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The Fallacy of Merger Math
In recent months, trade publications have been filled with breathless accounts of the exciting and unprecedented number and nature of law firm mergers, each of which creates a distinct advantage over moribund competitors and, naturally, the financial outlook of each merger is rosy. Two firms with overlapping global footprints have joined forces to take advantage of the obvious synergies; two firms with not a thing in common have joined forces to exploit the obvious opportunities; two firms with fundamentally different compensation systems have joined forces without conflict by embracing a novel corporate form that eliminates the mingling of profits; two firms whose respective client bases are perennial adversaries have joined forces because the combined industry expertise of the merged firm's lawyers will outweigh any potential client conflicts; and so on.
There is always optimism at the inception of a law firm combination, since few partners or clients would embrace a combination positioned as “a last-ditch effort to improve partner compensation when all else has failed.”
If we were to analyze law firm mergers by plotting client satisfaction on one axis and partner satisfaction on the other, the resulting scatter diagram would reflect a surprising few combinations that were deemed satisfactory after the fact to all parties. This isn't limited to law firm combinations; indeed, many corporate mergers go awry for similar reasons such as poor execution, loss of key talent, loss of key clients, boardroom battles, mismatched cultures and failure to achieve financial targets. So why do law firm leaders continue to pursue mergers at such a furious pace? It's a basic law of finance ' when you have eliminated all other drivers to achieve growth but one, leaders will pursue the remaining driver with vigor, and call it a strategy. Let's break this down a little further.
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