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 Project: "The Urge to Merge" Article for Barnotes
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The Urge to Merge
With a number of the state’s most prominent firms joining forces, 1986 may well be remembered among North Carolina lawyers as the year of the merger. In this article, some of the attorneys involved share the motivations that led them to merge—and the reservations that had to be overcome.
“Law firms have been merging with each other for decades, but lately in North Carolina, there’s been a definite acceleration in the trend,” says legal consultant Tom Clay of Pennsylvania-based Altman & Weil, Inc.
Clay mentions Washington, D.C., northern Virginia, Dallas and Houston as other areas where law firm mergers are on the increase. He estimates he now spends 30 to 35 percent of his consulting time on mergers—about four times the level of three years ago.
With a number of the state’s most prominent firms among the recently-merged, 1986 may well be remembered among North Carolina lawyers as the year of the merger. The following chronology lists the most notable of recent mergers involving Tar Heel firms.
April 1980
Raleigh’s Joyner & Howison, at that time a six-lawyer firm, merged with Richmond, Virginia-based Hunton & Williams. The Raleigh office now has 24 lawyers. Hunton & Williams also has offices in Richmond, Norfolk and Fairfax, Va., New York City, Washington, D.C., and Knoxville, Tenn.
June 1982
Winston-Salem’s Womble, Carlyle, Sandridge & Rice merged with Raleigh’s Purrington and Purrington. The resulting Raleigh office had three full-time lawyers, two of whom were from the Winston-Salem office.
January 1983
Charlotte’s Moore and Van Allen merged with Raleigh’s Allen, Steed & Allen to form Moore, Van Allen & Allen. When added to the Charlotte firm, the Raleigh firm’s 11 lawyers produced a combined total of about 50 lawyers.
September 1983
Greensboro’s Smith, Moore, Smith, Schell & Hunter, at that time with approximately 50 lawyers, merged with the three-lawyer Raleigh firm of Reynolds and Cox.
October 1984
Moore, Van Allen & Allen, with offices in Charlotte and Raleigh, merged with Charlotte’s Thigpen & Hines to form Moors, Van Allen, Allen & Thigpen. Currently, the firm has 55 lawyers in Charlotte and 18 in Raleigh, for a total of 73.
Womble Carlyle opened a Charlotte office. Although no merger was involved, the firm’s location in Charlotte is noteworthy for having made Womble Carlyle the first North Carolina law firm to have offices in the state’s three major metropolitan centers—the Research Triangle, the Triad and Charlotte. Currently, Womble Carlyle has eight lawyers in its Raleigh office, nine in Charlotte and 82 in Winston-Salem, for a total of 98 lawyers.
January 1986
Greensboro’s Smith, Moore, Smith, Schell & Hunter merged with Charlotte’s Helms, Mulliss & Johnston, making the new firm—Helms, Mulliss & Moore—the state’s first to use mergers to establish Triangle, Triad and Charlotte offices. Currently, Smith Helms has 32 lawyers in Charlotte, seven in Raleigh and 56 in Greensboro, for a total of 95.
Petree, Stockton, Robinson, Vaughn, Glaze & Maready in Winston Salem merged with Charlotte’s Farris, Mallard, Cummings & Booe. The new firm, Petree, Stockton & Robinson, has 11 Charlotte-based lawyers and 51 based in Winston-Salem for a total of 62 lawyers.
Poyner, Geraghty, Hartsfield & Townsend in Raleigh merged with Spruill & Spruill of Raleigh and Rocky Mount to form Poyner & Spruill. Forty of the firm’s 56 lawyers will be based in its Raleigh offices, with the other 16 in Rocky Mount.
In Raleigh, Maupin, Taylor & Ellis merged with Adams, Dorton & Bland to form Maupin, Taylor, Ellis and Adams, with a total of 30 lawyers.
Motivations to Merge
“Mergers start in a market,” says Altman & Weil’s Tom Clay. “Some firms consider their market to be local, some state-wide, some regional, and some national or international. When the first firm in a market merges, you have a ripple effect as everyone else in the market responds by evaluating the possibility of merging themselves.
“Competition is a prime motivator,” Clay continues, noting that most mergers are designed either to strengthen or protect a competitive position in the firm’s market.
“Most lawyers don’t say, ‘I want to be bigger,’” he says “But they realize if they don’t get bigger—if they aren’t able to grow with their clients—they may lose their competitive edge.”
“Growth breeds growth,” says J. Phil Carlton, a former Associate Justice of the N.C. Supreme Court and partner with Spruill & Spruill before it merged with Poyner Geraghty. “Right now, North Carolina’s growing by leaps and bounds, but it would become an unattractive state if a few of us hadn’t gotten together. To attract a Fortune 500 company, you have to offer them access to a firm that can offer a full range of services.”
According to Marvin D. Musselwhite, Jr., of Poyner & Spruill, the merger of Poyner Geraghty with Spruill & Spruill strengthened both firms’ competitive stance in Raleigh.
“Since I started practicing law with Poyner Geraghty in ‘63, the firm has been the largest or one of the largest law firms in Raleigh,” says Musselwhite, a former member of the State House of Representatives. “We feel that the merger keeps us in the position we’ve always had in Raleigh as one of the larger law firms.
“Obviously, Raleigh and the Research Triangle are growing, and there are lots of new companies in the area,” he continues. “By merging, we’ll be better able to serve large corporate clients and offer a broader range of specialties.”
“We have tremendous faith in the continuing economic growth in the eastern part of the state,” adds Poyner & Spruill’s Carlton. “With the growth in the Triangle, we’ll continue to see a tremendous influx of support industries that need places to build. Many that can’t afford the Triangle will naturally locate to the east. With our Raleigh and Rocky Mount offices, we’ll be able to solve their legal problems in-house and in a hurry.
W.F. Womble, Sr., says Womble Carlyle’s state-wide emphasis was largely in response to competitive pressures, both from within and outside the state.
“We saw that if we were going to continue to attract the kind of clientele we wanted, we needed a presence—a recognition—that would not be overlooked,” he explains. “Obviously a firm that’s small or local is not as likely to be the first one that will come to the attention of a large organization in need of legal services.
“We saw, too, that legal problems were becoming more complicated and were often crossing state lines,” Womble adds “So we anticipated that more of the larger law firms from outside North Carolina would establish offices in the state.”
For Smith, Moore, Smith, Schell & Hunter, establishing a state-wide presence was also a primary goal. “Having offices in the state’s three major metropolitan areas seemed to make sense,” says Charles E. Melvin, Jr., of the recently-merged Smith, Helms, Mulliss & Moore’s Greensboro office. “We’d had it in mind for some time.”
While building competitive strength within a market may be the major reason behind most mergers, a law firm can use a merger to improve its financial picture as well—not by reducing expenses, but by increasing gross income.
“Lots of people erroneously think law firms realize efficiencies of scale from mergers,” says Clay of Altman & Weil. “That has never been the case. But larger firms can net more than smaller ones because they represent larger institutions that have a need for more sophisticated services. That means a larger gross income.”
The NCBA 1985 Economic Survey confirms Clay’s observations. According to the survey, overhead expense averages between 33 to 46 percent of gross income for both large and small firms However, larger firms report significantly larger gross revenue per lawyer and larger compensation per lawyer, perhaps because of a larger number of associates generating a relatively high percentage of billable hours, increased specialization justifying higher hourly rates and reduced “start-up” time, more clients billed strictly on an hourly rate rather than by fixed fees, and more clients on retainer.
“Expertise was our prime motivator,” says Smith Helms’ Larry J. Dagenhart, who was with Charlotte’s Helms, Mulliss & Johnston before its merger with Greensboro’s Smith, Moore, Smith, Schell & Hunter. “We were concerned with developing an adequate number of lawyers with the specialized expertise we needed to serve clients. And since it’s hard to find enough really good people to grow quickly, the merger was the best way to do it.”
“One of the major appeals to us as a small firm was the large reservoir of talent available through Hunton & Williams,” says Raleigh attorney Walton Joyner. “I no longer have to be all things to all people. When a client has a problem in an area outside my particular expertise, I can get the help I need from within the firm.”
“I used to get a knot in my belly when clients asked me if we could handle a joint venture involving a foreign country,” says Phil Carlton of Poyner & Spruill. “As a small firm, we couldn’t bring in a person with highly specialized expertise in international law or patents or communications law and expect him to spend three-fourths of his time on divorces. It’s a tremendous benefit to be part of a large, full-service firm.”
“Tax was our specialty, but since most clients want to get all their legal services under one roof, we were thinking about becoming a full-service firm,” says Richard E. Thigpen, Jr., a partner with Thigpen & Hines before the firm’s merger with Moore, Van Allen & Allen. “When the opportunity came along to merge, we saw we could get together with those folks and have what it would have taken 15 years to build on our own.”
Armistead Maupin, a senior partner with Raleigh’s Maupin, Taylor, Ellis and Adams, has been quoted as saying, “We merged to expand real estate expertise. We are seeing more mergers, but I don’t think bigness is a good reason to merge. In our case, it was expanding our ability to serve our clients.”
The desire to establish an immediate presence in a convenient location is another merger motivator, according to William F. Maready of recently-formed Petree Stockton & Robinson. “It had gotten so somebody from our office was in Charlotte every day, so we decided it was time to establish an office in Charlotte and went from there,” Maready explains. “We gave some thought to opening a branch office, but we knew the work our Charlotte clients needed done would require two or three lawyers and we didn’t have them to send from here. Besides, we wanted to ‘belong’ in Charlotte immediately.”
“Merging with Allen, Steed & Allen in Raleigh put us in a better position to do regulatory work because their offices were in the state capitol,” says Harry J. Grim of Moore, Van Allen, Allen & Thigpen’s Charlotte office. “The opportunity to have 11 established lawyers also gave us a better foot in the door in the Research Triangle area.”
Drawbacks to Consider
Lawyers involved in the state’s most prominent law firm mergers generally agree the benefits of merging far outweigh the problems. Still, many of them readily admit that law firm mergers are not without their drawbacks.
“You lose something when you get bigger,” says Petree Stockton’s Bill Maready. “The bigger you get, the more complicated things get. And there’s no way you can have a close personal relationship with everybody in a law firm of 50 or more people.”
“Even though we knew some of the people from Petree Stockton and thought highly of them, we weren’t interested in merging when they initially approached us because we weren’t inclined to give up any of our autonomy,” says Ray Farris, whose Charlotte firm, Farris, Mallard, Cummings & Buie, merged with Petree Stockton. “As we continued talking, though, we realized they had expertise it would take us years to develop, and that was attractive. It then became a matter of comfort with and trust in the people from Petree Stockton.”
“You give up some things when you merge,” says Dick Thigpen, “particularly if you’re a senior partner in the firm and are used to controlling the governance of your firm. Still, you can get most things you don’t like changed, and it doesn’t really affect the practice of law or your control over cases.”
“When a smaller organization becomes part of a larger one, the environment becomes more structured,” says Hunton & Williams’ Walton Joyner. “You end up doing administrative things their way. You become more aware of efficiency. There are more things to look after and more room for things to get out of control.
“There are clients who are afraid of bigness, and we knew we’d probably lose a few of them because of that,” Joyner adds “A lot of my clients needed reassurance that their bills wouldn’t double.”
“Our biggest challenge has been in making sure all the lawyers are comfortable and that they know and get along with each other,” says Harry Grim of Moore Van Allen. “We pay special attention to new lawyers coming in by assigning someone within their section to work with them from the beginning.”
“Our biggest fear was the fear of the unknown—the fear of change,” says Smith Helms’ Larry Dagenhart. “We tried to counteract that by keeping our people informed all along the way.
“There’s also the danger that large legal organizations will become more like businesses than professional groups,” he continues, “and that the trend toward bigness will eventually damage the quality of professional services. We want to keep our practice personal and professional.
“We want to be business-like, but we don’t want to be like a business. Law isn’t so much a money-making enterprise, although a lawyer’s expectation should be to make a comfortable living. We emphasize that delivering high-quality service in a highly professional manner is a reward in itself.”
Tips from the Recently Merged
For colleagues considering mergers, lawyers experienced with the process list the most important considerations.
“First, I’d ask the reason for the merger,” says Maready. “There has to be a good, sound reason related to the practice of law, and if there is, go find good, sound, competent lawyers who are with you philosophically. Then work hard.”
“Chemistry among the people involved is important,” adds Ray Farris. “If you feel any hesitancy on that score, I wouldn’t move ahead with a merger. And if you have any doubt about the fairness of the people involved, I’d pull back.”
“You have to ask yourself, ‘Can we do a better job for our clients?’” says Dick Thigpen. “‘Will the merger make the practice more efficient, more enjoyable and more profitable?’ Then you need to have as frank an exchange of information and philosophy as you can have with the other firm.”
“The first thing I’d do is employ an experienced consultant,” advises Charlie Melvin, whose firm worked with Altman & Weil’s Tom Clay on their merger. “A consultant can’t solve every problem, but it’s very beneficial to have someone to cause you to think about the major considerations.”
Most attorneys involved in recent mergers say it’s too early to tell just what the long-term implications of the merger trend will mean to the profession, but most believe the mergers will generate mostly positive results.
“I think the merger trend will be beneficial to the profession because we can be more efficient and provide better services,” says Harry Grim.
“For many years when people had complicated tax problems, they felt they had to go to New York or Philadelphia or Washington,” says Dick Thigpen. “You don’t find that now. North Carolina clients realize there are now firms in North Carolina that can do the work.”
“In the next 10 years, we’re going to see law firms in North Carolina much larger than firms on Wall Street were a few years ago,” says Maready. “That will make it extremely difficult for the single practitioner or the small firm.”
“There may be problems for the person who doesn’t want to be part of a large organization,” agrees Melvin, “although in certain areas, there will always be room for the lawyer in an individual practice who prefers to practice in a relatively narrow area of expertise. I would guess them are already fewer ‘renaissance’ lawyers now than there were 10 years ago, and that trend will probably continue.”
“We all seem to be getting oriented toward efficiency and specialization,” says Ferris, “and when you do that, you run the risk of losing an overview. The individual lawyer still needs autonomy and independence. You still need to recognize you have an responsibility to the community.”
Sidebar:
Eight Reasons Not to Merge
According to legal management consultant Tom Clay of Altman & Weil, Inc., one or more of the following factors “ought to stop a law firm merger dead in its tracks.”
1. Broad discrepancies in the earnings of the two firms. “If one firm makes a great deal more than the other, a merger won’t work.” says Clay.
2. Inability to agree on how partners are compensated. “Although the trend is definitely toward rewarding productivity, there are hundreds of ways to compensate partners,” says Clay. “If one firm bases compensation on production and the other bases it on seniority, they’ll have to resolve the difference one way or the other before they can merge.”
3. Differing philosophies in firm governance. “Typically, law firms start out with strong central leadership, evolve toward a more democratic system as they add partners and then limit to a more centralized governance by an executive committee,” explains Clay. “Both merging firms have to agree on one form of governance for the merger to succeed.”
4. Incompatible firm “personalities.” “Law firms develop their own personalities,” according to Clay. “At one extreme, you have a confederation in which each lawyer works pretty much independently. At the other, you have a close-knit, collegial firm in which the lawyers take more of a team approach to the practice. Obviously, the personalities have to mesh for a successful merger.”
5. Internal problems. “Occasionally, a law firm will try to use a merger to solve some basic internal problem that it’s unwilling or unable to face,” says Clay. “It might be personality conflicts, an inability to deal with an unproductive partner, problems with governance structures, economic problems, or difficulties in arriving at common business goals for the firm. Both firms need to get their own house in order before they consider merging.”
6. Lack of synergy. “If each of the firms can’t expect to benefit, the merger shouldn’t take place,” says Clay. “The effect of a merger should be synergistic, so that two plus two equals five.”
7. Differing philosophies about the approach to client service. “If, for example, one firm has quality control as its highest priority and the other is primarily oriented toward profits, the merger won’t work,” Clay says.
8. Inability to agree on a name for the merged firm. “Our market studies have shown that the name of the law firm makes little to no difference to clients,” says Clay, “but I’ve seen mergers that would have worked out fall apart because they could never agree on the name of the new firm.
“There’s usually a lot of ego involved, as well as concern on the part of one firm about appearing to have been acquired by the other. One of the first things I do is try to get the two firms involved to agree on the new firm name before we get too far along in the evaluation process.”
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