Why is it that merger discussions often break down in the final stages?

This is a question that comes up time and time again, especially among those contemplating entering into merger talks. The most common reason is an ill thought-out business rationale.

Far too often discussions proceed on the basis that a merger 'looks like a good idea'. And it may well do.

But the question that needs answering before talks begin is: what is it about the merger that will make the new firm more competitive than either of the previous firms?

It is the lack of any real hard and compelling analysis that results in unconvincing and unsuccessful proposals being presented to partners.

An example of this situation would be initial discussions between firms identifying that the merged firm would benefit by having more lawyers in key areas.

Each firm involved in the merger provides services that balance and compliment the other and so, the argument runs, it looks like a good merger.

The problem is whether this benefit actually makes the new firm any more competitive. Increasing in size is not always a good commercial idea – becoming bigger can make a firm less competitive, not the reverse.

Traditionally the same issue runs through many discussions. People handling the merger see an increase in size as a good thing then spend hours over structures, rates, name, finances and so on. No one asks questions until late in the day.

he critical issue is that of performance. If a merger fails to improve competitiveness in the merged firms' performance, if it fails to strip out costs without harming income, or if it fails to improve leverage across the board, then it is unlikely that the merged firm will perform any better than the firms who constitute the merger partners.

The second key area where discussions break down late in the day is the attitude over the lengthy period that merger discussions tend to take. Over the extended period of time, one side comes to the conclusion that the other side is not quite what they thought at the outset.

Sometimes this disillusionment appears as inflexibility. One side considers that they have given way on all the difficult issues and that the other party has not budged on anything.

Sometimes it is during discussions that one side feels that the other side sees the 'merger' as a takeover: all sorts of examples emerge through language (both spoken and body language) and in the degree of flexibility displayed during discussions.

Other times there emerges a simple incompatibility, something that was not apparent to the parties at the outset. We have seen this happen even between firms that were well acquainted at the beginning of the talks.

Further down along the negotiating line, the discussions revealed that the two firms view the world differently and 'never the twain shall meet'.
Culture, of course, is another area that often proves to be a stumbling block at the last minute.

This is a difficult one to understand at the outset, even though many people attempt to articulate their firm's culture in the early discussions. Again, it is one of those issues that just emerges during the discussions.

Potential areas in which to clash are numerous: the way in which different firms handle issues; the way communications occur; the way in which management controls are implemented; even the way in which people work. All of these areas, taken for granted and accepted within the company, provide signs to particular cultural aspects in firms.

We have seen mergers flounder, despite a good business rationale, because it becomes apparent during the discussions that there are wide cultural gaps that can never be bridged.

Another important area where talks can collapse late in the day, is that of economic and financial structures. While financial information is usually exchanged quite early, it is often at a surprisingly much later stage that the really difficult questions begin to be asked by the different parties.

Questions, for example, such as why do fees per fee earner differ so widely in similar practice groups? Why does the average charge out rate realised differ widely? And why is utilisation so different between the firms?

We have also seen situations where differences in the financial structure of two firms cause a breakdown very late in the discussions. While it is known that a major difference exists between the parties concerned, everyone assumes that it will be resolved – later.

When the time comes, no-one is prepared to concede.
What we also find in merger discussion is that the key issues requiring attention, thought and consideration usually emerge early on in the talks.

However, there is a tendency among the merger negotiation teams to continue dealing with the more positive issues and so the difficult ones are put to one side.

It is only when the easy issues are out of the way – which can be a fair way down the discussion path – that attention is given to the more difficult issues, and then the merger breaks down.

The final area of breakdown can occur with the partnership as a whole. While partners are usually told at some point that discussions are proceeding, they are rarely given any insight into the 'shape' of the deal until towards the end. And they do not necessarily like the deal that they are presented with.

There have been situations where some partners in one firm are unlikely to even vote for a merger with another particular firm, no matter how good the business case presented to them is.

While they do not make this known at the outset, it drives their thinking towards the closure of the deal and, being good lawyers arguing their own case, they can demolish any proposals that the management bring forward for consideration.

It would help all the parties involved in the negotiations if these partners set out their bias at the outset rather than at the conclusion of the deal.
Rarely do discussions break down at the last minute because of jostling for position, or over the name of the new firm. Where this does appear to be a reason at times, we have found that it is superficial:

the real reason for a lack of agreement on issues such as these lies earlier on in the discussions.
The earlier the thorny issues of merging are considered and answered, the smoother the negotiating path.

Alan Hodgart runs management consultancy Hodgart Consulting.