2011 Banner Year for Mergers

Much has been written about 2011 being a banner year for mergers including articles in the Wall Street Journal and the American Lawyer.  It is true that there were somewhere around 60 mergers involving U.S. firms last year and that represents a 54 percent increase from 2010.  But this may be much ado about relatively little substance.

Indeed, more than half the reported mergers involved situations in which one or both of the firms had less than 10 lawyers.  In fact, only eight of the 60 mergers involved two firms of significant size, i.e., where both firms were over 50 lawyers.  However, several of these mergers provide a fascinating insight into the strategic trends that large law firms are pursuing.

One change from past years is the growth in the number of national mergers as compared the  greater focus in prior years on regional mergers (regional being defined as between firms in contiguous states).

Mergers of Equals
There were only two mergers of relatively equally sized firms in 2011.  The merger of 450 lawyer Faegre & Benson and 300 lawyer Baker & Daniels appears to represent more than the classic geographic expansion strategy.  Faegre is headquartered in Minneapolis where it is in a tightly fought war of dominance with Dorsey & Whitney.  Faegre has carefully pursued a strategy of dominance with its only other major office being in Denver where Faegre shares a position of dominance with Holland & Hart.  Baker & Daniels enjoys shared dominance in its headquarters city with Barnes & Thornburg and Ice Miller.  As a result, Faegre Baker Daniels enjoys a dominant position in three geographic markets that have experienced among the most growth in legal service revenues during this decade.

What does FBD do for an encore?  Both firms have a strong focus on China and Faegre supports a small London office so their attention may be focused internationally for the near future.  But, with the combined firm’s corporate transactional strength, a presence in a capital market more significant than their 34 lawyer Chicago outpost would make sense.  Unfortunately, their combined mediocre PPEP could make them a candidate for a domestic separate profit pool merger.

The other merger of equals involved 130 lawyer Bingham McHale and 117 lawyer Greenebaum Doll & McDonald.  This merger would appear to be as much about creating critical mass as about geography or a particular practice synergy.  Both firms are comparatively small to compete in their respective markets and likely hear questions about capability and depth from their most important clients.  Together they will have almost 250 lawyers and likely rank on the AmLaw 200 and other national listings.   Since they have achieved critical mass, their best focus for future mergers would be to gain practice strength in both offices to enhance their position in Indianapolis and Louisville as their competitors are distracted with geographic expansion.

Large Acquisitions
Mergers are often mislabeled as acquisitions.  However, because no capital changes hands and no acquisition price is paid by the acquiring firm, the term refers to the fact that one firm dominates the consolidation.  There were two such acquisitions involving larger firms in 2011.

Bryan Cave with 900 lawyers merged with 160 lawyer Holme Roberts.  This follows Bryan Cave’s strategy of creating a national practice by entering new legal markets through mergers with larger firms that are well respected but are having difficulty competing against larger national firms in their markets.  A couple of years ago they entered Atlanta in a strong way through their merger with Powell Goldstein.  Bryan Cave offers an attractive national strategy, a strong leadership team and good record of profitability growth.  It is a strategy that is working well for them and they are likely to continue to expand as a top quality national firm.

Using almost an identical geographic strategy, Edwards Angell Palmer & Dodge (500 lawyers) merged with 160 lawyer Wildman Harrold Allen & Dixon of Chicago. Apparently Edwards Angell sought a strong Chicago presence to fill out their national profile and got Wildman’s nice LA entertainment practice in the bargain.  Increasingly, large acquisitions (like Bryan Cave above) look heavily one sided in favor of the larger firm.  This is especially true in situations where the acquired firm is viewed by the marketplace as being in trouble (Wildman has been steadily losing partners to other Chicago firms).  But, in this case, Edwards Angell bent over backwards to give this the trappings of a merger.  The consolidated firm will be known as Edwards Wildman Palmer and the Wildman’s Managing Partner, Robert Shuftan, will carry the titles of Deputy Managing Partner and Chair of the Strategic Planning Committee.

Midsized Acquisitions
The merger of 700 lawyer Arnold & Porter with 82 lawyer Howard Rice Nemerovski Canady Falk & Rabkin is a perfect example of two firm’s strategies coming together.  Arnold & Porter sought to develop a stronger presence in Northern California than they have been able to create with laterals and small mergers.  Meanwhile, Howard Rice wanted to develop new capabilities that would help them compete in the increasingly competitive San Francisco market.  However, to gain consensus among a partnership that had little interest in being acquired, Howard Rice would need to find a merger partner that would provide an exceptional quality and depth of practice.  By shedding underperforming partners and focusing themselves on their practice strengths, Howard Rice was able to attract A&P, a firm that has traditionally avoided even considering mergers.  A win-win for both firms.

But even the best merger strategies can be tough to accomplish.  Jones Walker with 300 lawyers in Louisiana, Texas and Alabama needed a Mississippi capability to complete its strategic of being the dominant Gulf Coast law firm.  With 65 lawyers in three Mississippi locations, Watkins Ludlam Winter & Stennis appeared to be an ideal merger partner.  Unfortunately, two former partners who claim they were carved out of the merged firm have sued and, while Jones Walker is not a party to the suit, it will be an unnecessary distraction that could blunt the business development value of the merger.

Perhaps the most common merger strategy, especially with acquisitions, is to expand within a region.  Indanapolis’ 225 lawyer Ice Miller’s acquisition of 90 lawyer Schottenstein Zox & Dunn, with offices in Columbus and Cleveland, is a logical move to a contiguous state.  A regional merger has been part of Ice Miller’s strategy for years but the firm’s extremely conservative culture has lead to a number of false starts.  Although relatively safe and easy to assimilate, the problem with regional expansion is the new lawyers are so nearby that the market views it as a non-event making generation of publicity and client synergies difficult.  Nevertheless, it is a much needed merger success for Ice Miller with a well thought of neighbor.

International Affiliations
The creation of Swiss Vereins is permitting unprecedented international growth of law firms.  A Swiss Verein (“Verein” is German for “Association”) permits firms to function as a single entity while not pooling revenues or sharing liability.  As a result, the issues of differing profitability and partner compensation systems are not a factor, making mergers easier to negotiate but more easily dissolved.

An example of the growth that is occurring using the Swiss Verein is Norton Rose which merged in 2011 with Canada’s 450 lawyer Ogilvy Renault and 270 lawyer McCloud Dixon, Australia’s 400 lawyer Deacons and South Africa’s 230 lawyer Deneys Reitz.  This creates a combined firm with almost 3,000 lawyers in 43 offices on six continents.

However, the merger with the greatest impact may be China’s largest firm, King & Wood’s, announced consolidation with Australia’s Mallesons Stephen Jaques.  The two giants will have a combined total of almost 2200 lawyers including being the largest law firm in Australia and the China, and having offices in Tokyo, New York, the Silicon Valley and London.  Since China is Australia’s largest trading partner the firm will be a natural choice for Chinese companies.  Of course, the strategy is to become the firm of choice for all companies seeking to do business in China.

Mergers in 2012
I was quoted last week in the Wall Street Journal as predicting 50 significant mergers in 2011 (in my defense, I figured no one will remember if I’m wrong and I’ll look like a genius if it turns out to be correct).  On balance, however, I believe the projection is, if anything, conservative.  My reasoning involves three factors that I think will drive the more active consolidation of law firms:
1.    A number of law firms have been hesitant to pursue a merger due to the uncertainty of profitability during a recession.  Firms either hoped to improve their own revenue or feared for the stability of a merger partner.  In the 4th year of the downturn there appears to be greater confidence.
2.    The acceptance of the use of Swiss Vereins for international mergers and the likely loosening of legal practice restrictions in China, India and Brazil will increase the growth of UK and US foreign offices.
3.    The Verein model may drive greater use of merger alternatives in the U.S. where firms will associate in a joint marketing and referral platform but will retain separate profit pools.