The trouble with law firm mergers

On Monday, November 24, Philadelphia-based Morgan Lewis & Bockius LLP absorbed Boston-based Bingham McCutcheon LLP. When the merger is complete, Morgan will have nearly 2,000 lawyers in 28 offices worldwide, and will be the tenth-largest law firm in the world. Is there an advantage to the merger? Let’s put it this way: in their shoes, I’d likely vote against it – even if I’d be in the minority.

My (not very popular) answer is that a merger of this scale can be quickly disadvantageous. While I’m likely in the minority, here’s my logic:

  • Law firm mergers are financially risky. When law firms have bank debt, that debt must be repaid whether there is capital to do so or not. If two firms with debt merge, the consequent debt increases as well and the resulting firm must justify its size by earning even more than its constituent parts did before the merger, and if hourly rates are too high, this can be extremely difficult.
  • Corporate culture differences are hard to negotiate. Without a solid and cohesive culture, partners’ loyalty may be compromised. At the first sign of trouble, instead of seeking solutions together, partners may flee to a firm with a more solid financial background.
  • Professional responsibility rules limit the number of clients a firm can have.When a lawyer represents a party in a matter, the entire firm may be conflicted out of representing other parties, and when matters involve hundreds of parties, that could mean hundreds of unavailable clients. When two colleagues are retained by conflicting parties, often there’s a decision about which matter is larger or which lawyer’s contributions to the firm are greater – but those decisions may not involve which client has a greater or more immediate need for a lawyer’s help.
  • Excessive overhead is a concern. Economies of scale don’t always work the same for megafirms as they do for other large businesses. At least one author has commented on this, saying that large firms spend more per partner on staffing, office overhead, insurance, and other costs than smaller firms. And each separate branch office must be profitable, or the attorneys staffing the office could be dismissed.
  • The bigger the firm, the larger the price. Which means that clients feel that to get quality representation from any firm, they should be paying a lot. Sometimes paying a high price for representation feels secure – “if it was blessed by Cravath, it must be fine.” But remember that the same was said about deals vetted by Arthur Andersen. Clients shouldn’t have to pay extremely high fees for quality representation.
  • Fewer choices for lawyers’ employment. It’s difficult enough for law students to find jobs now. Mergers mean there are fewer options for a new lawyer to get that first opportunity to work, to learn, and to thrive. In turn, fewer new lawyers will receive legal training. At least some of those new attorneys may open up their own practice with only limited skills and real-life experience. And those attorneys will be hired by clients, who will bear the brunt of the training gap. In short, this is a problem for all of us who either provide or use legal services.

Perhaps my vision is clouded because I am now the Managing Member of a very small firm. Nonetheless, I feel that a new megafirm must look to the past, to failed mergers and large law firm bankruptcies – and to the future of building a sustainable long-term solution to address clients’ needs. 

Paul M. Barrett, “Howrey’s Bankruptcy and Big Law Firms’ Small Future,” Bloomberg Businessweek Online, May 2, 2013,available at http://www.businessweek.com/articles/2013-05-02/howreys-bankruptcy-and-big-law-firms-small-future#p3 (last visited Nov. 25, 2014).
Jason Fagone, “Wrongful Death,” Philadelphia Magazine, May 26, 2009, available at http://www.phillymag.com/articles/wrongful-death/?all=1 (last visited Nov. 25, 2014).
David J. Parnell, “Al Togut of Togut, Segal, On Avoiding law Firm Bankruptcies,” Forbes.com, August 4, 2014, available at http://www.forbes.com/sites/davidparnell/2014/08/04/al-togut-of-togut-segal-on-avoiding-law-firm-bankruptcies/ (last visited Nov. 25, 2014).
Jeffrey A. Wurst, Esq., “When Law Firms Go Bankrupt – What Secured Lenders Can Learn From The Dewey Bankruptcy,” ABFJournal, Nov./Dec. 2012 Issue, Vol. 10 No. 8, available at http://rmfpc.com/wp-content/uploads/2012/11/When-Law-Firms-Go-Bankrupt-p74-75.pdf (last visited Nov, 25, 2014).

Published by nellabloom

I help small-business owners with their legal needs – from startup to shut-down and the issues in between.

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