Do as we say, not as we do

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Published on 6/2/08

Merger and acquisition work long has been a profitable mainstay for big law firms. Of course, M&A activity cycles up and down, as any glance at today's business news will attest.

But one type of merger seems on a continuous upswing: combinations of law firms. The Hildebrandt International consulting group, in its ongoing MergerWatch survey, reports well over 425 law firm mergers and acquisitions from the start of this decade through 2007 (including more than 70 last year alone). And in the first quarter of 2008 there were 17 law firm mergers announced, almost double the number of a year ago.

The question is, does combining law firms to make them bigger actually make them better? Typically the answer is "yes" only when the parties have thought through what they want to accomplish and what synergies exist between them.

For what happens when this isn't done, consider 600-lawyer Thelen Reid, which recently announced the layoff of 26 associates and 85 support staff. The firm's co-chairman, quoted in the press, said that the layoffs were the result, not only of a downturn in business, but because of redundancies following the firm's 2006 merger with a New York-based firm.

Why did the firm wait two years to address such redundancies? And why do layoffs, rather than transfers to parts of the firm that were still growing? Would the firm have advised corporate clients to do the same?

Great thought needs to be given before a firm grows — and before it jeopardizes its future by shrinking and being unable to respond once business rebounds.

One has to be old enough to recall that corporate America once thought that "bigger was better" when viewing itself. Years ago, I remember thinking that the merger mania would gobble everything up and, literally, there would be only four corporations in the world left. ITT was a prime example of the gobbler. Then these conglomerates seemed to collapse of their own weight.

The phrase, "getting back to core competencies," became the watchword and large enterprises began breaking up into smaller units. Not all were as forward thinking as 3M, which, within its larger corporate enterprise, encouraged smaller units to operate as independent, entrepreneurial units. Hence, the word "intrapreneurial."

Law firms seem to follow their clients. How law firms' pursuit of mergers will fare in today's economic climate is yet to be determined. I don't think that we've seen large enough firms created to experience their collapse simply because they are too big. But, because size inevitably creates inefficiencies (see Thelen Reid), there will always be a place for good, focused smaller law firms that serve the needs of business as well as individuals.

It's regularly demonstrated that U.S. growth is fueled by smaller, entrepreneurial businesses and the new ideas they create. These companies will require smaller, more adaptable and flexible law firms to meet their needs. And that could leave the big dinosaurs in an uncomfortable position.

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