Law Firm Merger The managing partners of the law firms Spencer, Spinelli, and Ho...

Law Firm Merger

The managing partners of the law firms Spencer, Spinelli, and Howe (SSH) and Gilbert and Lenz (GL) are discussing a possible merger. The two firms specialize in different areas of law, but focus on the same corporate client pool. The proposed merger offers two benefits: higher revenues and lower combined overhead costs. Higher revenues are forecast through cross selling (current SSH clients will start to use GL and vice versa). Three percent more billable hours per attorney in each firm is expected, and these additional billable hours will not require adding any more staff or other costs (such as higher lawyer salaries) because both firms have excess capacity across their professional staffs. Moreover, the billing rates of the two firms will not change following the merger. All attorneys in each firm are paid a flat annual salary and a share of any profits.

Combined overhead costs will fall 25% by merging and eliminating duplicate service functions such as accounting, IT, marketing, and so forth. The following table summarizes the pre-merger operating data for each firm.

Overhead consists of all other costs except the cost of attorneys (salary and benefits). Each firm now distributes any profits among its lawyers using formulas based on seniority and revenues generated by the attorney.

Post-merger, the new firm will be known as Spinelli and Gilbert (SG) and will consist of two profit centers: SSH and GL. All attorneys in the two pre-merged firms will remain and will be assigned to the corresponding post-merger profit center. Each profit center will distribute its profits to the lawyers in that profit center using the same pre-merger distribution formula. Post-merger, the overhead of the two firms will be pooled and allocated back to the two profit centers based on the number of billable hours generated in each profit center.

Required:

a. Prepare a table that reports the current profits of each firm before the merger and the total profits of the two firms prior to the merger.

b. Prepare a table that reports the profits of each profit center (SSH and GL) after allocating the overhead based on billable hours following the merger assuming that the cost savings and additional revenues are realized.

c. Based on the analyses in parts (a) and (b), discuss the likely outcome of the proposed merger talks. For example, will the attorneys in SSH and GL be equally enthused about the merger? Do you expect the merger to occur if put to a vote of all the lawyers in each firm?

d. What is the underlying cause for your prediction in part (c)?