Orrick/Dewey: A Postmortem

The coverage has been wall-to-wall, if not deafening, and two things we do not do here at "Adam Smith, Esq." (there are others, trust me) are (1) cover breaking news; and (2) tell you things that we know you already know. 

So I haven't yet addressed the breakdown of the Orrick/Dewey merger talks.  In case you've not reached saturation on the story, here you can read about it courtesy of:

• The New York Times
• Crains New York Business
• CNN/Reuters
• Law.com
• and a plethora of sites from the blawgosphere.

But if you only want to read one article about it—and I've certainly had my fill surfeit at this point—go to Legal Times' excoriating coverage, some hot dots from which include:

• "At Dewey, the hemorrhaging continues. "
• "It represents at least the fourth time in four years that Orrick has failed to cinch a merger, prompting speculation about why the firm can't close these deals."
• “It's a moment of great instability for Dewey,” says Peter Zeughauser, a California-based legal consultant. “The fact that they couldn't pull it off without losing some of their best talent will raise questions about their future.”
• And finally:  "The partner defections seemed to fuel a vicious cycle in the negotiations. The departures prompted Orrick to ask for new terms, the Orrick source says. But these new terms in turn complicated Dewey's effort to stem further departures because they added to the uncertainty surrounding the deal, the Dewey source says. “You can't do a deal until you know the terms, and the terms kept changing with Orrick,” he adds. "

But, as always, we are here with malice towards none, and with charity for all, so let's take this as an object lesson in just how difficult law firm mergers can actually be. 

Truth be told, corporate America has a less than stunning track record in M&A, although McKinsey believes they may be getting a little better at it compared to the last M&A activity spike in 2000:    According to "Are Companies Getting Better at M&A?," which "reviewed nearly 1,000 global mergers and acquisitions from 1997 to 2006, comparing share prices two days before and two days after each deal was announced," in which they examine both "value created" (which can of course be a negative number) and "proportion overpaying" (which leads to those nasty negative numbers), and find that public-company America is doing better this time around than last.

Specifically:

• the "value added" in the last boom was +1.9% of the deal's total value; this time around it's 6.1%; and
• the "proportion overpaying" reached a peak of 73% in 2000 and is down to (a still ugly) 56% in 2006.

This is how they sum it up:

"The improvements reflected in our M&A indexes are encouraging: despite the recent intense volume of M&A, it appears that acquirers have been disciplined about creating value. Nonetheless, plenty of room remains for acquirers to improve their M&A performance by focusing on the scope to create value and to ensure that they don't overpay."

Granted, law firms don't "overpay" (or underpay) explicitly when they merge, since it's mostly treated as a pooling rather than an acquisition; the division of outstanding liabilities, and partners' contributions to capital, are the primary exceptions. But an explicit value is never placed on the acquired or the acquiring firm.

The point is not that there's a 1-to-1 analogy between corporate-land and law-firm-land; the point is that even companies who merge for a living have a remarkably unimpressive track record.

On the other hand, this McKinsey piece, Habits of the Busiest Acquirers, talks about how to tilt the odds in  your favor.  It describes the results of interviewing dozens of executives responsible for pre-merger target identification and strategic justification, as well as post-merger integration, to find out what separates winners from losers.  While the results are somewhat complex, I think this fairly states their findings:

• The successful companies "use M&A to complement a company's distinct capabilities. They understand the limitations of acquiring a company in order to acquire its superior management or operational know-how."  Translated to our world, this frankly is a counsel in one direction only:  We essentially never merge for "superior management or know-how," but it does mean that mergers designed with a view to creating more complementary practice groups should stand better odds of success than mergers blind to that perspective. 
• McKinsey and its interviewees strongly endorse the notion of strategic M&A as a tool for enhancing a firm's geographic footprint, if that would be quicker and more efficient than organic growth. 
• Consider this tale of two strategies, if you will:
  • One high-tech company, for instance, used a combination of acquisitions and organic growth to pursue its twin strategic goals: reducing costs and becoming the leading US company in its industry. Pursuing its goals only organically would have taken too long because it needed an immediate nationwide presence to capture market share ..."  In other words, a well-thought-out, carefully calculated plan, designed to capitalize upon the firm's position and compete more aggressively.  Then we have:
  • "Contrast this long-term success story with the experience of a financial-services firm that relied almost entirely on acquisitions to fuel its growth in the 1990s. The company's stock skyrocketed as it captured all the synergies, and it significantly outperformed its peers. However, hidden in the massive top-line growth and market appreciation was the fact that the company was devoid of organic growth."  How true does this ring?  Haven't we experienced the syndrome of growth-for-its-own-sake?
• Lastly, consider the post-merger integration issue, which can trump everything that went before:
  • "The integration phase of an acquisition is often the time when deals go wrong; some studies blame poor integration for up to 70 percent of all failed transactions. According to the vast majority of acquirers we spoke with, the responsibility for integration falls to the business units. Not that they are to blame for all of the widely publicized failures, but in the words of one business-development executive, "Our biggest challenge is to make sure that the corporate M&A team and business unit executives work in concert on an acquisition"—an important insight."

Read that last phrase again:  Having the M&A team and the business unit (practice group) leaders work in concert.  What that really means is having the entire firm behind the merger:  Not just the firm chair, not just the executive committee.

Here, if I read the tea leaves correctly, we have the dark core of the failure of the Orrick/Dewey merger. 

I never sensed the partnerships themselves—practice group leaders on down—were behind the deal.  I sensed it was driven from the top, and the top alone. 

Understand:  First of all, I have no inside information that this is true (and I wouldn't write about it here if I did!), but I do have this sense.  Second, there is nothing wrong with initiatives being driven from the top; they almost always are (those that aren't are called insurrections).  The point is that the "top" must enlist support, fully, completely, patiently, collaboratively, sincerely.  Somehow that doesn't seem to have gelled in this case; more's the pity.

And so we are left with one firm, Orrick, with its greatest aspiration to date unrequited, and another firm, Dewey, materially bloodied by its encounter with the irresistible wave of consolidation reshaping our industry.

This stuff is not for children.