Growing or going – Gadens shows its hand with international merger

The decision by leading independent Australian firm Gadens to join forces with two international firms makes sense as it seeks to look after domestic clients and pursue global opportunities, writes Trish Carroll.

Australian firm Gadens is merging with Dentons and Rodyk & Davidson to become the largest law firm in the Pacific Rim, with the new entity to be known as Dentons. And so we say goodbye to another independent Australian law firm. Gadens has been around in Sydney since 1928, and in Melbourne its origins date back to the 1800s, while it also has a presence in Brisbane, Adelaide, Perth, Singapore and Port Moresby. The firm is particularly well-known for its work in the property, energy and banking sectors.

For as long as I can remember it has been an innovator, opening an office in Papua New Guinea in 1969, well before that country gained independence. It also recognised early the importance of integrating technology, legal knowledge and processes to create products that more efficiently service high-volume legal business needs. The Gadens Galaxy product suite was well ahead of its time and no doubt helped cement its dominance in the property and banking sectors, while also demonstrating that it was a firm that successfully traversed high-volume, low-value work and high-end, complex work.

Opportunities abound

So why would a hugely successful, independent Australian law firm with an 85-year-plus history that is large enough to be a key player in its chosen sectors – yet small enough to be agile and positively differentiated – decide to do this?

The answer may lie in the “growth is magic” thinking outlined in a recent McKinsey article written by Yuval Atsmon and Sven Smit, who point out very convincingly (and with extensive data to back up their view) that growth makes it easier to fund new investments, attract great talent and acquire assets. As Gadens takes its 500 lawyers and becomes part of a firm of 7300 lawyers with 130 offices (including 80 in the Pacific Rim) it is easy to imagine that life at Gadens and the spectrum of opportunities this merger creates will be vastly different to anything the firm has experienced before.

“Grow or go” is a strong message in the McKinsey article. According to the authors: “Growth must be actively and continually renewed. That may seem like common sense, but sometimes, as Voltaire aptly noted, ‘common sense is very rare’. A consistent finding is that about 75 per cent of all growth is a function of the markets in which businesses compete – portfolio momentum – and the acquisitions they initiate. In other words, just 25 per cent of a company’s growth typically comes at the expense of competitors. Making good choices about where to compete requires a truly granular understanding of market dynamics and of a company’s business performance. Opportunities will not always come in traditional or even familiar locales.”

Knowing where to compete and on what to compete is clearly vital.  So many Australian firms behave as though Australia is not part of Asia. It is hard to understand this thinking given that former Prime Minister Paul Keating’s mantra – Australia is part of Asia – has been ringing in our ears since 1992. We are part of a key regional hub for trade, finance and manufacturing, as highlighted by the Trans-Pacific Partnership and China’s Silk Road infrastructure program.

These are the opportunities that firm such as Dentons, and many others, want to conquer with their clients. Dentons notes that almost half of its top-200 clients have significant business in Australia and Singapore. No wonder Gadens chairman Ian Clarke commented in The Australian Financial Review that the deal made sense given the “seismic global shifts” in the Asia-Pacific region, with the United States increasingly engaging with Asia, and China seeking to make more and more infrastructure investments in Australia and Papua New Guinea. The deal, Clarke noted, also comes in the context of trade discussions with China, while Singapore is the second-largest incoming source of investment into Australia after the US. “This has driven us to think about a stronger international combination for our clients,” Clarke said. “We always knew we would need to go to the next level and have a much deeper relationship in Singapore. This potential combination provides a real powerhouse on the Pacific Rim to look after our clients.”

Strategic minefield

Many Australian firms of all shapes and sizes want growth. The grow or go mindset is alive and well, and so it should be. But while it is easy to agree that growth is imperative, it is not always clear how to achieve it. Should we expand outside our core (be that legal, quasi-legal or geographic location)? Should we refine our existing offerings in saturated areas (to improve their profitability and hang on in those sectors just a bit longer)? Should we develop totally different non-core offerings (and how would we decide which non-core offerings to pursue)? Should we exit saturated and low-profit areas (and, if we do, with what do we replace them?) So many choices and so little time to explore them in a disciplined, granular way. That is why for many firms “sticking to the knitting” is the fallback position.

Even firms that develop sound growth strategies and make well-informed choices about which markets to enter or exit can come undone without the strong resolve needed to fund the strategies and stick with them long enough for success to be achievable.

One of the insights in the McKinsey article that is worth considering if your firm is contemplating the dilemma of too many choices is this: “Yesterday’s core may not be today’s or tomorrow’s. Getting free from a decaying business is different from investing in one with a strong potential. But the two perspectives may become linked through the reallocation of scarce financial and human resources. Companies must often let go of businesses that were once important and focus on up-and-comers. But it can be hard to jettison businesses that management grew up with or to accept that they can’t be turned around enough to justify further investments.”

Many firms struggle to create the clarity of business strategy necessary to realise the benefits of the “magic of growth”. And sometimes many years of acceptable success is the very reason why sharpening the strategy to pursue growth based on a disciplined and granular analysis of market attractiveness and competitive advantage does not happen.

Competitive advantage

My last article discussed the need for firms to own their niche or niches in established or emerging market sectors as this is the foundation of competitive advantage. Over many years, Gadens has built a market-recognised position in the property, energy and banking sectors. This dominance, combined with many other factors, would have contributed to it being an attractive merger partner for Dentons.

Many firms with growth strategies speak about organic growth because protecting their independence is paramount and they fear being gobbled up. Fair enough. But if your firm is successful, independent and has strong market-sector recognition and achieving growth is fundamental to your strategy, then you need to consider whether the often used-arguments for not merging –such as independence, protecting your firm’s heritage and a fear of what getting bigger will mean to your firm’s culture – is really more important than creating a scale of opportunity for your people and your clients that eclipses anything your firm could do alone.

Trish Carroll is the founder of Galt Advisory, an advisory firm focused on helping firms and individuals devise successful business strategies. Trish can be contacted at trish@galtadvisory.com.au.