Challenges facing law firms growing through mergers & acquisitions

When Louis-Michel Tremblay got word that a boutique firm was looking to jump onto a larger platform, the managing partner of the Montreal office of Miller Thomson LLP leaped on the occasion in less 24 hours and made an appointment to meet for lunch at the prestigious Mont Royal Club.Acting decisively was essential, particularly since the North American legal marketplace is in the midst of consolidating and shrinking, marked by growing competition for small and medium-sized targets at a time when the number of attractive law firms is diminishing.

“When there are opportunities, you have to seize them immediately,” said Tremblay, who is also a member of Miller Thomson’s National Executive Committee. “We’re always on the lookout for small groups of lawyers who can add depth to our different fields of practice.”

Braman Barbacki Moreau fit the bill on all counts – and more. It specialized in three sectors — international real estate investments, tax and estate planning, and commercial litigation — that was strategically important to Miller Thomson, its partners had wealth of experience and worked together for more than two decades, and it had a fine reputation in Montreal’s legal circles.

It also didn’t hurt that from the very first meeting at the renown Montreal business club, “it clicked right away.” And negotiations, points out Tremblay, are to a large degree a people’s game. “When you are on the same wavelength, it is much easier to overcome obstacles that may arise during discussions. In this case it went very smoothly.”

Indeed, so smoothly that a deal was struck in less than two months, with Braman Barbacki Moreau joining the Montreal office of Miller Thomson Pouliot (as it is known in Quebec) as of early September in order to take advantage of the Labour Day weekend to work out kinks that may arise.

Miller Thomson is no stranger to growth through mergers and acquisitions, surging into the national scene as Canada’s ninth largest law firm thanks to no less than six major M&As over the past decade. It now boasts a complement of 430 lawyers working in nine offices across the country. The Montreal office alone will now host 60 lawyers, including some 30-odd partners. “At a certain point, size matters,” said Tremblay. “It is not the only aspect. Size matters not because of size but because of what size can produce as opportunities.”

That’s a harsh reality that the Montreal boutique firm was coming to grips with, particularly in recent years as it was becoming increasingly “starved off” from new client sources who opted for larger firms capable of offering a broad range of services under one roof, said managing partner Fred Braman, who was enticed by Miller Thomson’s reputation as a law firm that operates under a federal system and “not a Toronto office with a bunch of clients in branch plants.”

“Boutique firms are at a competitive disadvantage in the current state of the marketplace, and they are having to make alliances with larger firms or joining larger firms in order to continue the type of practice they are good at,” said Braman.

Even so, most efforts at striking deals in the legal world fall through, at least seven out of 10, according to professional service consultants. “Typically very early on in the process, after serious review of direction and philosophy, people will go on a first date, maybe a second, but rarely a third,” noted Richard Stock, the founding partner of Catalyst Consulting in Toronto.

Deal breakers are plentiful, and it includes all of the key elements behind the operation of a law firm, be it client conflicts, compensation systems, governance structures, practice management or even the firm’s name. Cultural divergences, though, tends to be a daunting hurdle to overcome.

“The tough part of cultures is that it’s tough to even define what a law firm’s culture is,” explained Michael Short, a consultant with Hildebrandt International professional consulting services. “It is a mix of very complex attitudes, behaviors and perceptions. And combining this blend with another firm’s, which is perhaps very different, can be quite a challenge.”

Because it is a costly endeavor to lay the groundwork for a deal and exceedingly challenging to prevail over  the obstacles, Short says it is essential that law firms contemplating growth through M&As avoid implementing a strategy that calls for growing for growth sakes as it has been “proven time and time again” that it is a surefire recipe for disaster. Growth initiatives should instead be driven by a need to compliment or supplement services to clients, either by increasing depth in practice areas and offices, adding specialized capabilities, or in some cases, extending geographic reach.

In short, a strong business case must be developed before proceeding with an M&A. And it should plainly demonstrate that neither of the firm’s would be able to achieve what the business case contemplates for in the newly combined law firm.

“A compelling business case must be made that addresses all of the details, as lawyers do for their clients,” said Short. “They have to bring those same skills and focus to their internal transactions.”

That same focus must also be brought to the forefront when integrating a firm, according to Alastair Mills-McEwan of Flare Consulting. Integrating two professional service organizations is always challenging,  more so the bigger the transaction. Amalgamating different infrastructures – such accounting and information technology systems, practice group operations and governance structures — in order to establish seamless service can be difficult, costly, and time-consuming. But it is a necessary exercise, and one that needs to be undertaken as quickly as possible, says Mills-McEwan.

“Merger integration needs to be quick if it is effective, and it is doubly important in law firms because time is money,” said Mills-McEwan. “And the thing that costs a lot of money is running a project for a long time. But more importantly, if integration doesn’t start and completed as much as possible within 90 days, then it will just wither away or run on the fringes. Eventually business as usual takes over, the sense of urgency disappears —  and you have failed to maximize the value you could have gotten from the merger or acquisition.”

But just as law firms have become adept at crafting growth strategies and more proficient at evaluating opportunities, they have also become adroit at integration. “The first one is difficult, the second one little bit less, and then they become quite adept at it,” said Short.

That certainly seems to be the case with Miller Thomson. In fact, it has already begun integrating Braman Barbacki Moreau into its Montreal office, having met several times with the personnel – all told, six lawyers – to put them at ease and to explain the reasons behind the move. Miller Thomson has also begun taking measures to ensure that infrastructure components are compatible. Further, financial and communication benchmarks have established.

“Over the next 12 months we will measure the level of communication and interactions between the new members and the firm,” said Tremblay. “One measure is through docket times. Another is if we are able to do things we would not have been able to do before the joining of the forces.”

Braman and his colleagues face another set of challenges. Besides having to adapt to a new environment, with new offices, and new faces, Braman must ensure that his clients do not feel left out.

“The challenge we face is to make sure that our clients feel we haven’t sold our practice because we haven’t,” said Braman. “We are continuing our practice, somewhere else. We have to make them feel that the responsiveness of the firm is going to be the same or better, and that our rates are not going to be increased. So far, so good.”

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