Law Review: The ins and outs of law-firm mergers

Robert Denney, a business and law-firm consultant from Wayne, says the path to a merger or acquisition is strewn with potential land mines.
Robert Denney, a business and law-firm consultant from Wayne, says the path to a merger or acquisition is strewn with potential land mines. (DAVID FONDA)
Posted: May 17, 2011

It took the Haddonfield law firm of Archer & Greiner P.C. nearly five years of painstaking research and negotiation before landing a long-desired merger partner in North Jersey, a deal completed May 2 when the two firms officially combined.

The merger in a single stroke boosted the firm's lawyer head count 20 percent to slightly more than 200, no small accomplishment in an economy that so far is managing only an anemic recovery.

And that is what makes the Archer & Greiner merger interesting: It's not so much that some firms are growing, but how and why they are pulling it off.

Law-firm mergers on a national basis began to tick upward for the first time in years in the fourth quarter of 2010, and the results for the first quarter of this year suggest a continuing recovery.

But the overall trend is down.

Four years ago, when the legal marketplace still was booming, there were 60 law-firm mergers and acquisitions nationally, says the Newtown Square legal-consulting firm Altman Weil Inc.

Last year, despite the fourth-quarter increase, there were just 39.

And while the mergers of a few years ago reflected exuberance over what seemed like an endless gusher of legal revenue, the current mergers have a more strategic feel. Simply opening an office and waiting for clients to walk through the door isn't going to work when legal revenue is flat.

"That is the field-of-dreams approach," says Archer & Greiner president Christopher Gibson.

Build it and they will come - except in this market, they probably won't.

So while some law firms are growing, they are doing it mostly by absorbing existing business. This is happening most noticeably among larger firms such as Archer & Greiner, which merged with Herten, Burstein, Sheridan, Cevasco, Bottinelli, Litt & Harz L.L.C. on May 2. It concluded an earlier merger in January 2009 with Pelino & Lentz, expanding Archer & Greiner's Philadelphia office to 32 lawyers.

But it is also occurring on a more granular level, with firms, sometimes very large ones, picking up single lawyers or small groups with very big and prosperous practices.

These hires typically don't make news, but they do bring in business. Law-firm leaders say they get calls all the time about lawyers seeking to make a jump. Very often, these lawyers will not be hired because they can't bring clients with them.

"I asked, how much of that [the business] is portable," said Howard Maycon, the managing partner in Cozen O'Connor's Los Angeles office, when he was approached recently about a lawyer seeking to join the firm.

"Firms can no longer count on an expanding legal market for growth," says business and law-firm consultant Robert Denney of Wayne. "This means they must obtain a larger share of a flat or even shrinking market by obtaining business from other firms. And one way to obtain business is by merging, or acquiring other firms, or at least an entire practice group."

It all sounds very nice, but Denney points out the path to a merger or acquisition is strewn with potential land mines.

Denney advised two firms on a merger more than a decade ago and concluded after looking at their books and interviewing partners that the deal, if it were to happen, could be disastrous. The main problem was that partners at one firm were booking 1,400 chargeable hours a year, while partners at the other were putting in 1,800 hours. Partners at one firm were making a whole lot more than partners at the other.

Denney knew this was a recipe for distrust and ill will. Sure enough, he got a call two years later from one of the lawyers at the merged firm asking how they might be able to unwind the deal, which they eventually did.

There are all sorts of reasons firms might not be able to make a go of it, Denney says.

There may be conflicts in legal representations that could force one or the other firm to drop a major client. Several years ago, before the Center City firm Wolf Block L.L.P. collapsed, the firm had engaged in talks over many months with the large Florida firm of Akerman Senterfitt.

The talks stumbled over, among other things, one such conflict issue.

Denney says firms can also find conflict over economic issues. One has a fully funded pension plan and another does not, for example. Or they may have vastly different practices - one firm focuses on exceedingly sophisticated, time-consuming, and costly litigation with a huge bottom-line impact; the other does more routinized, commodity-style work that does not command premium rates.

A deal can be blocked by one particularly influential partner with rainmaker status who doesn't like the idea. Even stranger, Denney says the deal-breaker in a number of mergers has been a disagreement over what the name of the new firm will be.

Gibson, of Archer & Greiner, said no red flags emerged during the firm's evaluation of the merger plan; rather, he said, the firms were well-matched economically and in business style and practice areas.

No doubt, Archer & Greiner and its merger partner were mindful of the potential downsides.

With so much at stake, it only makes sense.


Contact staff writer Chris Mondics at 215-854-5957 or cmondics@phillynews.com.

 

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