It won’t have escaped your attention that the past 12-18 months has seen a swathe of actual and potential law firm mergers. Each merger has its own rationale together with unique pros and cons but what is clear is that the UK legal market landscape is changing dramatically both by natural evolution but also in the wake of the global financial crisis. So… what is the rationale for merger, their pitfalls and upsides and what do they mean for the legal sector moving forward?
There are any number of reasons why firms may merge and there is always an inevitable underlying financial reason. However, more often than not it will be driven by client needs and reacting to developments within sectors, together with seeking to meet overall strategic aims. Most common reasons can be condensed…
Consolidation: Consolidation has been very much the watch word with a lot of law firms seeing an obvious financial benefit in having strength in numbers. That has been particularly prevalent within the insurance sector which saw the coming together of DAC and Beachcroft together with Clyde & Co and BLG.
As the insurance sector continues to demand more from its lawyers together with increasing its pressure on hourly rates and the cost of legal services and – more crucially – in starting to reduce its panel memberships, the coming together of two practices eliminates both a direct competitor but also strengthens the depth of service provided.
Consolidation can also bring about an immediate satisfaction of a firm’s wider strategic aim. A rise in growth and increasing size can, of course, be achieved organically but ultimately it can take a long time. Finding a merger partner can be an easier way to achieve substantial growth.
Discipline Diversity: Again, this is often a response to client needs but also to maintain a competitive edge. A client’s needs can be varied and no law firm wants to turn work away simply because they do not have the necessary experience in that particular area. New teams and a niche aspect can increase the merged firm’s capability and appeal to existing and new clients. Arguably, the merger of Weightmans and Mace & Jones provided greater diversification and added a substantive commercial presence to a historically insurance focused firm. Both practices were also ideally suited in terms of size and geographical symmetry.
Geographical Diversity: It will usually be part of a firm’s strategic aim to push into geographical areas. Mergers can bring about an immediate presence; a good example being the merger of DWF and Crutes in Newcastle. This is not limited to firms with a regional focus as it can include gaining a foothold on the international scene; just think Squire Sanders Dempsey and Hammonds.
In the same way that there are a great many reasons to merge, there are equally a number of upsides and pitfalls that are born of the process and outcome of the merger itself…
Detailed Analysis: As part of the due diligence for any merger, it requires both parties to undertake a thorough assessment of its position which can include analysing firm, discipline, team and individual performances across turnover, profitability as well as team structure. Property and IT infrastructure can also be crucial such as any lease obligations, IT contracts and systems costs as these will impact on integration.
A firm must also assess its obligations to its current equity partners i.e. what are the financial implications of an equity partner leaving as a consequence of any tie-up. The firm will also need to address its position with its bank – for example what are its borrowings and will it support or oppose the deal.
Strategic Consolidation: The coming together of two firms can provide strategic consolidation and strength often giving the competitive edge needed in a tough and shrinking market. Crucially it can – and should – bring together a client base that each firm didn’t previously have access to.
On first glance, it may seem that the cons outweigh the pros. However, more often than not, the significant pitfalls can be managed – or at worst accepted – as part of the wider strategy but these can include:
Personality Clashes and Partner Fall-Out: Not everyone may want a merger and there can be inevitable internal ructions on whether or not it is felt to be in the interest of everyone. Equally, consolidation on disciplines will invariably lead to integration of teams and that itself has a human element. Not everyone will get along as different people have different styles and approaches and they will not always marry. There is always the risk that post-merger, some people and even whole teams may eventually depart.
Too many cooks: Whilst all firms strive for the right balance between partners, associates and assistants, it is rare that this is the case and frequently departments are top heavy. It will not always be the case that a merged law firm can continue to sustain this kind of structure and there can be a risk of redundancies.
Conflicts: Sometimes, teams can find that their work conflicts directly with another team or department in the post-merger firm. Ultimately, one side will win the day and the loser will be left looking for a new home!
Cost: Sadly, a merger does not simply involve buying a new domain name and changing the letter head. There are substantive costs that can be incurred including; IT, precedents, office space, additional bank borrowings to fund a larger firm and the costs of the process.
All of the above are inherent aspects of a merger but can be planned for and managed. Provided the long term aim is well considered and is responding to the direction of the market, small bumps in the road are to be expected in getting to the finish line.
So what of the future?… As I have said, the recent spate of mergers will not be the end and it seems likely that firms across a whole range of sizes will come together. Smaller firms will find comfort in numbers and indeed in a larger form may well be able to attract external investment as the ABS model starts to proliferate. In my view, law firm mergers have only just begun so watch this space…..