Mergers and/or Acquisitions

There is a lot of talk about mergers and acquisitions but are either of them for you?

A merger is generally acknowledged to be a joining of two or more equals to form a new business. An acquisition on the other hand is the purchase of one business by another larger one. If we accept these simplistic definitions it is easy to see which is which when applied to the many situations law firms are now experiencing.

More important than the definitions are the motives behind either a merger or an acquisition. On the basis that in most situations the firms joining together will not be equal in size, then the rest of this article will deal with acquisitions rather than a marriage of two equals.

What are the motives for the acquirers? Growth in itself is not a sufficient motive unless at least some of the following flow from that growth:-

Economy of scale: This assumes that the combined firm can reduce its fixed costs by sharing resources and avoiding duplicate overheads, thus increasing profit margins.

Diversification: Where one firm has particular skills not present in the other, and vice versa, the benefits of cross selling to the two client bases could be so beneficial as to make the deal worthwhile on this alone.

Geographical: Operating on a broader geographical playing field may have attractions purely based on vanity to see the firm’s name in more distant lights but can also smooth profits that could otherwise be subject to local variable conditions. However, this does not always deliver value to the acquirer.

Resource transfer: Resources are unevenly distributed across firms and the interaction of target and acquiring firm resources can create value through overcoming resource asymmetry or by combining scarce resources.

But what are the motives to being acquired:-

Fear: Is the looming threat of ABS creating a climate of bigger must be better? Previous articles have looked at how to punch above your weight and 24/7 opening hours.

Management skills: It is often the case that firms reach their maximum potential and need better management skills to step up a league. An option for the partners to consider personally is would they be better off as a part of a larger firm or should they recruit those extra managerial skills internally. It may be expected that the larger organisation would bring these extra skills to the table allowing the whole firm to expand in a manageable way.

Partner retirement: How many, albeit successful firms reach a stage when one or more older partners want to retire and the firm does not have the resources to deal with it?

Whatever the motives are in considering a merger or acquisition all parties need to be clear in their personal and firm wide objectives, they need to keep checking that these are being met throughout the process and reconfirm them again before the marriage is finalised, with or without a pre-nup.