The Impact on Clients of Mergers among Firms
Synopsis
This chapter sets out the challenges, opportunities and pitfalls of mergers and acquisitions between firms and their impacts on Clients.
THOUGHT STARTERS
• If you are considering a merger with a firm, what will be the impact on your Clients?
• What is your firm's development strategy?
• Do you want to grow organically or by acquisition?
Market Consolidation
Today's professional services firms operate in highly competitive markets. Consolidation, particularly in the accounting and legal sectors, is becoming more frequent. The most important assets are your people, so any merger or acquisition is going to impact on them, followed closely by the Clients of both firms.
Many issues are faced when considering a merger and they require considerable attention for a successful result. Careful due diligence is paramount to avoid problems later on. A period of pre-merger courtship is advisable, as the ongoing process can be difficult, expensive and risky. The aspect of knowledge transfer between firms and how this will be captured and used is at the heart of any change.
Many other questions arise, for example: if your firm is committed to a growth strategy, will there be a good strategic and organisational fit with the other firm? What impact will the change have on our Client base? Clearly, the more differences that exist between firms, the harder the implementation will be. Another aspect relating to people is that mergers and acquisitions can often lead to conflicting organisational behaviours, leading to confusion among Clients.
Benefits to Clients
For Clients, a merger may mean an enhanced service line offering providing more depth and experience. It may also mean that the Client is geographically closer to its supplier Mergers can benefit the firms involved in many ways. They may improve their geographical coverage - larger firms often merge to consolidate or improve country positions, while others look for regional gains. Mergers and acquisitions can often address any strengths and weaknesses that exist in professional staff credentials. Other factors, no less important, are the possibilities of increased specialisation, fee billings and intellectual property.
HOW PENNINGTONS' STRATEGIC ACQUISITIONS STRENGTHEN ITS OPERATIONS
Law firm Penningtons merged with Manches in October 2013. Rolland Keane is the Business Development Director of the merged firm Penningtons Manches LLP and sits on its board. He is therefore involved in decisions relating to strategic growth and was part of the acquisition team.
Prior to that time Penningtons had been expanding with the acquisition of Dawsons and Wedlake Saint in 201 I, as well as opening offices in Cambridge and Guildford in Spring 2012.
Strategic Fit
'Penningtons has an organised strategic planning process which flexes with the dynamics of an ever-changing marketplace in achieving its aspirations in the accelerating legal sector' says Keane. 'Traditionally a London and South East England based firm Penningtons has had a strong commitment to increasing its London presence to facilitate greater access to international Clients. When Penningtons seeks a partner firm it tends to focus on international ambition and sector fit rather than legal discipline or geographical gaps. That said, the merger worked well in the regions; Penningtons' base in Cambridge complemented Manches in Oxford. Both firms can now take advantage of the technology and life sciences university spin-outs requiring legal advice. The merger strengthens their presence in the Thames Valley technology corridor with offices in Basingstoke, Oxford, Reading and Surrey. Penningtons' strength in Private Client work also neatly fitted with Manches' strength in Family practice.'
Cultural Fit
'Penningtons seeks potential partner firms with a similar culture and vision to their own. It was important to ratify this selection factor during the relatively short courtship of Manches. Given the compatibility of sector focus and complementary practices, cultural fit was of key importance. To assess this it's important to meet people in the target firm. Although culture is an historical legacy and difficult to define, it is hard to hide and can be felt even when visiting different offices. The luxury of having more time available would make assessing the cultural fit easier but in this case it worked well. In its search for a suitable partner firm Penningtons was careful to discount some firms along the way. This was due to factors such as the degree of transparency of information, how equity was shared and how the firms were managed and their working methods.'
A Short Courtship
'Penningtons and Manches had been in discussions about a possible merger earlier in 2013; there was more synergy in the relationship than both parties had initially expected. Penningtons was interested in merging as equal partners from the outset. However, due to Manches' declining financial situation, it was necessary to structure the deal in a particular way and move quickly to ensure protection of the wellbeing of the legacy Manches Clients and business.'
Impact on Clients
'Penningtons was keen to seek a firm with similar characteristics and type of Client base to its own and had already established that there was a good match. Mergers can unsettle Clients, so it's important to ensure a smooth transition when firms merge by appropriate communications and visits that reassure Clients about service quality and benefits of the enlarged firm. As mentioned earlier, Penningtons' Private Client practice will now be able to work alongside Manches Family practice and vice versa to offer a more holistic and joined-up service. To date the merged firm has not seen any noticeable Client attrition.'
Penningtons is proud of its Client satisfaction record. As Business Development Director, Rolland Keane is involved in around 30 face-to-face Client reviews annually along with his colleagues. 'We have a key account management process in place and we have the mechanism to get frequent feedback from even the smallest fee level Clients. Qualitative and qualitative Client feedback slots into our appraisal system, ensuring a culture of Client focus. Unlike some firms, Penningtons partners have always embraced the feedback process and it is evident that legacy Manches partners hold a similar view'
Responsibilities in the Merged Firm
Clearly any merger requires structural decisions to be made where similar roles exist. Penningtons Manches understands the need for compromise as in any good marriage, so most of the time it has been possible for the enlarged firm to find suitable candidates to manage the relationship in jointly held Client and lead practice groups.'
Rolland Keane expects the next few years to be even more dynamic than the past five years which have seen a rapid consolidation of firms in the sector.
KEY FACTORS WHEN CONTEMPLATING A MERGER
Allan Evans is partner at accountants BDO with responsibility for marketing and sales (including industries) and also sits on their Global Leadership team to ensure consistency in marketing, brand and Client service across the 148 countries in which it has member firms.
When discussing mergers, Allan observes that firms in the professional services sector are led by very entrepreneurial leaders and conversations about consolidation in their market are a constant backdrop, particularly given the current market dynamics.
'If two firms see an opportunity to grow and improve their Client proposition by merger or acquisition they will begin a dialogue rather than rely solely on organic growth which can be a slower burn. Consolidation is an expansive rather than a defensive strategy for like-minded firms.'
Allan feels that the key factors in considering merging are:
• The chemistry between the key partners - can they visualise the combined firm?
• The need for strategic assessment reviewing the Client portfolios - is there too much overlap or are gaps filled if merged?
• Will the merger extend the market reach of the combined firm?
• Will the merger mean giving up some work due to conflict of interest/ legal reasons?
• If the two firms operate in different markets what risks and pricing issues are likely?
• Cultural matches are important, as it is in this area that mergers can often fail.
The impact of innovative mergers on Clients is described in Chapter 14.
Well-managed Mergers Can Improve a Firm's Market Position
Mergers explains that if a merger is to succeed, any likely pitfalls must be considered early on in the process and plans should be made to avoid these. It is important to understand the culture of your firm and how it is likely to relate to the newly created firm. If a merger is planned, it is important to secure the support and understanding of your partners and senior management through regular communications about the merger process. Although mergers require a great deal of internal reflection and activity, the effect on Clients must not be forgotten. It is highly likely that over time there will be changes to the team serving the Client and, if at partner level, will affect the relationships on both sides. For a successful merger, it is vital to focus on whether it will improve your firm, its market standing and Client perceptions.
The Impact of Mergers
CLIENT MANAGEMENT REVIEW QUESTIONS
To what extent does your firm:
1. Have a development strategy?
2. Consider the impact on Clients when considering a merger or acquisition?
3. Have a formal set of selection criteria when seeking a merger or acquisition partner?
4. Look for cultural fit when considering a merger or acquisition?
5. Consider growth through merger or acquisition above organic growth?
6. Have international Clients that expect the firm to have a more global outlook?
