T.J.L.U. – Sufficient Motivation for a Merger?

When a law firm leader is asked why his or her firm is considering a merger with a particular firm, the most common answer you hear is, “They’re just like us.”  It’s probably human nature to seek out kindred spirits, and certainly dealing with people who share your values and have a similar history is comforting.  But, T.J.L.U. is probably not sufficient motivation for a merger.  In fact, firms might be better off seeking merger partners who aren’t at all like themselves.

A couple of months ago I was engaged to advise a mid-sized Midwestern firm that was considering a merger with a similarly sized firm in another Midwestern city.  In the initial phone call the managing partner told me that they had already had several meetings and, “This is a marriage made in heaven – they’re just like us.”  But, as we discussed the respective practices and client bases of the firms, we found general similarities (they both had large general commercial litigation practices and declining transactional practices) but no specific areas of strength on which to build a position of post-merger dominance.  They were similar to the extent that neither had any appreciable IP or bankruptcy practices, so they really didn’t do much to fill each other’s holes.

It turned out that T.J.L.U. meant four things:  (1) they were largely managed on a consensus basis with issues rarely coming to a vote that weren’t unanimously approved; (2) both of their compensation systems were subjective but generally based on statistical performance; (3) they were both experiencing flat revenues and profitability and (4) their respective partners where genuinely nice people.

We spent a lot of time looking for synergies and common strengths to build a merger rationale on but we kept coming back to the fact that they were mirror image firms operating in two similar but unrelated marketplaces.  Putting them together would have created a very homogenous firm that was twice as big but did not do anything to address the firms’ revenue or profitability issues.  Despite T.J.L.U., they decided not to merge but created a “best friends” relationship (I confess to taking as much pride in the mergers I’m involved in that don’t go through as those that do).

Law firms often place too much value on compatibility, especially cultural compatibility, when considering mergers.  The most successful law firm mergers involve creating a successor firm that is stronger and has greater opportunities than either of the parties had individually – the old 2 plus 2 equals 5.  And usually, creating strength and opportunities requires some level of diversity among the participants.

For example, a common motivation for midsized firms to consider merging with a larger firm is to obtain stronger leadership.  Often these firms have profitability problems based on having too many underproductive equity and non-equity partners.  They believe it is necessary to solve the problem but their culture won’t allow them to take effective action.  Their hope is that the larger firm will have the management strength to do what they can’t do themselves.  But then they judge potential merger partners on the similarity of their cultures and profitability, all but guaranteeing that the merged firm would have all the same problems with no greater capability of solving them.

Two basic truths about T.J.L.U.  First, most law firms are not that different from each other.  Oh, there are differences at the fringes.  Geography plays a role and certainly Eastern law firms are different from Midwestern law firms and Texas law firms have decidedly different cultures than, say, Los Angeles firms.  And firms with strong litigation practices tend to manage themselves a little differently than transactionally oriented firms.   But, on balance, law firms are populated by extremely bright, hard working people who are, by and large, a very convivial group.   Second, law firms’ judgments about T.J.L.U. are typically based on very short, highly structured visitations – cocktail mixers among the partners, joint practice group conference calls and ad hoc luncheons among partners.  As one partner said to me, “I know more about my barber than I do the people I’m about to merge my business with.”

Now, don’t get me wrong.  I’m not suggesting two-year courtships or getting everyone around a campfire to sing Kumbyah.  And neither am I suggesting that nice docile partnerships go looking for mergers in a shark tank.  Instead, consider the following:

1.    Focus initial merger partner selection and early discussions on creating strategic advantages – creating positions of real practice or industry dominance; expanding the breadth of services offered to your clients; moving into a location where you can expand the representation of your clients, etc.  Don’t say a word about governance, compensation or finances in your first meeting.

2.    Think about T.J.L.U. as a red flag.  If you and your potential merger partners are really that similar, what do you accomplish by being a bigger version of yourself?

3.    Study each other’s cultures looking for areas of difference rather than similarities.  Do those differences create conflict or complement each other?

Just don’t get sucked into the belief that, “They’re just like us” is, in itself, a rationale for a merger.