Law: A disarranged marriage

Arthur Andersen and Wilde Sapte decided to tie the knot, and a pre-nuptial agreement was drawn up. So why was one party left at the altar?

What started with flowers, or at least a floral codename, has ended with a terse announcement of the break-up as accountancy firm Arthur Andersen pulled out of its merger with City law firm Wilde Sapte last week: "Agreement has been reached that negotiations should be terminated."

That statement has set back accountancy giant Andersen's efforts to set up a global legal and accountancy services network. The proposed merger with Wilde Sapte was seen as a major coup in its vision of a global legal- accountancy consultancy practice.

What has surprised the legal marketplace was the short period that it has taken for the engagement to be called off. The law firm voted on going ahead with the link up in March and signed heads of agreement, with 1 September as the projected merger date. Sources close to Andersens confirm that the departure of two of Wilde Sapte's asset finance partners, Graham Smith and Mario Jacovides, to join their former colleagues at law firm Allen & Overy was "the straw that broke the camel's back".

But Wilde Sapte's marketing director Stephen Blundell says that Andersens pulled out of the due diligence when the announcement was made of Smith and Jacovides' departure in mid-May, and that Wilde Sapte were "disappointed that the plug was pulled on the deal on the basis of those two resignations".

Both partners had voted for the merger in March, but as one Andersens source comments, "the Wilde Sapte partnership agreement limits the number of partners who can leave in any financial year, so it seems that having thrown the law firm a life-belt in the form of the pro-Andersens vote, they then abandoned ship before being locked in" - Blundell counters that the partnership agreement does contain such a clause, but a new partnership agreement would have been put in place for the merger, and says neither partner considered that their leaving would end the merger.

The view from Andersens' side is that "we were attracted to Wilde Sapte's excellent reputation in banking and finance. Our objective to form a merged firm of the highest quality ... depended on the original elements of the transaction being preserved intact." A spokesman adds that, "the fact that it seemed that a rival banking team was being formed at Allen & Overy meant that the deal was substantially different: the currency of a legal practice is its people".

There is speculation that the two partners' move is not the only reason for the collapse. On the point that during the due diligence, Andersens considered that it would be getting a different entity - one source comments that it seemed that "instead of being a 73-partner firm, it was really a 40-partner firm, and 33 partners is too many to carry" - but Blundell stresses that Andersens were given all the figures of fee income before the heads of agreement were signed.

But a former Wilde Sapte solicitor and now in-house counsel comments that one of the underlying problems with an established legal practice and an accountancy firm merging is that the accountants may not appreciate the dynamics of a legal practice. That view is shared by Wilde Sapte's senior partner Mark Andrews, whose memo to staff of the news stated: "In our view, Andersens have made an error of judgement and have abandoned a negotiation which had very great potential for both sides. In the end, I believe that they did not understand the nature or internal dynamics of our business."

Where this leaves Wilde Sapte is a moot point - according to Blundell, the firm is "exactly in the same position as before the announcement. Ironically, as the firm was seen as doing something ground-breaking, it actually gained credibility because Andersens was interested. Until you do it, others doubt whether you have the balls to do it - it has done us no harm."

"There are mergers in the offing all the time and why many go ahead (and then sometimes fail) is often due to the parties' inability to walk away. What due diligence is all about is to find out what you are both getting into, and then be brave enough to back off if it is not what was originally agreed or expected."

Blundell adds that the firm would not rule out a merger with another accountancy firm. There are already rumours that Price Waterhouse (PW),which is itself merging with Coopers & Lybrand, is keen to renew its overtures to Wilde Sapte.

As for Andersens, a spokesman admits that "making a public commitment and then having to back out has not been helpful."

With any merger, it seems that it really comes down to is that other M-word - money. It seems that Andersens looked at Wilde Sapte's figures - factoring in the loss of its partners - did their own projections and decided that the wedding was off. The question remains, how many other suitors are interested in what Wilde Sapte has to offer as a dowry?