The Current Trends of Mergers - Term Paper Example

The Role of Mergers in B2B Law Firms Operating in UK and US Markets - Problems and Advantages Introduction The development of the phenomenon of mergers and acquisitions globally has been related with the need of the firms around the world to secure their position in the market by increasing their financial strength. Towards this direction, Schraeder et al. (2003, 511) supported that ‘mergers and acquisitions are becoming a strategy of choice for organizations attempting to maintain a competitive advantage’. However, there are cases that M&A do not lead to the required result – probably because the necessary measures are not taken in advance or because the firm is proved to lack the appropriate financial resources in order to respond to the needs of the relevant effort. At a next level, the changes in the firm’s financial policies – because of a merger or an acquisition – can cause the decrease of organizational performance either in the short or the long term. The specific issue was highlighted by Knyphausen et al. (2007, 344) who noticed that ‘most merger and acquisition activities destroy value; one reason for this is that acquisition premiums tend to be too high in relation to the synergies that motivated the premiums paid’. Because of the above risks related with mergers and acquisitions, when such schemes have to be realized by managers of firms worldwide it is quite possible that specific measures are taken in order to protect the firms’ assets from a potential failure. In this context, firms that operate in the modern market use to follow different directions in order to complete the relevant procedure. The specific issue was examined by Gondhalekar et al. (2004, 735) who supported that ‘over-invested firms pursue acquisitions more aggressively by paying higher premia while under-invested firms pay less, on average; agency rather than synergistic or hubris effects influence the level of merger premia’. In other words, firms tend to behave differently when having to be involved in a relevant effort; their financial strength as well as their targets as set by the firms’ managers are the most common criteria for the development of specific strategies regarding the completion of a merger (or acquisition) initiative. Current paper focuses on the examination of the role of mergers in Business to business Law firms within the British and the USA market. The current trends of mergers within the specific areas – especially in relation with the particular industrial sector – are going to be presented trying to identify and evaluate the factors that can lead to the development of corporate activity of firms belonging in the specific industrial sector – always referring to the use of merger as a strategic tool for improvement of the organizational performance. 2. B2B Law Firms operating in UK and US – overview and statistical data The legal industry in USA is well developed. Most of the firms operating in this industry are large firms with a high number of employees. In accordance with a series of relevant statistics the number of law firms operating currently across USA with more 50 attorneys is estimated to 900. Moreover, it is supported that ‘a medium and large firm market accounts for less than 1% of the entire U.S. legal market while over 76% of all U.S. firms have less than 4 employees’ (Legal Marketing News, 2005, online report). Under these terms the major problem for legal firms operating in USA is to establish their position in the specific market. From another point of view the above statistics can lead to the assumption that the high percentage of legal work in USA is not ‘fragmented’ and only in large firms operating internationally the specific risk (dependence on particular clients for the survival of the firm) could be possibly exist. The operation of law firms within the international market has been extensively examined in the literature. A relevant study is that of Segal – Horn et al. (2007) which was based on a research (interviews) conducted among the largest law firms in UK. It was proved that when having to proceed to a merger all these firms would follow similar strategies referring to the following issues: ‘a shift to a “managed” firm and decline in professional autonomy; post-acquisition integration and merger process issues; operationalization of global practices (such as common technology platforms, common systems practices, common human resources management practices and cross-border intra-firm working relationships) to achieve consistency throughout the integrated firm’ (Segal-Horn et al., 2007, 206). In practice, the B2B law firms operating in UK and USA are quite powerful (referring to their financial strength) but they all face the pressures of the market; under these terms the use of merger as a strategic tool for the increase of the firms’ profitability can be considered to be absolutely justified. The statistics related with the performance of USA law firms prove that these firms have a significant market share and their development through the years is achieved through the gradual increase of the volume of work rather than the geographical expansion. On the other hand, the phenomena of merger and acquisitions in the specific industry are quite often presenting a trend for further increase. In accordance with a report published by the Legal Marketing News in 2005 (online report) ‘consolidation in the profession will continue in 2005 primarily through lateral acquisitions of prominent partners and practice groups; there were 69 announced law firm mergers and acquisitions worldwide reported in Hildebrandt Headlines in 2004; there were 47 completed domestic and transatlantic U.S. mergers in 2004 (increased from 2003), as noted in Hildebrandt International’s MergerWatch’ (Legal Marketing News, 2005, online report). Despite the increase of the number of mergers in the USA law industry it could be stated that the performance of these firms remains at high levels (especially if compared with the performance of other firms – in the services industry – operating in the USA market). The latest available data on the financial performance of law firms in USA prove that these firms have a high level of profitability managing to increase their performance on an annual basis. More specifically, in accordance with a series of statistics revealed by Raj (2007, online article) ‘the legal services industry in the US generated approximately $184 billion in revenue in 2002; this figure includes revenue generated from law-firms, solo practitioners, title and abstract companies and various other organisations that provide assorted legal services’. There are no data available regarding the performance of legal firms in USA for the years that followed. It can be assumed – taking into account also the trends presented above regarding the development of the USA law industry – that the performance of USA law firms has been further increased from 2002 and onwards. In UK also the law industry faces a period of long term growth. In accordance with a recent report ‘the year 2007 finds the City of London a global crossroads, home to thriving financial, labour and retail markets; it is also the worlds most competitive legal bazaar--following a mid-1990s liberalisation of the UK legal market, over 200 foreign firms stampeded the City, and today three of the five largest and most profitable law firms in the world are headquartered there (Clifford Chance, Freshfields Bruckhaus Deringer and Linklaters)’ (Vault, 2008, online article). The development of law industry in UK has been the result of appropriate political decisions and market initiatives; apart from the liberalization of this market as mentioned above other factors, like the high profitability of the local market (City of London) and the entrepreneurial activity in the specific country has led the legal services in this country to a continuous growth. In UK, like in USA, the phenomena of mergers and acquisitions in the law industry are quite often. More specifically, in a relevant report it is noticed that ‘for many London firms, and especially those handling corporate matters, 2006 was a banner year; a global rise in transactional and M&A work, combined with the strong performance of the FTSE 100, led to an influx of mandates; UK law firms are also benefiting from the Sarbanes-Oxley Act, a US Securities and Exchange Commission initiative’ (Vault, 2008, online article). Under these terms it is proved that the market conditions are similar for the USA and the UK law firms; the performance of both is being increased on a continuous basis while the market conditions in both countries are offered for a long term increase in the legal sector. The mergers and acquisitions developed in the specific sector have helped the firms operating in the specific industry to further increase their profits. 3. B2B Law Firms operating in UK and US – problems and advantages The development of corporate activity of law firms in USA and UK markets can be evaluated after referring to a series of statistical data related with the levels of participation of these firms in Mergers and acquisition projects. In accordance with a series of statistics revealed by Martine (2005, online article) in USA ‘mergers dominate the market; the first half of 2005 has already seen 34; these mergers have created huge “megafirms.”’. The new corporate entity (resulting by the merger of law firms) will be stronger financially but also geographically covering a wider area either in the local or the international market. The most severe risk for the US law firms is the existence of fragmentation in the specific sector. This fragmentation can lead to the increase of dissolution of law firms. Of course the high revenue of these firms (in the report of Martini, 2005 it is noticed that ‘the 100th firm still has more than 410 lawyers and more than $161 million in revenue’, Martini, 2005, online report). Practically, this means that if the major clients (it could be just one) of a law firm choose to cooperate within another legal firm the loss will be significant; alternative investor could be then identified in order to secure the continuation of the firm’s activities in the long term. A severe threat for the UK law firms is the development of operation of USA law firms across the country; offering higher salaries these firms can have the best professional support compared to the British firms that prefer to keep the remuneration of their employees at a specific level minimizing operational costs as possible. In a relevant research it has been proved that ‘many UK firms face an additional threat: the defection of their best performers to higher paying US firms; the top 50 of these US firms employ more than 3,000 lawyers in London alone, two-thirds of whom are English-qualified’ (Vault, 2008, online article). It is perhaps for this reason, increase of benefits of employees and increase of employee motivation, that the performance of USA firms in London is increased the last years. Specifically regarding the performance of these firms for 2006 it is noticed that ‘in 2006, revenue for US firms in London grew by 17 per cent to #1.4 billion, compared to the 13 per cent revenue growth tallied by UK firms’ (Vault, 2008, online article). Under these terms it is clear that the performance of UK firms need to be improved further changing the policies followed until now regarding the internal and external corporate strategies (referring also the remuneration of their employees). Of course, the merger – as a suggested solution – could help towards the increase of financial strength of the law firms operating across the British market – especially for the UK firms rather than their USA competitors. 4. Conclusion - Recommendations The development of the merger procedure requires the existence of specific requirements in the firms participated in the relevant project; however, different policies can be followed by the relevant firms. In accordance with the study of Clougherty (2003, 115) ‘(a) Antitrust institutional independence plays a fundamental role in determining the effectiveness of corporate political activity, and (b) domestic mergers with international competitive effects are more likely to receive positive antitrust reviews’. Other criteria can be set by the legislators in each specific case in order for the whole effort to proceed and to be completed successfully. It should be noticed that the success of the relevant effort is highly depended on the firms’ managers. The latter can decide on the procedure followed for the completion of the relevant project while additional suggestions can be made throughout the progress of the above project – until its completion. The performance of B2B law firms that operate in UK and USA has been proved to be influenced by the merger – when the latter is chosen as a strategic tool of performance development. References Clougherty, J. (2003) The Roles of Institutional Independence and International Competitive Effects. Business and Society, 42(1): 115-143 Gondhalekar, V., Sant, R., Ferris, S. (2004) The price of corporate acquisition: determinants of cash takeover premia. Applied Economics Letters, 11(12): 735-739 Knyphausen, D., Koeppen, J., Schweizer, L. (2007) Identifying synergies ahead of mergers and acquisitions. International Journal of Financial Services Management, 2(4): 344-360 Legal Marketing News (2005) U.S. Legal Industry Overview, online, available at http://www.envisionagency.com/LMN/LMN_2005_Feb.htm Martini, J. (2005) Marketing and Megafirms, New York Law Journal (10-6-2005) online, available at http://balkininfo.blogs.com/legal_marketing/legal_industry_marketing_news/index.html Raj, M. (2007) United States Legal Industry and Legal Process Outsourcing to India, online, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=960967 Schraeder, M., Self, D. (2003) Enhancing the success of mergers and acquisitions: an organizational culture perspective. Management Decision, 41(5): 511-522 Segal-Horn, S., Dean, A. (2007) The globalization of law firms: managerial issues. International Journal of Service Industry Management, 18(2): 206-219 Vault Europe (2008) The State of the UK Law Industry, online, available at http://europe.vault.com/nr/newsmain.jsp?nr_page=3&ch_id=242&article_id=26979956&cat_id=3171 Appendices Appendix I Questionnaire (among employees of B2B law firms operating in UK and USA) 1. Which is the position of your firm within its market? 2. Was merger the most appropriate strategic tool for the development of corporate activities? Were other options available towards the same target? 3. Which do you consider to be the major advantage of your firm? 4. Which is the main corporate disadvantage? 5. Has the firm developed any strategic alliances within its market? 6. Which will be the major problem regarding the completion of the merger process? 7. Which would be the major benefit of the merger attempted for the organization? 8. Are there any risks related with the completion of this procedure? 9. Are there any alternative plans of action in case of failure of the merger project? 10. Which will be the cost of the procedure – in terms of funds, resources and time required for the firm? 11. Is the effort (merger) paid back (in terms of the benefits expected)? 12. Which is the time expected for the benefits of the merger to appear? 13. Which are the benefits offered by your firm in terms of the performance of its employees? 14. Would you evaluate the strategic choices of your firm as appropriate taking into account the current market conditions and the strength of competitors? Appendix II Figure 1 – Mergers and Acquisitions - by industry, 1988-2004, available at Global Policy Forum, http://www.globalpolicy.org/socecon/tncs/tables/mergesector.htm) Read More