A Strategic Acquisition
Merger Participants:
Pear Tree and Partners - this well established, general practice firm had 14 partner (8 equity, 6 salaried), over 100 staff and operated from a main office with four suburban branch offices. It enjoyed a 50% market share in it's northern coastal town, and was particularly dominant in commercial activity. The partners were keen to expand into a similary sized neighbouring town.
Quince & Co - with 1 equity and 2 salaried partners, this 24 strong firm occupied a prestigious leasehold office in the centre of the neighbouring town targeted by Pear Tree and Partners. It concentrated on private client work, with a particular speciality in leasehold enfranchisement work, so often sought after in areas where blocks of leasehold flats are common.
Background to the merger:
Pear Tree and Partners had already tried and failed to secure a vacant town centre office in their target area. The partners therefore identified a list of potential merger clients, with Quince & Co right at the top due to it's size, central location and car parking.
Quince & Co, whilst not initially seeking a merger, had reduced in size following partner retirements and was beginning to stagnate. The highly desirable office was actually larger than it needed, and this combined with ageing IT and systems, was draining both profitability and cash. However, Quince & Co did enjoy a strong reputation for it's leasehold enfranchisement work, reinforced by it's hard earned Lexcel accreditation.
In these circumstances, despite the obvious synergies of merging the firms, it took over a year to negotiate a deal.
How the merger was structured:
Inevitably, Quince & Co was absorbed into Pear Tree and Partners and the old firm's name disappeared. Each partner retained his former status, and Pear Tree agreed to pay a six-figure sum for goodwill. A complicated safety net was negotiated to protect the incoming equity partner from being voted out by his partner in less than four years without paying substantial compensation on a reducing scale basis.
It was the transfer of the qualified staff within Quince which ultimately generated more problems for the merged firm. Having previously been "a big fish in a small pond", the individuals concerned would not have been given such a high level of responsibility or been promoted to such a level within Pear Tree. This led to resentment and ultimately friction with the qualified staff of Pear Tree which was never fully resolved.
The major gain for the merged firm was to establish a strong foothold in the neighbouring town and quickly to grow a commercial practice, reinforced by the leasehold enfranchisement work (which Pear Tree regarded as an unexpected bonus).
However, another potential gain which was ultimately lost was the Lexcel accreditation of Quince & Co. This was founded upon outdated IT and systems, which, it was recognised Pear Tree pre-merger, could not be absorbed into the larger firm. Unable to build upon the foundation which had been acquired, the partners reluctantly allowed the accreditation to lapse as the merged firm had insufficient resources to preserve it. After a few months' parallel running, the entire firm moved across to Pear Tree's systems.
What was the outcome for the merged firm?
Three years later, the merger is still regarded as a success. However, not everything worked out as planned, and Pear Tree would highlight the following areas:
- Timescales - not only did negotiations take twice as long as expected, but the subsequent cultural integration took four times longer, over 24 months in all.
- System & technology - the processes at Quince & Co worked in isolation and justified Lexcel accreditation. They were not, however, current or scaleable, and ultimately proved less of an asset than expected.
- Senior staff - the cultural difference between the firms led to resentment at qualified staff level in Pear Tree which was never satisfactorily resolved.
- Office - the location and market share acquired with Quince have proved so beneficial that they more than offset all of the internal problems encountered during the merger. At the same time, the partners of Quince acquired a secure future which was otherwise beyond their reach.
The 360 Legal Group comments: this merger illustrates how in certain circumstances a strong small firm can justify charging a premium for goodwill and location. Be warned, however, that current market conditions have changed, increasing the relative value of a secure future for the smaller firm.
