Law.com: Should I Stay or Go? 8 Questions Partners Facing a Merger Need to Answer
This article by Melinda Wallman, a partner in Macrae’s London office, was published in The American Lawyer on August 28, 2023.
With all the mergers—or potential mergers—taking place this year, what key factors should lawyers consider when deciding whether to remain at their firm or move on?
It’s too soon to say if 2023 will be “the year of the merger” (or “the year firms attempted to merge,” given that some serious Big Law talks have been called off and Allen & Overy’s tie-up with Shearman & Sterling has yet to be finalized). But we can expect to see continued consolidation as Am Law 100 firms seeking a competitive edge—and, in many cases, a stronger geographic footprint—pick up smaller firms striving to scale up. Among the more than two dozen mergers so far this year are Orrick’s with Washington, D.C. firm Buckley; Clyde & Co.’s with Boston boutique Hermes Netburn and Eversheds Sutherland’s recently announced tie-up with King & Wood Mallesons. Numerous smaller firms have likewise expanded their footprint.
If you are a partner in a firm facing a potential merger, it is vital to consider early on how the deal could impact you. What will it mean for your practice, for your team and for your career trajectory, and for you personally? Will you now have more opportunities—and runway for success—or more hurdles? Should you stay or should you go? Before you sign a lock-up agreement, which typically bind partners to firms for up to several years post-completion of the merger—and even longer in some cases—savvy partners should consider these eight questions.
1. Will I run into client or practice conflicts?
While significant client conflicts among firms who represent industry competitors would prevent merger talks from getting off the ground—think Airbus and Boeing—all law firm mergers result in some client conflicts. When a partner in one firm is acting on the other side of a matter of the combining firm, they are often required to refer that matter elsewhere. The risk is that they will lose their client, so partners often prefer to go with their matter to a different firm. Client conflicts are the number one reason for lawyers to depart ahead of a merger.
Practice conflicts also lead to partner departures. These occur when certain practices in the merging entities are adverse to one another. For example, if one firm’s leveraged finance team acts for sponsors and the other for designated lenders, or one firm’s international arbitration team acts for states and the other for claimants.
2. What is the strategy behind the merger and does it make sense?
Strategy is a plan of action designed to achieve a long-term or overall plan. Though some would say otherwise, a merger is not a strategy—it is a way to execute on a strategy. When the merger firm includes a team that incumbent partners in the same or adjacent practice areas do not think makes strategic sense, the incumbents often decamp. Sometimes entire offices defect. For example, when Morgan Lewis & Bockius merged with Bingham McCutchen in 2014, Bingham’s London and Frankfurt partners left for Akin Gump Strauss Hauer & Feld. Whether that move was driven by strategy, brand, culture, financial fit or some combination of them is unclear, but their decision seems to have been the right one as most of them remain at Akin Gump today.
3. How will my clients view the new brand?
Give some thought to how your clients will react to the merger. Will your firm’s brand be diminished, enhanced or remain unchanged in their eyes? The Hogan & Hartson and Lovells merger in 2010 was not a brand-changer—both firms were well-known for their strong disputes and regulatory practices. Perhaps that is one reason it is considered to have been a success. Branding can be generic or specific to a practice or region. This consideration becomes a game-changer when partners perceive their new partners to be of a different quality from themselves and their current referral firms. Rather than risk losing their clients by terminating a steady cross-referral relationship in favor of an acquired team they don’t rate, partners often prefer to move their clients and teams elsewhere.
4. Will there be more opportunities to refer clients to new parts of the firm and will I receive more referral work?
When the quality of the new firm is consistent with that of the current firm and when quality is consistent across new practices and geographies, mergers create increased client referral opportunities. Quality is not the only issue here. You should also consider credit and culture. Partners will only truly benefit from the expanded capability if they perceive their new partners to have the right experience and client management skills to take good care of their clients. Inevitably, they will also want to ensure that their own client relationships are protected and that there are appropriate incentives in place to encourage them to refer, expand and embed the relationship across the merged firm. On the flipside, will there be fewer opportunities to export or import work from other partners? Will the flow of business from other parts of your firm be put in jeopardy because the firm you’re merging with has partners whose practices mirror your own?
5. Does it make financial sense?
The analysis required here is similar to that which recruiters carry out with every lateral partner candidate. Will your rates fit the new firm? How strict will the firm be about discounts? What are the hours targets for you and for your team? Ensure that you’re comfortable with these metrics and how they could impact your practice. Equally importantly, consider how the tie-up could impact your compensation. First, how will the new compensation system work more broadly? Many U.K. firms that have merged with U.S. or Australian firms have transitioned from traditional lockstep to a merit-based compensation system. This works for some partners but not all, not just because of the impact on personal compensation but also because of the cultural impact. Second, take a look at how the merger might change your cash flow. U.K. firms generally operate on an accrual system in which partner compensation is deferred for up to 18 months; U.S. firms generally operate on a cash basis and pay out each year’s compensation completely by the middle of the following year.
6. How will the merger impact my team?
Associate compensation is a significant issue in law firm mergers, as it is in any lateral move. Lateral partners quickly dismiss firms that can’t match their associates’ compensation unless a special deal can be put in place for their team. That, of course, has cultural implications which may outweigh the benefit. Partners also need to consider how the staffing system will impact their team. Is it free-market in which you can choose your own associates, or are they chosen for you by a central management system? Also, what will competition for partner promotions be at the combined firm—will associates aiming to join the partnership in the near future find their career trajectory has changed?
7. How will the culture change?
Assuming your firm’s culture is a significant reason you’re still there, consider how many of the things you like about your firm can be maintained in a merger. If you go from being part of a small or mid-sized firm to one of the world’s largest firms overnight, you might expect significant culture shock. However, what matters more than size when it comes to shaping a combined firm’s culture is how the firm handles governance and compensation. Does the way the merger firm governs differ from your current firm and, if so, how will key decisions be made and implemented? Who will the leadership team be? At the end of the day, the management system often proves less important than who comprises the management team. How diverse is the leadership team? Is it representative of the firm’s demography? Do you trust them? In the COVID era, another key cultural differentiator has become how firms approach hybrid work. If your firm has a generous flexible working policy and the merger firm has implemented a strict return-to-office policy, where will that leave you (and your home office), and your team? If you’re a woman or diverse partner, does the merger firm have a similar—or better—reputation for its treatment of diverse lawyers?
8. How quickly do I need to act?
Historically, I’ve advised partners to lift their heads above the parapet once a year to take a good, hard look at their careers. Are you engaged, happy and fulfilling your goals at your current firm? Are you riding the right horse to get to whatever your destination is? Given the merger talks—both rumored and real these days—taking stock even more frequently will help you stay one step ahead and be ready to act quickly if necessary. You should also be keeping a close eye on the relative performance and trajectory of your firm in the market. Has your firm been losing rainmakers? Groups? Has its reputation changed since you joined, and is that a good thing? Talking to a recruiter with keen market expertise can help keep you up to speed. If your firm goes into freefall or is about to merge, the process can happen in a flash. If you decide to leave, then you want to be a first mover. If you wait too long, unless you run a high impact team that will come with you, it may be hard to get attention in the lateral market. Law firm lateral hiring teams have only so much bandwidth so being ready and responsive are key.
If, after considering the questions above, you decide to stay put for now, your best bet is to throw yourself into the merger. Do all you can to make it work. There is nothing worse than being a disengaged bystander—it’s one sure way to make you, your clients and your colleagues unhappy. The risk of staying in this case is often greater than the risk of joining a healthy, stable firm that is a strategic, cultural and financial fit. So, go all in, but stay informed not only internally but externally by routinely speaking to your external personal “board of directors,” which should include at least one experienced recruiter. Should the combined firm turn out to be less than what you’d hoped for, you’ll be ready to act.