A Complex Merger of Equals
Merger Participants:
The Apple Partnership - was a young fast-growing general practice with a single partner but 18 fee earners across three offices, and nearly 50 staff. Operating across most private client areas, Apple was developing a good reputation and continuing to improve it. Despite this, Apple was weak in the area of trust and probate work, and had not yet targeted work from commercial clients.
Background to the merger:
Both firms operated in a large northerly county town, with Apple's additional offices in two neighbouring towns. Apple's partner A had briefly worked with Bear & Co some 10 years previously before setting up Apple, and had some knowledge of the firm.
The merger nearly didn't happen at all. A had an initial meeting with the third partner at Bear & Co, B3, and expressed his interest in merger discussions. Eighteen months later, B3 eventually instructed an accountant to call A with news that Bear & Co was up for sale, but did not warn A to expect the call. After two failed attempts, the accountant gave up and so A remained completely unaware that Bear & Co was looking to sell/merge. Bear & Co then spent three months trying to negotiate a defensive merger with another firm.
As it happened, A learned of those negotiations when they stalled, and moved quickly. A rapid exchange of e-mails led to the conclusion of a deal by phone within 24 hours. As with so many mergers, however, this was merely the beginning. The final course of the merger was dictated by what went into that rapidly negotiated contract.
How the merger was structure:
Not all of Bear & Co was taken into the merged firm. In essence, 2 of the partners wanted to go their own way and develop their own specialisms. Only B3 joined The Apple Partnership with his well established probate and trusts team, and the majority of Bear & Co's private and business clients. This gave the merged firm a more rounded profile than either of it's predecessors.
The priniciple casualty of the merger was the family team at Bear & Co. This team was made redundant because The Apple Partnership, in common with many other firms, had already decided to discontinue legal aid work and refocus on private family work. However, the merged firm did take on and complete all exisiting private client family matters from Bear & Co, allowing it to further build up it's private client family practice and drop legal aid.
The departure of partners B1 and B2 received particular attention in the merger contract. The merged firm agreed to retain and realise their existing work in progress, so the contract included enforceable obligations for them to bill so far as they were able and close off those files.
In the event (and perhaps unsurprisingly, given how Bear & Co had been managed) these obligations remained unfulfilled. Under the terms of the contract, the merged firm completed all these matters but then billed B1 and B2 at a cost for all work undertaken in billing and closing those files. This was paid directly from work in progress payments collected on behalf of Bear & Co.
The financial structure of this merger was unusual, being substantially dicted by Professional Indemnity insurance considerations. As a consequence of it's long history, Bear & Co faced considerable run-off premiums should the practice cease. So keen were the partners of Bear & Co to sell (with pressure from their bank, disputes between partners and rapidly worsening finances), they actually paid a significant sum into the merged firm in recognition of those premiums.
On completion of the merger, Bear & Co's premises were sold off and the partners received a small sum for conveyancing work in progress. The remaining monies were only paid as and when outstanding bills and disbursements owing to Bear & Co were received and their share of WIP realised. This last element was, of course, reduced when B1 and B2 failed to meet their obligations to bill, close and archive files.
What was the outcome for the merged firm?
Three years later, the merger is still regarded as a success, but only because the contract included those clauses which held B1 and B2 to their obligations. The first year Professional Indemnity premium for the new merged firm was considerably increased, sufficient to absorb the significant sum paid by Bear & Co.
Nevertheless, the systems improvements driven forward by The Appler Partnership in due course prevented this problem from recurring. Ultimately, the long serving staff and a loyal client base of Bear & Co joined with A and B3 in sharing the benefits of the new merged firm.
The 360 Legal Group comments: this merger demonstrated an early example of what is now increasingly common. The senior partners of Bear & Co sought an exit route which was not available to them through more conventional means. They were prepared to buy their way out, leaving the newly merged firm to manage some significant risks as it began.
Strong firms like The Apple Partnership need to be alert to opportunities like this one in the current marketplace, and be prepared to negotiate hard. Conversely, partners seeking an exit route need to think creatively and be realistic about what they can take with them.
