MERGING FIRMS SHOULD KEEP THEIR IDEAS UNDER WRAPS AND LEAVE THE MARKETING TO THE PROFESSIONALS, SAYS JON ROBINSThe secrecy in which City firms Denton Hall and Wilde Sapte managed to tie the knot last month surprised commentators, and reaffirmed the widely accepted wisdom that the best way for firms to promote their mergers is to keep their mouths shut until there is something to talk about.There are frequent punch-ups on the path to the merger altar, and occasionally beyond.

Earlier this month, an undignified war of words broke out hours after the merger of London commercial firm Finers and high-profile media firm Stephens Innocent was announced.

An aggrieved former suitor of Stephens Innocent - City firm Rakisons - gatecrashed the celebrations, expressing outraged surprise at the choice of Finers as partner.

Finers had represented Stephens Innocent in Rakisons' own merger talks with the firm.

Rakisons senior partner Tony Wollenberg told the Gazette that the fracas was 'not a question of sour grapes but of professional conduct', (see [1999] Gazette, 10 November, 6).Such high profile bickering is likely to become increasingly common as more and more law firms leap in and out of bed with each other.

Last year, a survey of 90 law firms by accountants Smith & Williamson found that 73% of the firms had been approached with a view to a potential merger in the two previous years.

This month an international poll of firms by ELD International - including 21 top global law firms such as Allen & Overy, Linklaters and Alliance, and Clifford Chance - revealed that 52% were actively seeking alliance partners and over one third were looking for merger mates.Unsurprisingly, Finers and Stephens Innocent are bullish about the negative press coverage.

Finers' senior partner Peter Jay believes that clients are not affected by disputes.

Staff are 'buoyed up' by the merger, he says, and the firm has no interest in what Rakisons has to say other than to counter 'the wildest of their distortions'.

The senior partner at Stephens Innocent, Mark Stephens, agrees, and reports that Finers Stephens Innocent - as the firm is to be called - has just been instructed on a £90 million deal.

'If you ask people what they know about the Stephens Innocent merger in the new year,' Mr Stephens says, 'they'll know about it - and that's all that needs to be said.'At Rakisons, corporate partner Jonathan Polin says the spat is over as far as his firm is concerned.

He says he would have preferred to keep the discussions with Stephens Innocent under wraps, and adds that he believes there is a role for the Law Society in developing a protocol governing law firm advisers to a merger.Of course, Denton Hall and Wilde Sapte themselves have both been around the block a few times in their search for a merger mate, and this time went to great efforts to avoid industry gossip.

Only 12 months ago, Denton pulled out of a tripartite merger with Theodore Goddard and Richards Butler, and three years before that, the firm had failed in another three-way link up with Cameron Markby Hewitt and McKenna & Co, now Cameron McKenna.Famously, Wilde Sapte last year failed to merge with Garretts, the law firm associated with Big Five accountants Arthur Andersen.

Francis Quinlan, a consultant at legal consultancy Hildebrandt Interna-tional, remembers the 'excitement and fireworks' that accompanied Arthur Andersen's courting of Wilde Sapte.

Photographs emerged of leading lights from the two firms sitting side by side but when the talks collapsed the solicitors were left with egg on their faces, he recalls.According to Virginia Glastonbury, the deputy chairman of Denton Hall, this time around the two parties decided to do it differently.

A 'small and tight' negotiating team of six senior staff from the two firms was assigned to draft terms and conditions.

It was set a six-week timetable to formulate proposals that would go before the other partners.The firms met the deadline and the plans went before the partners on a Thursday, and they voted to accept them the following Monday.

Overnight a document - under the cheery name 'Good Morning' - was published and on desks by the morning.

If staff were on leave or secondment, then documents were taken by courier to them and clients were also told before the firm went public.For merger talks to succeed, it is crucial they are held in confidence, says Vanni Treves, the former senior partner of City firm Macfarlanes and a self-confessed merger sceptic.

He makes the point however, Denton Hall/Wilde Sapte talks aside, that the only other example of merger talks which were held in complete secret were those surrounding Clifford Chance's merger more than a decade ago.

Confidentiality might be crucial, but it is also almost impossible to guarantee, as partner approval has to be sought and clients consulted, he reckons.Once the gossip starts, he believes that its effects are 'extraordinarily de-stabilising' for firms.

The head-hunters start moving in on those partners and assistant solicitors who are perceived to be unhappy, and disaffected staff start updating their CVs.

In the case of Wilde Sapte's unsuccessful merger talks, Mr Treves says that partner departures happened 'in spades'.Ronnie Fox, senior partner and partnership law expert at City firm Fox Williams, believes law firms should leave the marketing to the experts.

He says: 'One of the problems with law firm marketing is that lawyers think that they are good it'.

He adds that it looks 'terrible' when two firms are incapable of producing a consistent line on their rationale for their proposed relationship.

In merger-speak, it must be evident that two plus two equal five.Fenella Gentleman, a consultant at public relations firm Fishburn Hedges, which advised on the Eversheds regional mergers and the Cameron McKenna merger, says that the starting point for firms is to ensure negotiations remain behind closed doors.

However they should be prepared for the eventuality that talks leak and contingency plans, such as a holding statement and a prepared spokesman, should be ready.She believes firms concentrate too much on 'hard' business issues at the expense of 'softer' ones, such as the culture of the merged firm and motivating staff.

'It is critical that firms communicate with their internal audience and clients at the same time as they announce to the media what is going on,' she says.Often the best way of doing that is to prepare a booklet for staff and clients that is with them within half an hour of any press release.

It is worth starting work on the document early, she says, as it can be a catalyst for confronting issues which would otherwise be left until the end of the process.According to Tim Prizeman, a director of public relati ons consultancy Kelso, lawyers often call on the professionals too late in the day.

When firms go into merger talks they enter a period of purdah, he says, focusing only on matters of internal organisation, and calling on external advisers only when that is out of the way.

Firms should capitalise on the momentum a merger brings.

'Change can be an impetus,' he says.When marketing mergers, firms need to identify which new qualities the deals will bring to their practices, says Francis Quinlan at Hildebrandt.

Firstly, he says they have to consider whether there are any added competitive strengths.

For example, has the merger helped the firm bring extra quality in the key service areas? he asks.

After that, he says firms need to establish whether it can improve service through better geographical or industry segment coverage.

In addition, the merger could have strengthened relationships with existing clients or introduced better IT systems to the firms.But no amount of marketing can save the merger where the chemistry is lacking, argues Mr Treves.

Looking back over what he believes to be the evident lack of success by firms to join forces over the years, he says marketing difficulties are so great that they make it even more difficult for firms to 'make two plus two equal five'.ALAN HODGART LOOKS AT WHY FIRMS SEEK TO MERGE, AND WARNS THAT MANY HAVE POOR STRATEGIC REASONS FOR DOING SOThe UK legal profession is heading towards a major period of consolidation should even half of those in merger talks at present carry out their intentions.

There are currently a significant number of merger talks being held between firms in the UK.

Discussions about possible transatlantic mergers have increased significantly.

And a large number of UK firms are investigating the possibility of a mainland-European merger.

A look at why firms chose to merge in the past, and what happened, should be helpful to those contemplating a merger.There are only two strategic justifications for merger, and in recent years a number of firms have demonstrated these.

The first justification is where two firms, with complementary strategic objectives, are better able to achieve these objectives by merger than by remaining independent.

The critical issue is that the combination provides the new firm with an enhanced competitiveness over and above either of the constituent firms prior to the merger.Effective mergers under this justification have occurred when management recognises both the competitive forces in its key markets and its own weaknesses in regard to these forces.

Good examples here are firms seeking to compete in focused work types but who lack the critical mass; finding a merger partner in much the same situation, but where a merger creates critical mass in those work types, has been an effective approach.The second strategic justification occurs when one firm (often the smaller one), merges with another, and the resulting enhancement to the first firm's competitiveness catapults it into a market position to which it could not have aspired had it remained independent.These mergers are particularly effective when the smaller firm brings a specific strength that improves the overall competitiveness of the larger firm: the larger firm is strengthened in its existing position and the small firm raises its market position.

There have been numerous examples of successful mergers under this criterion although they are often written off derisively by the critics as 'takeovers'.Takeovers they might be, but some have been very effective indeed.

The larger f irm closes a gap in its competitiveness and the smaller firm has an enhanced client base with which to work, along with the prospect of playing on a much larger stage than before.

A so-called takeover of a small professional services firm by a larger one can be a very effective partnership provided both firms are strong in their respective markets and there is a two-way benefit from the deal.Another successful merger approach has come about where one firm has a viable business, but an increasing overhead cost is eroding profitability.

A good merger can occur where the overhead cost is essential in order to compete, but the business is, at present, not large enough to generate adequate profits, and it cannot afford the growth required to achieve the necessary critical mass.

If an astute managing partner in another firm sees the opportunity to reduce overheads and improve profitability in the merged firm, this will help achieve a successful merger.Many of the other reasons for firms merging are weak on strategic grounds and carry a high degree of risk.

One such reason a number of firms cite at the moment is 'security'.

They are feeling threatened even though their profitability is holding up.

There is a strong sense in these firms, however, that this profitability is being achieved by everyone working ever harder.

There is a limit to how long this can continue, and partners in these firms sometimes see 'strength in size'.Many firms believe that by being bigger, the merged firm will be somehow more secure.

This is a fantasy, unless the merger meets one of the two justifications set out previously.

There is not necessarily a connection between becoming stronger in a competitive sense and becoming bigger.

Growing in size without any clarity about competitiveness in a desired market position can leave a bigger firm more vulnerable than a smaller one.Another poor reason for pursuing merger, but one we see regularly, is that of the declining firm.

Partners see the business declining steadily but are not willing to make the often painful decisions necessary to address this.

They see a merger as a way of letting someone else address their problems.There are occasions when such a merger is effective, but it has some specific conditions attached.

One is that the merger partner sees a significant boost to competitiveness by addressing some of the problems and the merger agreement does not prevent the problems being addressed.

A second condition is that the cause of the decline is isolated and identifiable, and does not run right through the business.

We have seen a situation where a few partners in a firm were stifling the productive efforts of the majority.

Removing the problem partners, which a merger allows, transformed the business.What rarely works is a situation where a firm that faces irreconcilable tensions within the partnership seeks a merger but wants to take the whole firm.

The logic is that the problems will disappear in a much larger environment.

The critical issue is that such problems infect the new firm and continue to stifle development, to the detriment of everyone.Some of the most disastrous mergers of all are what we call 'senior partner mergers'.

A few senior partners in both firms know each other well and, over a series of meetings, convince themselves that the merger is a good idea.

They dress the reasons for the merger up in dubious logic (easily recognisable) when the reality of the matter is that they are all a bit tired of running their own firm and are hoping that the other side will do it for them.

These are, without exception, terrible disasters.This is also the case of firms who seek to merge simply because they feel they lack leadership succession.

Many of these mergers lack any strategic logic, and it is only too easy to talk of 'increased size in key areas'.

Whether such an increase means 'more competitive' is never addressed.

The outcome in these cases is that most of the partners in the firms that lack leadership succession eventually leave and the question of whether the real issue was an unwillingness to be led remains unanswered.Any merger that has a negative issue at its heart is unlikely to succeed unless this is more than offset by a positive strategic enhancement in the merged firm.

The most successful mergers are those that have been driven by a real strategic logic.LINDA TSANG CHARTS THE DIARY OF A MERGER AND FINDS THAT THE TIMETABLE CAN BE CRUCIAL TO ITS SUCCESSThe legal profession is currently experiencing merger mania.

Almost every week has seen the announcement of a law firm merger, from a regional tie-up - such as the one mooted by East Anglia firm Mills & Reeve, which is in merger talks with Birmingham firm Martineau Johnson - to the City merger of Denton Hall and Wilde Sapte, and beyond, to the global giant which will be created when Clifford Chance, US firm Rogers & Wells and German firm Punder Volhard Weber & Axster merge to form the largest law firm in the world next January.But one firm which has embraced this business strategy has merged not once but twice in the last 18 months.

Exeter firm Stones merged with Cann & Hallett in 1998 and then with Burd Pearse in 1999.

The firm's letterhead gives the merged firm the name of Stones (incorporating Cann & Hallett and Burd Pearse), but, acknowledging the fact that one of the issues with mergers is what the merged firm will be known as, the firm is known generally as Stones and not the unwieldy formal name.The original Stones dates back to around 1917, and is one of the largest practices in Exeter, with a presence in Okehampton and a smaller office in Torrington.

It offers a range of services to private and corporate clients, with niche areas such as sports, travel and tourism, timeshare, personal injury and family law.Senior partner Hugh Winterbotham says: 'The two main reasons for merging were that we wanted a larger base in Exeter and to develop further specialist areas of work.

Merger was chosen over organic growth because organic growth would have been very slow and we wanted to make a more rapid impact.

Exeter is an enormously competitive city and other firms in the region have been moving into the Exeter area to open up local offices, but that was not the driving force behind the merger.'September 1997: the search is onHaving made the strategic decision to merge, the next task for the firm was to find potential merger partners.

Mr Winterbotham says: 'We had had previous discussions with other firms, which did not materialise.

Our perception is that it is difficult to merge with firms in the same town because of the psychological problems with the takeover factor - merger is too often perceived as a takeover, and not a genuine merger.'The initial talks were in spring, then both firms had to deal with their own financial year ends and the talks were resurrected in September 1997 - we were very keen to expand in Exeter and their practice had certain specialist areas which complemented our own business and which didn't overlap too much.'Having found a potentially suitable merger partner, it took three months to deal with the main heads of agreement, and the timetable was set for the merger date to coincide with the financial year end of Stones (30 April), which both firms worked towards.

All the partners knew about the decision to merge but the senior partner/managing partner Mr Winterbotham and the practice manager John Tuckett carried out the day-to-day negotiations.December 1997/January 1998One slight hiccup was that the heads of agreement took a month longer than anticipated; instead of being finalised in December 1997, they were not settled until the end of January, leaving only ten to 11 weeks to carry out the merger deal.

There were no major hurdles or dissension, which meant that the timetable was adhered to.

As Mr Winterbotham says: 'Generally most partners were enthusiastic and no one was adamantly opposed.'The firm's accountants were also brought in.

Mr Winterbotham recalls: 'Although we did the vast majority of the negotiations ourselves, we felt the accountants would be useful when a few difficult issues had to be resolved.

We got advice on valuations and accounting issues but also used Stephen Gratton, a partner with Ernst & Young in Exeter, to assist with the final negotiations.'1 May 1998: first merger officialThe first merger was official, and the only hiccup was that there was a delay in putting the IT structure in place - but that was done by 18 May 1998.October 1998: more merger movesLess than six months after the first merger, the firm approached nearby practice Burd Pearse, which had been in discussions with a few other local firms but then decided to go ahead with Stones.

After the financial matters were dealt with, the heads of agreement were signed early this year.Mr Winterbotham explains: 'The first merger identified the issues that were 'deal breakers', which at the second merger were addressed at an early stage - essentially that is the financial side of capital, contributions, profits and work in progress.

The second merger was a logical and natural progression in that with the first merger we acquired a smaller Okehampton office.

Through merging with Burd Pearse, the largest practice in Okehampton, we could develop a cohesive and strong practice in that area.

On a day-to-day basis this could be run by the existing partners, albeit under the umbrella of the firm.'1 May 1999: second merger officialThe merger with Burd Pearse was official.

Mr Winterbotham says: 'From the practical side, after the two mergers, the practice has grown one-third in size (to 18 partners), operating from split sites - one commercial, the other private client work.

This was not the preferred route but it offers a practical solution.'According to Chris Bush, a senior manager at Ernst & Young who also advised on the merger between Stones and Cann & Hallett, whatever the size of the merger, timing is crucial as to whether and how an initial agreement to merge progresses to a successful merger.

He says: 'As a general rule, you have to move fairly quickly after the initial agreement - about six to nine months up to the actual merger; any longer and you risk losing the momentum.'Having completed two mergers in such a short period, Mr Winterbotham adds that one of the lessons - and benefits - of the first merger was that the firm did not need to bring in external consultants for the second one.

He also has advice for any other firms looking to merge: 'Have a clear objective and strategy.

Balance that by not being too prescriptive on who you will talk to or not.

You have to be prepared to look at opportunities available but you also have to bear in m ind that you have to make it work as a genuine merger rather than a takeover and in negotiations it is important to deal with real issues as quickly as you can.

Don't merge for merger sake.'And is the firm still looking to merge and make it three in a row? He says: 'Yes, with the right firm - and if the opportunity is out there.'