ANOTHER MERGER TOO CLOSE TO CALL – BUT WITH LOTS OF QUESTIONS

In another of life’s timing ironies, Law.com published an article early on Friday, August 24, 2007 positing the question “Is All Quiet on the Law Firm Merger Front?” – and then late in the afternoon on Friday The Wall Street Journal ran an online article (subscription required) reporting advanced merger talks between Dewey Ballantine LLP and LeBoeuf, Lamb, Greene & MacRae LLP.  As I’ve done in prior postings where I’ve looked at other announced mergers (Mergers, Metrics, and Other Musings; A Merger Made in . . .?; and A Merger Too Close to Call), here is a quick LawBall analysis of the proposed Dewey/LeBoeuf merger.  Using data published in the 2006 AmLaw 200 and the 2007 AmLaw 200, at the end of the posting (and also included as a *.pdf attachment under Posting Attachments in the right-hand margin) are:

•    The 2005 and 2006 individual financial operating results for both firms.
•    The annual compounded growth rates from 2005 to 2006 for both firms.
•    A 2006 pro forma for the new firm.
•    A comparison of each firm’s 2006 operating results to the new firm’s pro forma.

As previously was the case with the prospective K&L Gates/Hughes & Luce merger, this merger is too close to call from a relative financial health or financial direction pre-merger perspective alone.  On the one hand, growth from 2005 to 2006 in revenues, profit, asset turnover (revenue per lawyer), and return on assets (ROA or profit per lawyer) all significantly favored LeBoeuf.  On the other hand, return on equity (ROE or profit per partner), leverage, and cost per lawyer growth from 2005 to 2006 all favored Dewey; although it certainly looks like Dewey’s improvement in leverage and ROE largely was the result of a decrease in partners from 110 to 92, as its profit and margin both fell in 2006.  LeBoeuf’s 2006 margin was better – 37.00% to 32.56% - than LeBoeuf’s, although both firms’ margin fell (LeBoeuf from 38.86% and Dewey’s from 34.27%).   Dewey’s 2006 asset turnover ($820,281) actually slightly was higher than LeBoeuf’s ($797,360), as was Dewey’s ROE ($1,445,652 to $1,428,571 for LeBoeuf).  With respect to ROA, which as I’ve said before I believe is a better indicator of a firm’s financial health since it is a good measure of the efficiency with which a business allocates its resources and eliminates the potentially distorting effects of financial leverage on operating results, LeBoeuf’s 2006 ROA ($295,031) was higher than Dewey’s 2006 ROA ($267,063).  LeBoeuf’s leverage in 2006 was 4.8421, while Dewey’s was 5.4130.  Although LeBoeuf’s costs per lawyer grew at a rate (14.28%) in 2006 nearly double Dewey’s cost per lawyer 2006 growth rate (7.64%), LeBoeuf’s actual 2006 cost per lawyer ($502,329) was lower than Dewey’s ($553,213).  Again repeating a comment from prior merger postings, this 1-year snapshot is interesting – but I’d like to see the panoramic view (a 5-year comparison) before I reached any significant conclusions about the relative financial health or direction of the 2 firms pre-merger.

On a post-merger pro forma basis the changes are minimal in size, but definitely show favorites.  In margin, ROA, and cost per lawyer, the pro forma changes resulting from the merger would favor Dewey – that is, on a pro forma basis a combined Dewey LeBoeuf would’ve performed better in 2006 with respect to margin, ROA, and cost per lawyer than Dewey performed on a stand-alone basis; while Dewey LeBoeuf would’ve performed worse than LeBoeuf standing alone in those 3 metrics.  On a post-merger pro forma basis, the changes in asset turnover, leverage, and ROE would favor LeBoeuf.

As I noted in the earlier merger postings, numbers aren’t the entire story to a successful M&A transaction; the transition and integration of the people, technology, and processes (including the typical law firm hot spots – culture and management) into the post-closing firm are critical.  The future success or failure of this announced merger likely lies with the firms’ post-merger transition and integration plan.  But, if I were a partner in either firm, I would ask a series of questions about the 2 firms’ comparative 2006 financial operating performance:  Why did LeBoeuf’s revenues grow 16.70% vs Dewey’s 4.08%?  Why did LeBoeuf’s profit grow 11.11% vs Dewey’s -1.12% decrease?  Why did LeBoeuf’s asset turnover grow 10.91% vs Dewey’s 4.91%?  Why did LeBoeuf’s ROA grow 5.59% vs Dewey’s -0.32% decrease?  Why did LeBoeuf’s costs per lawyer grow 14.28% vs Dewey’s 7.64%?  Are these changes 1-year anomalies or are they continuations of trends?