With worries about a potential recession plaguing partners’ minds, law firm merger mania is now in full force, with Biglaw firms combining with competitors and gobbling up boutiques as well. While many firms have had luck in finding merger partners, others are finding nothing but trouble in a would-be paradise.
Take Stroock & Stroock & Lavan, for example. The New York-based firm has lost quite a few partners in recent years, and it made headlines last month after ringing in the new year by conducting a round of layoffs. While Stroock has been in merger talks with quite a few Biglaw firms, it hasn’t been able to find a successful match yet. The American Lawyer has the scoop:
[T]he law firm is facing some challenges to a combination, including its pension program for retired partners and its accrual accounting system, according to sources familiar with the matter.
In particular, Stroock has been in discussions with McGuireWoods, Steptoe & Johnson and, most recently, Squire Patton Boggs, according to a source. Representatives for these firms did not return messages seeking comment on merger talks.
In a statement, the law firm declined to comment on specifics of any merger talks but acknowledged that “operations systems” and pension obligations may be points to address in “sizeable law firm mergers.”
While most firms use cash basis accounting, Stroock’s accrual system means that the firm considers revenue from work in progress and accounts receivable before clients have actually paid. While most firms follow a standard calendar fiscal year, ending their year in December, Stroock’s fiscal year ends in September. Stroock also has a pension obligation to its retirees that’s tied to its revenue, which at one point was about $40 million annually. According to Am Law, the firm has contacted its retirees to ask them to consider a reduction in benefits while merger talks are progressing.
“We are always working to strengthen our business in line with our long-term strategy to grow independently and fairly evaluate new opportunities as they arise. We do not comment on rumors or speculation,” Stroock told Am Law in a statement. “It is common knowledge that sizable law firm mergers are typically complex, and while operational systems, compensation systems and pension obligations of the parties involved rarely dovetail perfectly, many still find a way to close.”
Will Stroock’s accounting and pension issues be enough to kill a merger deal?
“Most firms are not excited about adopting an accrual base system,” [Brad Hildebrandt, a veteran consultant of law firm mergers] said. “It creates new income and tax issues for them, and those are two significant issues. Are they solvable? Yes, but it takes a good understanding of whatever direction the firm [being acquired] is heading. If it is a positive one, there can be a compromise.” …
What was a deal killer, said Hildebrandt, was a “lack of flexibility.” The question is how flexible Stroock and its merger partners are going to be.
Best of luck to Stroock as it hunts for a merger partner. With mergers being announced left and right, we’re hopeful that the firm will someday be able to find the right partner.
Stroock’s Merger Talks Face Pension and Accounting System Hurdles [American Lawyer]
Staci Zaretsky is a senior editor at Above the Law, where she’s worked since 2011. She’d love to hear from you, so please feel free to email her with any tips, questions, comments, or critiques. You can follow her on Twitter or connect with her on LinkedIn.