Going separate ways

When the marriage of two firms turns sour, divorce may seem like a quick way out.

However, as paula rohan reports, the process may not be quite as painless as the parties expect

Mack Dinshaw, senior partner of legal consultancy Law Mergers & Acquisitions, sees mergers between firms as having parallels with a love affair.

There is the meeting, the wooing, the decision that the two were meant for each other, the public declaration of commitment, and the honeymoon period.

The trouble is that when a merger goes wrong, the parallels do not disappear.

'A merger is like a marriage, and a demerger is very much like a divorce,' he explains.

'The process can get very acrimonious and expensive, and most parties lose out not just financially but psychologically when it all turns nasty and each blames the other for everything.'

Not all demergers are so painful; last month south Wales firm

Hugh James split from west country-based Ford Simey because it wanted to take a national approach to its work, while Ford Simey was more focused on local business (see [2002] Gazette, 14 February, 9).

'Our experience was probably untypical in the sense that we were able to operate as two profit centres, which made for a clean uncomplicated break,' explains Matthew Tossell, managing partner at Hugh James.

'There were no difficulties at all with the demerger.

In terms of the business rationale it was certainly the best thing to do to service the two constituent markets.'

However, even for the firms which manage to keep things friendly, there are the practical struggles of a demerger.

It has grown more complicated over the years, says Michael Kenyon, a partner in new Manchester firm Cooper Kenyon Burrows.

He and four other partners left criminal firm Burton Copeland last month to concentrate on white-collar crime.

'The logistics of setting up a new firm are far more complicated than they were 20 years ago, when you could set up on Monday morning, ring the VAT people and get a number, ring the Law Society and get a legal aid number, and then you'd be up and running,' he says.

'Now you've got to get a franchise or a contract, it takes several weeks to get a VAT number, it takes weeks for BT to set up your telephones.

You are really slowed down by the organisations you have to deal with.'

Paul Roberts, managing partner at Mayfair firm Forsters, says another problem can be dealing with complex relationships that have built up over the years, both inside and outside the firm.

Forsters was formed following the 1998 merger between City firms Eversheds and Frere Cholmeley Bischoff.

He and ten other Frere partners were not happy with the way things were going, so they upped sticks and set up on their own.

Although he has no regrets about his decision, Mr Roberts admits that taking such a major step is not the simplest operation to carry through.

'The main problems are the intricacies of ongoing obligations towards the partners, the staff, the clients and then everyone else in the world, the most obvious being your landlord,' he explains.

'When you split up you have to deal with all of those.'

Mr Roberts emphasises that it is important to be realistic about how the break-up is handled when it comes to clients.

'At the end of the day, a client you fight over is a client you will both probably end up losing,' he warns.

'It is obvious that they will follow the people and the specialists they like, so you are a bit arrogant if you think you can just decide to take a client away with you, because it is not your choice.'

Mr Dinshaw says the only way to get around these problems and still be friends is to be 'grown up' about it.

'When partners decide to go their own ways, they realise that other people now have sensitive information about them, that they have opened themselves up - it is like undressing in public,' he says.

'They must agree to go their own ways without poaching clients, they must agree to take the clients they had previously, agree to be confidential and be gentlemen about the whole thing.

They just need to take their luggage and go - or the story about their bitter arguments will end up in the Gazette.'

Probably the most important element is demerging for the right reasons.

Martin Staples is one man who has seen a number of changes over the last few years, both in terms of mergers and demergers.

He was senior partner of insurance firm Vizards when there was an agreement to dissolve in 1999 and become two separate firms.

Two-thirds of the partners joined him in a merger with fellow insurance firm Bannisters to become Vizards Staples & Bannisters (VSB), and the remainder became Vizard Oldham.

In November last year, VSB merged with AE Wyeth to become Vizards Wyeth.

And Vizard Oldham recently linked up with Weightmans.

Mr Staples says that if there is one thing he has learned from the musical chairs, it is not to take that momentous decision lightly.

'People need to look extremely carefully about why they are demerging,' he says.

'You need to get the backing of your bankers and accountants, you need to take a strategic approach, look at the market you are working in and make a business decision.

You can't just think that you're a bit cheesed off so you'll demerge.'

Mr Dinshaw says the same thing goes for mergers, as ultimately prevention is better than cure.

He advises his clients that the best way of avoiding the hassle of a demerger is to go into a merger for the right reasons.

'A bad reason, for example - and one which is quite common - is that a firm has an empty floor in its building.

I tell people: "If you have floor space that you need to fill, then go to an estate agent and get them to let it.

Don't get involved in a merger".'

But Mr Roberts is convinced that, ultimately, a demerger does not have to be seen as a negative move, so long as it is handled properly.

Ignoring your instincts can work out worse than rashly following them, he says.

'You will never be popular for implementing change, but if it is properly done, it can be beneficial.

It is better than being a group of partners hanging about together just because that's what you have done forever - even though you don't really know why - because you don't want to take a risk.

With risk comes reward, if it goes well.'

Mr Roberts says he has learned two valuable lessons about how to get through a demerger.

First, as any divorce lawyer will tell you, the best thing to aim for is a clean break.

'Do it as quickly as possible, because dragging it out just creates an opportunity for acrimony to creep in,' he says.

'You can't say, "Let's split by agreement in a year's time", because between now and then the two sides of the split are looking at their own interests, not the interests of the firm.'

Secondly, do not dwell on matters unnecessarily: 'We were given a sound piece of advice, which was to get the right balance between time spent looking at the past and time spent looking at the future.

It is far more important to spend time, money and resources concentrating on your new firms, rather than having bitter arguments about the carcass of the old one.'