition. While no formal measures exist on the number of merger conversations initiated yet never consummated, we would estimate that fewer than 1 in 10 initial merger meetings actually progresses to a combination of firms.
Why do merger discussions fail? And should firms continue to invest in merger approaches in light of high failure rates?
Merger discussions fall apart for any number of reasons: conflicts, poor financial fit, a lack of practice fit, a lack of alignment in future strategy, a lack of alignment on deal terms (governance, compensation, partnership structure, etc.). In many cases, initial meetings are quite speculative and discussions do not proceed for valid reasons. However, all too often, discussions drag on without sufficient recognition of likely hurdles and with no clear sense of a conclusion. Interestingly, the causes for failed discussions are often quite detectable early on in the process, and with appropriate and objective analyses of the merger opportunity at the outset, firms can avoid expending energy on a merger that can’t and won’t be completed due to fundamental differences between the firms.
While firms should not hastily dispense of a promising merger opportunity when it starts to hit minor bumps in the road, there is a real need for firms to be more realistic in assessing fit and the likelihood of success in merger earlier on in the process. All too often, we are approached by new clients that have invested months (and in a few rarer cases, years!) in exploring a merger which cannot work. This misallocation of resources consumes significant hard and soft costs, in addition to presenting the risk of partnership destabilization due to a lack of direction and overall leadership distraction.
However, the risk of failure is not a reason for firms to avoid contemplating merger altogether. When a firm determines that a merger offers potential strategic advantages, it is worthwhile to explore merger opportunities in a structured and analytical way. Well-run merger search and discussion processes can help better inform firms about the strategic options available in the market, the potential advantages and disadvantages of a combination, and even shift a firm to be more pragmatic and aggressive in pursuing other non-merger related strategies.