ABA Section of Business Law

Business Law Today
May/June 2001 (Volume 10, Number 5)

What will happen to your law firm?
Choose one: a) castaway, or b) survivor
By Michael A. Bedke

Teams. Alliances. Confidential negotiations and secret votes. Is this the latest "Survivor" sequel or a description of your law firm's latest merger discussion?

Globalization. Consolidation. Mergers and acquisitions. Ancillary business. Market share. Market penetration. Building a brand. Unfunded retirement plans. Corporate culture. The rich getting richer and the big getting bigger. Merger mania. Lately, it seems as though these words and phrases are as likely to be seen in the National Law Journal or the American Lawyer as in The Wall Street Journal or Barron's.

Attribute it to the fact that, like it or not, our cherished profession has become more like a business and regardless of the fact that the American Bar Association's House of Delegates overwhelmingly rejected the notion of multi-disciplinary practices - that trend is likely to continue.

Whether it is because of old-fashioned greed, the fact that many of our brethren view compensation as the way to "keep score," or because of the pressure of competing against new economy companies for the best and the brightest (which, for many firms, has resulted in the skyrocketing salaries of young associates), law firm managing partners are expected to, now more than ever, focus on "the bottom line." That focus is causing an ever increasing number of managing partners and their firms to consider merging with other firms. Your firm could be next.

Having been through a merger relatively recently, I believe the concerns addressed will provide you with material that will be helpful if you find your firm in merger discussions. Whether you are a senior partner or a young associate, whether your firm is the "acquiror" or the "acquiree," whether your firm is a large, national, full-service firm or a small, local boutique with a niche practice, there are certain issues you should consider.

Maintaining the status quo is almost always the path of least resistance. By nature, many of us abhor change. That having been said, we are cognizant that shifting market pressures may dictate that bold action be taken in order for our firms to survive, let alone thrive.

At the risk of inciting outcries of "It is about more than money" or "I practice on Main Street, not Wall Street," let me point out that the average revenue per lawyer is more than $100,000 higher in the largest 100 firms in the country than in the next 100 largest. Furthermore, average profits per equity/capital partner are more than $200,000 higher in this top tier of firms than in the second tier. In fact, while it may be difficult for those of us practicing in second- or third-tier cities to believe, the 101st to the 200th largest firms are now often referred to as "middle market" firms.

The point is simple: Clear trends and eye-popping statistics show that the large, national firms are quickly leaving most local, statewide and even regional firms in the dust. Grow or die? Not necessarily, but last year, more than 90 law firm mergers were reported in one law firm consultant's client newsletter alone.

Yes, recently published statistics regarding the largest U.S. firms do suggest that size is an increasingly important indicator of a law firm's financial success. The larger firms have significantly higher revenue per lawyer and profit per partner than do the medium-sized firms. This income gap is widening at a breakneck pace.

Why is this gap occurring? The sense is that, all things being equal, the national firms have the breadth and depth of talent to handle the highest margin/most profitable work for the "best" clients. Firms that fail to at least consider this notion of critical mass risk finding themselves among the "have nots" rather than the "haves."

As they watch their clients consolidate, becoming more national and international in scope, many firms are deciding to follow suit. The mid-sized "regional" full-service firm is becoming increasingly marginalized. Think about it. Have you heard your colleagues talking over the water cooler about such firms being dinosaurs? About how the future seems destined to reward national or international mega-firms on the one hand and small "boutiques" on the other?

The good, local, medium-sized firm seems increasingly antiquated to many clients and consultants. They are considered too cumbersome to be highly specialized firms doing one type of high-profit work extremely well but too small to enjoy economies of scale on a significant level or compete for "national" clients.

Geographic diversity provides a firm with a certain degree of stability and a "platform" (a word you will hear often during merger talks) for "taking the firm to the next level" (a phrase quickly becoming a cliché - or mantra - in the selling of the merger concept to the partners who will vote). Some firms cling to the view that they can be "national" by having offices in three or four regions of the country. Others think they must have a presence in most, if not all, first-tier cities. Under either theory, there is a belief that geographic diversity is important.

Notwithstanding the landslide vote of the ABA's House of Delegates denouncing multidisciplinary practices as inconsistent with the core values of the profession, the issue is not going away. Accounting firms employ thousands of lawyers abroad. As our clients expand their markets to places in the world that do not regulate lawyers as we do in the United States, we will inevitably be faced with competition from accounting firms for the handling of our clients' legal work. Unless the law firm has an office or an affiliation with another firm in the new market, it is likely going to lose its clients' business.

The merging of one law firm with another can reduce risk through a diversification of practices and an expansion of the client base. For example, it is easy to imagine how the merger of a transactional firm with a litigation firm could smooth out the inevitable bumps either would face individually as a result of normal economic cycles. It would also seem that such a merger could easily foster the cross-marketing of existing clients, resulting in a "growing of the pie."

Law firms, like their clients, are talking about "building a brand" in order to achieve greater "market penetration." Firms are concerned about differentiating themselves from their competitors. If you doubt this, just consider the proliferation of law-firm ads, brochures, newsletters and logos (on everything from coffee mugs to mouse pads, pens, coasters and the ever-popular golf shirt).

Obviously, conflicts may create a major impediment to a proposed merger. The combination of even small firms presents a significant likelihood of serious conflict-of-interest problems. No partner relishes seeing his or her book of business diminished as a result of losing a client because of a conflict created by the merger. Mergers have fallen through and lawyers have taken their clients and practices elsewhere because of conflicts.

The earlier that conflicts are settled, the better it is for all involved. As a result, you should consider having client lists from each legacy firm subjected to computer searches of the other firm's conflict-of-interest database early in the process. As talks progress and become more serious, you may want to have each new matter opened by either legacy firm subjected to a conflict search run through the system of each firm. Any conflict arising in this stage should be discussed and disclosed to the affected clients.

Finally, as the merger discussions progress even further, a list of each firm's largest clients should probably be submitted to the partners of the other firm to be reviewed for potential conflicts of interest. Because of the sensitivity to confidentiality concerns, each legacy firm should have a "conflicts czar" to filter the information provided to the rest of the partners.

Another potential pitfall in the merger dance are pending or potential malpractice claims. A number of small claims or a single substantial claim may, understandably, cause consternation. This concern may be exacerbated if the legacy firms have significantly different practice areas that may make it more difficult to analyze the risk involved. Past judgments and settlements must be considered and an analysis of the premiums currently being paid can provide additional comfort or concern, as the case may be.

Books have been written about law firm governance and management issues. Who will run the new firm? For how long? Who will sit on what committees - particularly the ones addressing compensation and the admission of new partners? Will the years to partnership change? What about the buy-in? Will there be separate classes of partners? Will the form of the firm change (for example, from a general partnership to an LLP)? Will the merger require the partners to pay income tax in other states?
Who will lead the various practice groups? Will all partners in the existing firms be partners in the new, combined firm or will some (continuing the "Survivor" analogy) be voted off the island, having to take a perceived (or possibly actual) step back?
These are just some of the questions that must be resolved in a manner that promotes an integration of the firms. In many instances, the merger can create the opportunity to select the best practices, policies and procedures of each legacy firm - or to wipe the slate clean and adopt an entirely fresh approach.

While economics and strategic outlooks often lead to initial merger negotiations, a considerable hurdle is the fear of losing an existing firm's culture. Face it, firms differ significantly in their "feel." Some are formal and stuffy, while others are extremely relaxed and informal. Some are committed to pro bono, believing we are members of a learned profession with an obligation to give something back to our communities, while others don't even pay lip service to such ideals.

The importance of the firm's atmosphere should not be underestimated. In a rare "merger of equals," when Piper Marbury and Rudnick & Wolfe merged, there was much talk about the "conservative, genteel, white shoe" Piper merging with the "hungry, aggressive, street-smart" Rudnick. Several observers predicted problems would result from the anticipated culture clash. Fortunately for us in the new Piper Marbury Rudnick & Wolfe firm, these problems failed to materialize.

It is becoming increasingly difficult to remain an island in a sea of law-firm mergers. This sea change is occurring within the legal profession worldwide. The movement toward large, multiple-office, "one-stop shopping" law firms is convincing even previously reluctant firms to at least give serious consideration to merging with or acquiring other firms. In order to avoid becoming a castaway, rudderless and adrift in the legal marketplace, many experts believe the law firm of the new millennium must be able to deal with multi-jurisdictional transactions, technological advances, an ever more complex world, and the "surges" that occur when a major client's activities require many lawyers with different areas of expertise to work on a matter at one time and on short notice.

For those of us in private practice, this trend can be good or bad. Larger firms can easily become more institutional and less personal - but that need not be the case. (I know of a managing partner at one of the nation's largest firms who personally calls each firm employee with a greeting on the employee's birthday.) For all but boutique lawyers, the question seems to be becoming, how can we use the growth and increased "risk capital" that comes with it to create a law firm that is institutionally positioned to better serve its clients, community, partners, associates and staff?
Get ready for the next vote.

Bedke is a partner at Piper Marbury Rudnick & Wolfe LLP in Tampa, Fla. His e-mail is michael.bedke@piperrudnick.com.