Merger mania can be a road to ruin

My first journalism teacher always told me a headline needed one of two elements: sex or cash.

In legal reporting, the chance to write stories about the former are sadly all too rare. But the latter, ideally with a little ‘£m’ to really grab people’s attention, is mercifully more common.

Mergers are a godsend when it comes to this phenomenon. Inherently, they’re a pretty dull story: two firms you probably haven’t heard of come together, using nonsense terms like ‘synergy’ and ‘shared valued’ and include a picture of two old men in suits shaking hands.

But when you combine the firms’ revenue figures, and add some alliteration, you have yourself a ‘Merger mania as £50m deal is finalised’ headline. Clickety click, take the rest of the afternoon off.

The trouble is this makes one glaring assumption: that the merged firm will inevitably rake in the same cash that the firms made separately before the deal. It ignores all the different factors that can turn a merger sour and promotes the line that business will continue as usual.

One common factor from several law firm struggles of the past couple of years has been the simple problem of growing too quickly.

Law firms, transfixed by consultants telling them to merge and scared of their own diminishing profit figures, have jumped into partnerships and takeovers often with their eyes shut.

North-west firm Linder Myers bought five practices in three years prior to running into trouble, leaving it with a portfolio of offices all dancing to a different tune across the region. Having been saved through a deal with Assure Law, the firm now thrives again.

Quindell could barely stop coming back for more as it furnished the stock market with exciting news of yet another takeover, all the time apparently forgetting to put in place any plans to make money.

Merged firms make one glaring assumption

Slater and Gordon, bless it, went meta-merger last year by buying Quindell itself, adding it to a sprawling collection of firms that must be difficult to bring under control.

This week’s fable comes from Parabis, which brought claimant and defendant firms under its wing without ever seeming to worry if they would fit together.

As the administrators explained, Parabis companies worked under multiple systems and ways of working, bringing about inefficiency and increased costs. It was a recipe for disaster and now creditors receiving 2p in the pound are paying the price.

Mergers are not inherently bad. Plenty of firms have grown in recent years and not suffered for it. But those managing partners and chief executives seeing a takeover as a quick fix to maximise profits are taking a huge gamble unless they have a long-term plan in place and staff happy to integrate and bend to a new way of working.

After all, in the corporate world, studies regularly show that at least half of mergers damage shareholder value.

Big is not always beautiful.

John Hyde is Gazette deputy news editor