Law Firm Mergers: Live and Learn

Once we had decided to seek a merger partner, we systematically examined the New York market. We had preliminary conversations with several other firms, but our search eventually led us to Reid & Priest, which at the time had about 160 lawyers in two offices, New York and Washington, D.C. (By comparison Thelen, Marrin had about 200 lawyers practicing in four offices � San Francisco, San Jose, Los Angeles and New York.)

Combining two large professional services organizations is a complex undertaking involving many important steps, including:

• Preliminary negotiations and due diligence, including possible conflicts of interest. The conflicts examination is critical, because conflicts can and do derail law firm mergers. Fortunately, conflicts were not significant in our transaction, as most issues were resolved in a matter of weeks.
• Serious discussions and negotiations and in-depth due diligence.
• Partner approvals and closing.

Completing these steps takes time. Exploratory conversations between Thelen, Marrin and Reid & Priest first took place in April 1996, but serious discussions did not begin until the third quarter of 1997. Ultimately, partner approvals were obtained in March 1998, and the closing took place on June 30, 1998.

MAKING THE MERGER WORK

In bringing two firms together, it’s critical to understand the difference between “change,” which is the factual differences in life before and after the merger, and “transition,” which is the emotional process that people experience in adjusting to change. Examples of change include new practice departments, leaders, governance structures, policies, partners, strategies, expectations and firm name. Change is important, but it pales in comparison to transition.

Here are some examples:

Firm governance model. We put in place a transitional governance structure for 2 1/2 years after closing, with equal representation from the constituent firms. The purpose was to provide stability during the post-merger period and ensure that important partner constituencies were represented. These goals were achieved, but the price was a balkanized, representative structure that detracted from a one-firm philosophy and preserved pre-existing divisions within the two firms. It’s a price that I would not pay again.

Firm leadership. An eight-member merger committee comprising partners from both firms decided who would occupy key firmwide, office and practice group leadership positions. The advantage of this process was that decisions were made promptly; the disadvantage was that feelings were invariably hurt, and some partners with reduced influence in the new firm became problems for us in the post-merger environment.

Partnership tiers. We combined Thelen, Marrin’s two-tier (equity and partial-equity, all voting) and Reid & Priest’s two-tier (equity and non-voting salaried) partnership structures into what was, in effect, a three-tier Thelen Reid system. This reflected our wish to be fair to all partners by preserving existing partner classes. The downside was the added complexity and inefficiency stemming from too many types of partners. We should have used the merger as an opportunity to create a simpler partnership structure, not a more complex one.

Partner compensation. Here, we adopted the principle that except in “extraordinary” circumstances, the profit participations of each partner would remain unchanged for 18 months after the merger. The advantage of this decision was predictability, allowing ample time after the merger for evaluation of individual partner performance. In hindsight, this was a significant error in judgment. We should have grappled with performance immediately. We failed to anticipate the large number of partners who considered their performance to be “extraordinary” within the meaning of the exception and thus qualified for advancement to a higher profit participation level.

THE UNEXPECTED

Any merger between two large organizations will produce surprises: The Thelen Reid merger was no exception.

• Although relatively less profitable than Thelen, Marrin before the merger, the Reid & Priest component became significantly more profitable immediately after the merger. This was due, in part, to the identification and correction of inefficiencies and underperformance during the merger process. While healthy for the firm overall, this change led to unexpected post-merger tension between partners from the two constituent firms.
• Pre-merger differences between high-value and mid-value Thelen, Marrin practices were exacerbated after the merger as mid-value West Coast practices suffered even more by comparison to the economics of high-value Reid & Priest practices.
• Unanticipated cultural differences surfaced after the merger, as East Coast partners demanded a higher level of personal contact with firm leadership than West Coast partners had historically required.