Merger Focus - Marry in haste, repent at leisure.
The number of 'marriages' between firms is expected to rise. But,
The number of 'marriages' between firms is expected to rise. But,
Partners hoping to merge their practices would do well to consider the old wives’ saw before rushing into a new liaison. There is an air of expectancy in the profession that next year could see the wave of mergers between firms accelerate.
Some of these mergers will certainly succeed in adding value to the sum of the parts but many more will struggle to make what seemed at the courting stage to be a marriage made in heaven into a tolerable relationship.
It was the merger of PricewaterhouseCoopers, reducing the Big Six to Five, that originally sparked the latest wave of merger activity. That has continued to influence the mid-tier and now smaller firms throughout the regions. In the mid-market, BDO Stoy Hayward merged with Moores Rowland and Hays Allan with MacIntyre & Co.
Among the regional firms, two of the most recent to get it together are Thompson Jones & Co and Gortons creating Thompson Gorton Jones, a firm with five partners and 60 staff, based in the north-west. And there are specialist mergers such as that between actuarial practice Bacon & Woodrow and Deloitte & Touche’s financial services division creating B&W Deloitte.
Yet as a new study by Dr Laura Empson from the Said Business School at Oxford University, makes clear, merging professional services firms is fraught with pitfalls. The problem is that, on the surface of most mergers, there always seems to be an irresistible logic to go ahead.
‘The firms are similar in size with complementary specialist markets,’ says Noble Hanlon, partner at MacIntyre & Co, merging with Hays Allan.
‘In the present market there is a need to be larger to be able to provide the depth of service required by our clients.’
‘The merger will enable us to offer all our clients an increased range of services from a single centre of expertise,’ adds Hays Allan senior partner Alastair McDonald.
‘The synergies between our businesses provide strong growth opportunities for the merged practice and will create excellent opportunities for B&W staff,’ says a senior partner involved in the Bacon & Woodrow tie-up with Deloittes. ‘The culture fit is good. B&W Deloitte will provide our firm with a platform for fast growth in the European and health sectors.’
You can, in fact, find practically identical quotes for almost any merger between accountancy practices that takes place. And while, on the surface, they seem to provide a sound basis for two firms getting it together, they ignore several underlying issues which Empson found can make partners wonder whether the pain is worth the gain.
At the heart of the issue, Empson has identified three powerful contradictions that need to be resolved if a professional service merger is to work effectively.
The first is that, unlike limited companies, accountancy practices generally operate a partnership ethos in which, in theory at least, partners are equal.
This inevitably creates tensions in a merger negotiation where, on both sides, some partners may be deeply involved in the negotiations while others are on the periphery or not consulted at all. Central control is important for making a merger happen, but it doesn’t sit comfortably with the partnership principle.
The second of Empson’s contradictions is that partnerships are based on the notion of peers evaluating their colleague’s value. This can work within the boundaries of a single firm where partners know one another’s strengths and weaknesses and where the working ethos is well understood.
But it’s not an idea, like fine wine, that always travels well.
It is sometimes difficult for partners in one firm to understand how those in another create value and how that value could be captured in an enlarged company. There is also the problem that evaluating the value contribution of unknowns is difficult where there is no track record for guidance.
Finally, Empson argues that a merger can conflict with the idea of professional autonomy. Most mergers talk about increasing fee income somewhere along the line. The logic of the merger is that two plus two is going to equal five. Yet what is the basis of this thinking?
Generating fee income is based on selling professional expertise and, of its nature, that is a scarce commodity. So increasing fee income either involves persuading existing clients to pay more or finding more professional expertise to sell – perhaps by hiring additional staff. It is difficult to see why either of these approaches necessarily require a merger.
In the three professional services mergers Empson studied in depth, there were considerable problems making them work and deliver the value which the respective partners originally thought was there for the taking.
Empson identifies the tendency even in the most balanced mergers for one side – not necessarily the larger – to gain an upper hand. This may create resentment among the other side.
And she also notes that it’s not uncommon for some of the fiercest dogfights to take place at the top – just where the marriage ought to be happiest.
As a result, a defensive or hostile atmosphere percolates down through the merged firm.
But there is one bright spot. Often it’s the youngsters rather than their betters who realise that somebody has to do something if the merger is to be saved from disaster. Empson says ‘integration entrepreneurs’ – often more junior staff – become fed up with the play acting antics of those who seem only to want to score points over the other side. They start cooperating to make the merger work.
Empson is not the only academic to have identified the fact that it’s only when a merger is signed and delivered that the real problems begin.
In a major study published earlier this year, Duncan Angwin, a lecturer in strategic management at Warwick Business School, says that mergers or acquisitions are a ‘double edged sword’.
They can contribute to strategic renewal but they also have the potential to destroy value through costly implementation and cause damage to both parties. In his detailed study, Angwin points to the need for pre-merger negotiations before tying the knot. He warns a superficial approach stores up problems for later.
A key problem is that senior people inevitably focus on the ‘big picture’.
But Angwin warns: ‘To get beneath the surface of the various functions and processes, it is essential to allow opposite managers to speak to one another to understand in practical terms how parts of the business may fit together and, as quickly as possible, to uncover major potential problems.’
Angwin recommends setting up integration teams to help pull various functions within the merging parties together more effectively. And it’s not just the processes they have to concentrate on. It’s also important to address issues of culture and even simple working practices like what arrangements are made for booking holidays.
Few mergers fail outright but many don’t live up to their promise. Indeed, as the merger specialists point out, it’s possible to spend two years or more diverted by the issues raised by the merger. During this time, partners’ focus may be on getting the merger to work rather than on the more vital questions of winning new clients or service delivery.
And clients, too, may be disturbed by a merger if they suddenly find they lose favoured points of contact or if the organisation suddenly seems to have become too big to be bothered about them.
None of this will slow the wave of ever-hopeful mergers. It looks as though, post PricewaterhouseCoopers, the top end of the market has probably settled down for a while, but there is still plenty of room for merger activity in the middle market. And smaller firms will continue to look for partners in order to increase regional leverage.
But in mergers as in marriage, love at first sight is not always the best guide to a happy and fulfilling future.
TEN WAYS TO MAKE A MERGER WORK
– Be upfront and open. If you’re not going to be honest and open when you’re negotiating with a potential partner, it’s not likely you’ll create the trust necessary to make a merger work. Make sure the skeletons are out of the cupboard early in the talks.
– Involve staff. There’s nothing more unsettling to staff than not knowing what’s going on. Keep staff informed about what’s happening. Secrecy breeds distrust.
– Create a worthwhile vision. If you and your partner can’t spell out a worthwhile vision of what you’ll achieve together, what’s the merger all about? Ideally, that vision ought to be something that neither can achieve alone.
– Set a realistic timetable. In a merger negotiation, sometime the talking has to stop. But don’t underestimate the complexity of putting in place the minimum needed to fuse both firms and certainly don’t rush the merger.
– Lead from the top. If senior partners aren’t enthusiastic for the merger, don’t expect other staff to be. Partners need to show by their actions that they want the merger to work and are willing to change their working practices to make it happen.
– Find enthusiasts. Seek out those staff at all levels who are keenest for the merger. Give them key roles in helping to fuse parts of the firms together and encourage them to spread their enthusiasm to others.
– Harmonise what’s important. Don’t waste time trying to do everything the same way in both halves of the merger from day one. Focus on those issues that are most important such as new client focus and key service delivery.
– Show some early gains. Nothing helps to dull the inevitable pains of merger work than early gains. Demonstrate savings in working practices, access to more resources or, best of all, bring in a big new client neither partner could have won alone.
– Make key new appointments. When making appointments to the merged firm, look for new staff whose attitudes will help to bring both sides together.
– Hand out the order of the boot. In most mergers, there are reactionaries who’ll fight in the last ditch to wreck the plan – simply because it challenges their privileges or creates change they don’t want. Give them a fair chance to change, but take the tough decision to wave goodbye.
Merging Professional Service Firms by Laura Empson is published in the Summer 2000 issue of Business Strategy Review. Visit www.blackwellpublishers.co.uk/asp/listofj.asp
Implementing Successful Post-Acquisition Management by Duncan Angwin is published by FT Prentice Hall.