The following column is by Antonio Leal Holguin, Director, Adam Smith, Esq. Antonio is based in Santiago, Chile, and spearheads our Latin America practice.
Mergers & Alliances: Proceed with Caution
Five Steps for Latin American Firms
In our recent Latin American Legal Market Whitepaper, we described how globalization, the more-for-less challenge (clients’ demand that you do more for less) and fierce competition are reshaping the region’s legal market. They’re forcing everyone to pay attention and make choices. In unprecedented numbers, global players and foreign firms are arriving in the region, oftentimes through mergers and alliances with Latin American firms. Combinations and alliances of local law firms are also on the rise.
Far too often, law firms seem to act under the premise that mergers and alliances are good per se. They’re perceived as progress. Bigger is better. This is particularly true of mergers and alliances with foreign firms: international is better than national, seems to be the slogan. “They joined an international firm, they made it!”
I’d like to approach the internationalization and consolidation trend from the local firm’s perspective. With so much noise in the market about it, it’s easy to overreact and make bad decisions. I suggest a five-step process for local firms to approach mergers and alliances:
- Ground Recognition: recognize the need to reflect strategically about the market and your place in it
The Latin American legal industry is undergoing a period of intense speciation (the process of law firms segregating themselves based on different business models, following the “taxonomy” structure proposed by Bruce MacEwen in his second book: “A New Taxonomy: The seven law firm business models.”) Competitors are making their bets. Some have gone for the full-blown merger with a global player, others for the Iberoamerican model, others remain independent, and so on. This is pressuring everyone who wants to survive and thrive to find (or reassess) its place in the market. And, because competition has never been fiercer, even firms that have figured out their place in the market must think hard about how to keep it. Indifference is not an option. You ought to be thinking strategically about the market and your position in it.
- Taking a stand: develop a plan or review your existing one
Next, you need to develop a plan, if you don’t have one, or review your existing one. As we’ve said it here many times, law firms that have a clear, compelling and distinctive strategy (and implement it) are more successful than those who don’t.
What does it mean to have a plan? It’s having focus and determining priorities, which lead to having a unique, distinctive value proposition. It’s answering the questions: whom do I serve, doing what and how? Having a plan requires choices. You must choose which opportunities to pursue and, perhaps more importantly, which ones not to pursue. You have limited resources, so you must prioritize. Once you have a plan, then consider how to make it a reality. Here is where a merger or an alliance may come in.
- Think, don’t feel: determine whether a merger or alliance would achieve your plan’s goals
Perhaps the biggest and most frequent mistake firms make with combinations and alliances is thinking that they’re an end in themselves. That the merger is the plan. It is not. It’s an instrument to achieve your goals. For example, if you’re a Bogotá-based firm and you want to position yourself as the go-to IP firm in the Colombian middle-market, then a merger with an IP boutique in Medellín probably would help you achieve your plan. If you’re a mid-size Chilean firm specializing in mining projects development and your clients are repeatedly asking you for environmental law capabilities, a merger with an environmental law firm probably makes sense; it would further your strategic objective of being the go-to firm for the Chilean mining industry. If you’re a Mexican firm that realizes you can’t stay afloat much longer in your present form because your clients have grown and require a larger and more multidisciplinary team, with international capabilities, then an alliance with a global player might make sense for you.
What are some bad reasons to seek a merger or alliance?
Fear: you tell yourself: “if I don’t join a global firm, I’ll fall behind. Everyone else is doing it.” Fear is a poor counselor. Jumping aboard the merger and alliances train because “everyone else” is onboard reflects an inaccurate reading of the market. Not “everyone else” is doing it; there are plenty of independent, robust firms out there who know what they’re doing. And it’s also foolish because you don’t know where the train is taking you. You must have your own route. Mergers and alliances are just alternatives to get to your destination. They may not be the right train for you.
Vanity: the photo-op. The headline. The overnight doubling of your headcount. All these will pass and leave you empty and, if they were the main reasons for your move, with more problems than you started out with.
Daydreams: you think a merger or alliance will solve all your problems. Your diminishing profitability issues will vanish. A merger with a big name will prevent more partners from leaving. Their client hoarding tendencies will evaporate. How cute.
The client mirage: you assume that your clients prefer being served by the newest member of the XYZ Global legal family, with 30+ offices around the globe, than by good old local you. They might. They might not. Instead of assuming, why not ask: who are my clients? What do they need? And, even better, why not ask them what they need? When we interviewed corporate counsel at large Latin American companies we found that they have ambivalent opinions on mergers and alliances. Depending on who your clients are, what their business is and what you mean to them, a merger or alliance may or may not add value.
“Ok,” you say, “but I’m talking about new clients?” Perhaps it will bring you clients. But, again, it depends on your plan. If you’re a full-service firm in Peru with strong and numerous relationships with firms abroad, chances are that a merger or alliance will lose you more clients (from lost referrals and referrals of referrals) than it will win for you. However, if you’re a small, but well-positioned firm, with challenges to grow in your local market, then perhaps a merger makes sense.
Because someone’s asking: you hadn’t even thought about a merger. Not having done a serious analysis, you have no clue whether it’s good for you. But here you are, your very local you, face to face with a partner of a global player with 40+ offices in five continents who’s asking you if you’d like to become a member of the 5,000+ attorney-strong law firm. You can’t believe this is happening to you. How could you say no? Well, if a merger and alliance doesn’t help you achieve your plan, you should say no.
So, think, don’t feel. Achieving your business’ goals may not require a merger or alliance. Bigger is not necessarily better. Maybe you need to go smaller, ditch your unprofitable practice area. International is not necessarily better than national. What’s the point for you of joining a global player? Maybe independence is your best bet.
Also, the fact that you’re not considering a merger or alliance now doesn’t mean you’re precluded from doing so later. Maybe in three years, when reviewing your strategy, you decide that it makes sense at that point.
If a merger or alliance is what you need, move on to step four.
- Proceed with caution: use a framework for analyzing mergers and alliances
As soon as you decide that a merger and alliance would help you achieve your goals, put up a sign in your office that says: “proceed with caution.” Mergers and alliances are dangerous animals. You’ll get excited. You’ll likely see everything – from cultural incompatibilities to compensation issues – as surmountable barriers. There’s lots of literature on why mergers fail and projections are almost always overly optimistic.
So, you should enter your quest of a merger or alliance with a framework that allows you to stay focused and grounded through the search and negotiation process (for more on this, take a look at these Bruce MacEwen articles: Mergers 101 and Mergers: Finance Before Cuilture or Vice Versa? As Bruce recommends, it’s best to “set up “must-have,” “nice-to-have,” and “dealbreaker” criteria.” He also suggests considering these elements in evaluating a merger: culture, partner compensation structures, productivity, geographic and industry overlaps, conflicts, back office issues, revenue synergies, personality concerns and likely client reactions. However, it “should all boil down to whether the combination augurs well for creating a financially stronger, more profitable firm with greater client service capabilities.”
Just like a merger or alliance may not be right for you, not every target will be. The fact that a firm is available, that it’s the first one you find after a long search or that it’s asking you to merge doesn’t make them right for you.
Also, don’t underestimate culture. It’s a difficult and, oftentimes, wrecking factor for merging firms in the same country. It’s critical when dealing with a cross-border combination. Your lifestyle will likely change. You’ll probably change the benefits and burdens of independence and small size for the benefits and burdens of belonging to a global business. You’ll have a foreign boss, you’ll have to report your financial performance to him/her (in Dollars, Pounds or Euros, at likely unfavorable exchange rates.) You’ll have to work across time zones. And you’ll have to treat (as you should) the firm’s Russian client with small, sporadic interests in your country as you treat your top local client. This isn’t bad or good per se. You just need to be aware of it and make sure that it’s right for you.
You should also use the framework you come up with to negotiate a solid merger or alliance agreement. The success of your plan will largely depend on it. For example, if you’re joining a global player, the way you negotiate your integration into the firm will likely make a huge difference.
- Fortune favors those who act: implement
Many of the promises of mergers and alliances fail to materialize because of poor implementation. It’s not enough to have a plan or a good merger agreement. You must have the leadership and the right systems to ensure that what’s on paper gets done.
Our research shows that one of clients’ main concerns with mergers and alliances is patchy quality. Therefore, you should focus on ensuring standardized quality across offices and teams of the merged firm. You should convince your clients that you have the best team in your practice areas and that you work as one firm.
These five steps (1 – recognizing the ground; 2 – taking a stand; 3 – thinking, not feeling; 4 – proceeding with caution; and 5 – acting) seek to provide a deliberate, patient, methodical process for approaching mergers and alliances. Using them will likely spare you many headaches in the future.