According to the self-assured analysis of McKinsey, there are only six types of successful acquisitions. Cutting directly to the chase, they are:
- Improving the target firm’s performance;
- Removing industry excess capacity;
- Creating market access for services;
- Acquiring skills faster or cheaper than they could be developed internally;
- Exploiting economies of scale; and
- Picking winners early.
We’ll get to these momentarily but first McKinsey volunteers a few harsh words on how most acquisition “strategies” are mere cosmetic puffery, including “growth” per se, They also voice skepticism about the strategy “of record:” “the stated strategy may not even be the real one: companies typically talk up all kinds of strategic benefits from acquisitions that are really entirely about cost cutting.” A more recent column asserts that “at least 60% [of mergers/acquisitions] are expected to fail” and provides the author’s own analysis of our Six Type taxonomy.
But shall we look at each of these categories and map whether it does or even can make sense in Law Land?
Bruce, a recent transaction in Seattle may be an example of a combination (not a merger) that is somewhere between 4 (buy skills) and 5 (exploit economies of scale). A real estate practice group of 13 lawyers left a smaller firm for a larger firm. The larger firm already has the capacity to serve that field. It picks up perhaps a few skills; more importantly, it acquires the ability to handle even larger transactions than those it already does. As for economy of scale, I wholeheartedly agree with you that there is no economy of scale in a law firm, at the macro level: i.e., the overhead per lawyer of a 500-lawyer firm is higher than the OPL of a 100-lawyer firm, which is higher than the OPL of a 50-lawyer firm, and so on. But for small changes in firm size there may well be an economy of scale: there may be sweet spots among the lemons. For example, I can expand my firm by 50% (going from 2 lawyers to 3) without renting more space or hiring more staff. My OPL will decrease by 30%. But if I hire a 4th lawyer I then do need to hire another staffer and rent more space; my OPL goes back up. It may be that some practice group acquisitions are small enough in relation to the acquiring firm that the acquiring firm’s OPL decreases, or at least doesn’t increase. The firm may be able to accommodate the practice group in its existing space. It may hire the legal assistants of the practice group, but not need to hire more accounting personnel, receptionists, file clerks, and other support staff. Those acquisitions may actually be accretive to earnings.
There’s another reason that McKinsey overlooked. As the marketing classic by Trout and Ries, “Positioning,” advises, perception vanquishes reality in the fight to get customer mind-share. Getting big to be seen as the elite or “nobody ever got fired for retaining” firm in your market can become a self-fulfilling prophecy.
Now, this strategy can get pathological — see Dreier LLP or Finley Kumble. But note how until their falls those firms were lionized by the legal press and attracted paying, if not the most blue chip clients. A rational AmLaw 200 firm or even AmLaw 50 firm could conclude that bulking up with marquee laterals and scrambling for mindshare, as long as costs are somewhat under control, is the only possible strategy.
Great contribution; thanks. Clearly you well understand the odd dynamics of the law firm market.
“Brand perception” studies a la BTI or Acritas will frankly tell you, if you ask (we have, trust me) that simple recognition is highly correlated with scale/global footprint and often not at all or only loosely with quality or sophistication of service delivery.
This is a type of market failure that (touche!) firms like Finley Kumble and Dreier (and surely others under our nose today) are hoping to exploit.
Without editorializing, I would venture that DLA has employed this strategy (grow big fast, then clean up quality) in a case study fashion. The second part is the one that requires business and cultural discipline, which is why you so rarely see it.
And DLA could still blow up!
Thanks again for writing,