There seems to be no decrease in law firm
enthusiasm for mergers, despite continuing turbulent times. According to Hildebrandt Institute’s
MergerWatch, law firm mergers jumped by 67 percent in 2011, and are expected to
rise again in 2012. Certainly activity
in the first half of the year seems to point to another busy year.
However, it has always
been difficult to get any hard evidence of how successful merger strategies are
in practice. My own informal study of
publicly available information is that whilst mergers are often successful in
assisting with the achievement of an over-arching strategic objective (such as
the need to gain access to new geographical locations, or new service lines, or
to raise the profile of a brand), it is much more difficult to demonstrate
success on the bottom line and many firms seem to have a period of a few years
where profits remain in the doldrums for a few years post-merger. In many ways this is not entirely surprising,
as it is in the nature of businesses which essentially sell professional time
that scale does not necessarily equal greater profit. If you
accept David Maister’s well known formula, which says profit per partner (PEP) is
a function of utilization X charge-out rate X leverage X margin, then none of
these are likely to be significantly impacted by a merger. Few mergers fundamentally
change the ratio of partners to fee earners, or enable big hikes in charge-out
rates. It is true to say that there are
a degree of cost synergy savings in some mergers with the elimination of
back-office duplication, but these tend to be relatively modest and are often
offset in the early years by the additional costs of the integration exercise
itself. The best mergers do lead to an
increase in combined revenues, but turning it into an increase in PEP is a much
greater challenge.
A good example of this is
likely to be Clyde & Co¸ which has
achieved the phenomenal achievement of a 36% hike in revenue (to £287 million) so
far this year, following its merger with Barlow Lyde & Gilbert in November
2011. This makes it currently the
fastest revenue growing firm in the UK top 50, and even when the revenue
contribution from Barlows is stripped out, like-for-like revenues at Clydes grew
17% - impressive growth by any standards.
It appears that a lot of the growth has come from the firm’s non-UK
operations, which seems to suggest that the course of internationalisation that
they have embarked upon is resulting in a rapidly increasing market share - so
clearly Clydes’ strategy is working in that regard.
However, there is likely to be a lull before
that translates into increased partner earnings, if indeed it does so. Profits
have not yet been announced by Clydes but whilst absolute profit is expected to
have increased at the group, PEP is widely expected to have declined over the
same period, perhaps by 10%. This
reflects the relatively high costs of opening new offices, and having to place a
relatively high proportion of senior people there in advance of the work flows. Despite this, Clydes certainly seem to be
happy to stick with the expansionist plan - earlier this week they announced
new office openings set to happen in Sydney and Perth, which is an indicator
that they are happy to bear a short term dip in personal earnings to achieve a
longer term strategic objective.
The prospects of Clydes recovering any temporary
loss of PEP seem to me to be very good in the medium term, as newer
international offices gain scale and the proportionate costs of supporting them
and the integration effort reduces. However,
it would in my view be misguided to think that the PEP will ever increase at
anything like the same rate as the revenue line, unless there is a fundamental
rethink of the basic principles of running a law firm, so that Maister’s
formula is truly challenged (perhaps for example, by following the bold steps
of Riverview Law, and breaking the direct linkage between hours worked and the
bill levied).
So by what measure should we measure the
success of a law firm merger? That is a
long and complex question. There are, as I said, many things which can indeed
by achieved by a merger – brand awareness, geographical footprint, sector
expertise, and sometimes even just the protection of a market share which is
likely to be eroded if a firm isn’t seem to be moving forwards and
developing. However, if the number one
strategic aim of a merger is an increase in PEP, then that is quite a tough nut
to crack.
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