White Knight Mergers

Lawyers earn their living by advising clients on how to minimize risk.  Not surprisingly, therefore, risk adversity is a driving influence in many law firms’ management decision making.  So, when considering merger opportunities, firms have typically focused on merger partners that represent the least risk.

For larger firms, minimizing risk means four possible merger strategies.  The first is to acquire a series of small firms that individually do not constitute a significant risk. This is a popular strategy; there have been 32 mergers thus far this year where one of the firms involved had over 100 lawyers.  In all but two of those mergers the larger firm had at least ten times as many lawyers as the smaller.

A second strategy for avoiding merger risk is to remove uncertainty.  This is typically accomplished by firms seeking merger partners that is a virtually carbon copies of themselves.  They believe that the more similar the culture, practice, size and profitability, the lower the risk.

The third is to find an international merger partner and use a Swiss Verein.  The verein permits firms to “merge” without actually combining finances or assuming each other’s liabilities.  Essentially it is a shared marketing platform that can be disabled at anytime with a minimum of hassle

Finally, risk adverse firms tend to steer clear of mergers with firms that are in any way troubled.  Before their demises, Howery, Dewey LeBoeuf, Coudert Brothers, Heller Ehrman, Thelen, Wolf Block and Thacher Proffitt all attempted to find merger partners to act as a “white knight” and save their firms.  However, for reasons unique to each firm, and the general level of risk aversion by potential partners, they were all unsuccessful.

Of course, there is an element of risk associated with any merger.  Therefore, the justification for a merger involves the determination that the benefits outweigh the risks.  This is especially true for in mergers that involve the rescue of a troubled firm and historically, the firm attempting the rescue doesn’t find sufficient benefit to justify the risk.  But, this year, for the first time, there appears to be a greater acceptance of risk by firms willing to consider a white knight merger.  Last May Squire Sanders seemingly pulled Patton Boggs back from the abyss and apparently Morgan Lewis is about to merge with financially troubled Bingham McCutchen.

It should come as no surprise that as legal markets tighten there will be more troubled firms available.  This provides aggressive firms that have gained workout skills through client engagements the ability to take advantage of growth opportunities.  But, there are distinct differences between acting as a white knight and being a suitor in a normal merger.

1. Cut to the chase.  The normal romancing and cultural niceties that are the starting point of most mergers go out the window.  If the target firm is truly troubled, there simply isn’t enough time to go through the “get to know each other” stage.
2. Get the facts early.  This means reversing the normal merger process and doing the due diligence up front.  This is a good time to bring in the forensic accountants. The process is expensive but everyone needs a clear picture of the real problems that caused the firm’s troubles, and you won’t find them on cash basis financials.
3. Don’t waste a good crisis.  Use the potential merger to get out from under non-qualified pension plans, surplus space, non-strategic offices and, especially, under performing partners.  If you don’t do it while you are cutting the deal, it will never happen.
4. Create ROI objectives up front. Project a best, worst and likely case risk analysis and determine the value of potential benefits.  It is important to not retrofit the benefits to in order to justify the risks.
5. Build communications channels.  Don’t depend on the troubled firm’s current management as your communication conduit.  Those are the guys who got the firm into trouble in the first place.  Make sure you communicate with and have commitment from the partners who control the client relationships.
6. Work off a clear vision.  My wife won’t let me go to Sam’s Club anymore because I keep bringing home things we don’t need just because they are a bargain.  Even if the numbers work, make sure the trouble firm you are looking at represents a strategic fit.