Enterprising Entrepreneurship in Legal Profession – Mergers & Acquisition

Conventionally a lawyer or a legal practitioner is an individual certified to give legal advice and to represent clients in disputes before the courts. The practice of lawyers advising businesses in deals and transactions and in complying with law to preempt litigation in future is in historical perspective fairly recent. With the creation of business conglomerates the concept of offering one-stop shop for different legal areas evolved and so did the institution of law firms. In the 21st century with globalization being the mantra for transnational business transactions the evolution of law firms having offices in multiple geographical locations has facilitated the formation of International law firms. Cross-border consolidation of legal business is occurring as evidenced by convergence of law firms vide international mergers, multi-national firms and international law firm networks. Multi-national practices offer new opportunities to serve foreign clients.

General practice firms in major markets are increasingly feeling that 150-300 lawyers is only mid-sized, both from the perspective of clients and recruits. Consequently, many of these firms are exploring expansion opportunities. Many follow aggressive and at times predatory M&A techniques for their expansion and growth. The US and UK led firms have laid a pioneering and innovative benchmarks and industry standards on building and managing large scale law firms.

Today the transnational law firms have business turnover running into hundreds of million dollars and are managed in a professional manner like any Fortune 500 corporations. Many of them hire top class accountants and MBAs to keep abreast with the latest management and financial techniques in constant effort to build a sound ‘brand’ name and create an effective and positive ‘value position’. Since the U.S. Supreme Court’s holding in Bates v. Arizona (1977) wherein the prohibition on commercial advertising of attorneys was lifted, the American law firms have made substantial budgetary allocations for advertising like any other business corporations.

As the size and complexity of the merger transactions increases, a premium needs to be placed on both effective evaluation and implementation of the merger. Merger discussions can place stress on both individuals and organizations. There are few changes in a law firm that are as dramatic as a merger. The key to managing this change is planning, structure and communication. It is pertinent to keep in mind that the legal profession is a service sector and its brand is nothing but the ‘value’ that each ‘individual’ attorney brings to it. Also the valuation of the firms is done on the strength of what each of the partner can bring to his practice vertical. Thus if a few individual attorneys leave the firm, the brand of the firm can be diminished exponentially. This aspect makes the legal business (It could include any other service industry (like consulting, software development and accounting), but for the purpose of this discussion I am only focusing on law firms.) different from other sectors. Consequent to a merger between different firms for a partner at an individual level is that it changes the remuneration policies, lines of authority and the bonus & retirement benefits. But at the professional level, what is considered and vigorously debated is how to synergize the strengths and weaknesses of each firm and whether the firms are culturally compatible.

Another significant issue which hovers over M&A in law firms is of compensation among partners of the firm. Generally two systems are followed- traditional lockstep method and the more competitive scheme of getting a share of income from ones business generation, generally known as the eat-what-you-kill-scheme. Lockstep is a system for paying partners according to how long they have been in the partnership irrespective of their personal contributions to the growth of the business of the firm. Lawyers in the partnership for three years, for example, will all earn the same, even though they may all bring different amounts of work to the firm. But today the management of the firms is making an effort to evolve a hybrid system involving the stability of lockstep and also to reward entrepreneurship among partners, a percentage of the share in the business they generate. This is more so when there are transnational mergers. Like for instance when Clifford Chance of England merged with Roger &Wells of United States in 2000. The enticement offered to the big money making anti-trust attorneys of Roger &Wells was common pooling of antitrust work of Europe and United States, which would remain within the merged entity and lead to more challenging assignments and more business for the merged entity. But the recent exodus of many American partners from this merger suggests that this is one issue that is paramount and needs to be worked on for every partner’s satisfaction.

Creation of transnational law firm by merger involves synergizing of different working cultures. The American law firms are bred in a more competitive and aggressive market oriented approaches than the firms in Britain and India. Thus it is pertinent that there is a wavelength and consonance of thoughts, wherein all the major partners are willing to compromise and adhere to a challenging future and the opportunity of doing cross-border transnational deals by creating a global entity. They have to realize that the merged entity will be penetrating into different areas and this will help them build a stronger relationship with their transnational and multi-product institutional clients. The individuals in many cases have to rise to the occasion and have the ability to think of building a bigger brand. It is significant for the partners to convince their clients that the emergence of the new entity will be of benefit to them too. The use of technology to conduct conflict checks and to take away this power from the partners has to be handled tactfully but assertively. The top to bottom review of the firm’s management structure has to be built and at times the managing partner has to introspect if he has the ability and the tools to handle the pressures of the new job.

The downside of such mergers is that there will be drop-off referrals from other firms, which will have concerns of handling clients over to a major competitor. Tremendous efforts have to be made to build relationships and mutual trust between partners of different branches and locations so as to boost internal client referrals.

There is one area of concern if such mergers are to be incorporated in different cultural settings. When the merger happens between firms of Europe and America there is not much differentiation in working culture and in dollar-euro exchange rates. But it will be a challenging issue, when an International Law firm would like to do an acquisition in a country like India, where the billing is significantly different than the ones adapted by the transnational law firms. The number of Indian law firms that work on the hourly billable cycle are handful whereas that is the norm with the International law firms. The strong sustained growth of the Indian economy and the appetite of Indian businesses to make a presence in the global trade is compelling many International law firms to have a “India Group” practice vertical as at present they are not allowed to set up practices in India. But with India being signatory to General Agreement on Trade in Services (GATS), it is inevitable that the service sector in India will be liberalized. Today the International law firms and multinational companies refer businesses to different local law firms, but like it has happened in the advertising and consulting business most of the multinational companies would like to relocate their work to a one-stop shop and this might fuel the appetite for mergers among law firms.

From the perspective of Indian Law firms, the conventional wisdom is that young firms are not very likely to be targets for a merger or acquisition. But in India the concept of law firm as a professional business entity has acquired significance only since the 1990s. Hence if a firm has built up its organizational structure and its reputation, the likelihood of its being acquired becomes more likely. Indian firms with strong domestic and cross border practice may find themselves inundated with offers.

The greater challenge for an International law firm will be its ability to keep profits per equity partner high and to pay partners in remote locations based on the local billing which may not match the lucrative billing of bigger commercial cities. This will be a key element for effectuating acquisitions in different countries. These were the issues that led to the collapse of Coudert Brothers, a firm with strong fundamentals, which expanded by not laying enough focus on developing strong domestic core practices to feed its global network. It will be pertinent that firms though having a global name will have to develop a strong domestic practice and only then the merger will be successful. For a transnational law firm entering a new market it would be worthwhile business proposition to tie-up with a boutique firm as the fundamentals of relationship and business can be strengthened and gradual exploration of the legal markets can be undertaken. This approach will certainly create a long-lasting brand and effective value positioning both for the local firm and for the International law firm.

Overcoming these challenges may lead to a creation of what can truly be characterized as a Global law firm. But can the sheer integration of global economies create a single law firm having effective offices in different continents is a challenge that many law firms are exploring and only time will be a better witness to its success.