What mergers can’t achieve

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Back in my university days, I remember walking past the Graduate Students Office and seeing a photocopied diagram taped to the door. It was called “The Doctoral Candidate Flowchart,” and it provided a series of turns and directions for graduates struggling to get their thesis finally completed. My favourite entry on the flowchart was in the “Delaying Tactics” stream, a box that sent the user back up to the top to start again. The box was labelled: “Read another book.”

I thought of the Doctoral Candidate Flowchart after seeing all the recent reports of real or suggested law firm mergers in the US and UK, because it occurred to me that just as grad students read another book when they don’t know what else to do, many law firms start talking merger when they’re not sure how else to facilitate growth. After a banner year for mergers in 2011, we can expect, as my Edge colleague Ed Wesemann points out, much more of the same in 2012. But Ed, who has facilitated many such mergers, will tell you that he’s proudest of the ones he helped discourage because they would have come to a sorry end. More firms should reflect seriously on that.

Interestingly, the latest round of breathless merger speculation in the legal press is starting to give way to more skepticism. Alex Novarese doubts that cultural fit and business case no longer matter as much sheer size in merger calculations. Ron Friedmann asks a pertinent question: in what ways do merged firms demonstrably deliver greater benefits to clients than their smaller antecedents? And most significantly, we should all ask: do mergers produce stronger firms? SNR Denton, to take one example, is a transatlantic giant born of a merger two years ago, yet its UK arm suffered a 40% profit drop last year; nonetheless, it’s on the merger trail again.

Don’t get me wrong: many law firms mergers make eminent sense and create real growth. But others do not and will not. And in any event, I think all the merger talk right now might be distracting us from the main event, which is taking place in other settings altogether. Let me suggest four developments in the global legal marketplace in the last couple of months that I think are more important than the latest elephant mating dance.

  • One merger that really matters: King & Wood Mallesons, the Sino-Australian giant whose emergence has caused barely a ripple among many legal market observers. But this colossal firm, Asia’s largest with almost 2,200 lawyers, looks better positioned than any global incumbent to generate real business opportunities in southeast Asia and Oceania, if not beyond. And Mallesons, before the merger, was the most innovative law firm in the world. Are they a threat to the AmLaw 100? Not today; but they’re looking much farther down the road than today, something that’s true of very few AmLaw 100 firms.
  • Another Australian invasion: the outright purchase by Slater & Gordon, the world’s first publicly traded law firm, of national British firm Russell Jones & Walker for an eye-opening £54 million. Not incidentally, RJW is the owner of Claims Direct, a slick and highly effective public portal for personal injury claims, and I’d not be surprised if Slater & Gordon considered that to be the jewel in the crown it just acquired. (See this acute analysis of the deal by Edge’s Sean Larkan and Chris Bull.)
  • Along with the RJW move, two other transactions under the finally-active Alternative Business Structures provisions of the UK’s Legal Services Act: technology and outsourcing company Quindell Portfolio bought personal injury law firm Silverbeck Rymer for £19.3 million, and private equity firm Duke Street shelled out as much as £50 million for majority ownership of Parabis Group, parent company of insurance litigation firms Plexus Law and Cogent Law. That’s almost £125 million in two weeks’ worth of law firm shopping, for those of you keeping score at home.
  • Finally, a move that’s not a merger but still matters: Nixon Peabody’s announcement that it’s retaining Thomson Reuters’ LPO division Pangea3 as its preferred provider of e-discovery services. You might remember a time when large US law firms wouldn’t even acknowledge the existence of LPOs, let alone suggest they might work with them. This is a tacit acknowledgement by a major American firm that much work previously performed by lawyers can no longer be done profitably by lawyers, which is absolutely correct. Nixon Peabody has broken the ice: expect similar announcements from other firms in future, and expect this relationship to evolve past e-discovery.

LPOs, private equity shops, publicly traded law firms and Sino-Australian giants are no longer theoretical participants in a future legal market. They’re here, they’re real, they’re sitting at the same table as (or partnering with) traditional law firms, and most importantly, they’re outsiders. They don’t carry all or most of the habits, assumptions and baggage of the traditional Anglo-American law firm, which leaves them free to be as aggressive, disruptive or innovative as they like. They think the future legal market belongs to those who approach and engage it differently. I think they’re right.

The fatal flaw of all market incumbents is a failure of imagination, the inability to perceive that what they currently do could be done differently and better by someone else. Many law firms eager to merge and expand seem to believe they’re still competing against other law firms in a market suffering a temporary downturn, and that size and reach are the cures for what ails them. I think they’re mistaken. They’re actually competing against new models, new approaches and new attitudes, in a market that has started to evolve beyond them. Size and reach alone simply aren’t going to be adequate responses to that.

Jordan Furlong delivers dynamic and thought-provoking presentations to law firms and legal organizations throughout North America on how to survive and profit from the extraordinary changes underway in the legal services marketplace. He is a partner with Edge International and a senior consultant with Stem Legal Web Enterprises.

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