Of mergers and minnows: growth options for law firms

Recent activity in the legal market suggests that mergers, while not a universal recourse, are still on the agenda for some.

Resurgent mergers?

Although the financial crisis saw a large increase in merger discussions and transactions, there have been relatively few major deals recently, with the notable exception of the CMS Cameron McKenna, Nabarro and Olswang three way merger in early 2017.

However, the recent announcement that UK law firm Berwin Leighton Paisner is set to join forces with US firm Bryan Cave indicates that, while not as frequent as previously seen, mergers are not extinct.

Why merge?

Our research indicates that over 70% of firms are not expecting to merge within the next 12 months – up from 58% in 2016.

The challenge of integrating firms who have become increasingly reliant on their own IT systems and have developed their own brand identity has become harder to pull off and if there are other ways of achieving strategic goals, these may be preferable.

The reasons behind a merger can be manifold, but the right approach can be adapted from what we see in the corporate market:

• a firm should define its strategy and set clear targets;
• the firm should then consider whether it can achieve these targets with its current set up;
• if the firm needs to bring in additional resources or skill sets to achieve the targets, it should investigate whether team hires or recruitment are an option;
• if this isn’t possible, only then the firm should consider a merger.

If a firm decides that a merger is an option, then research should be undertaken to find the firm with the right fit. Consider a football club: the idea is to define the system and then find the player that fits into that system, rather than just buying a big name player and then finding that they can’t integrate to achieve success.

Getting the defence in first

Anecdotal evidence suggests that merger discussions increased during more challenging economic times. The conclusion is that mergers are generally more of a defensive strategy, rather than offensive.

Some of this is a natural consequence of the partnership model. One can hypothesise that when profit shares are increasing year on year, partners are more content and allow management to run the firm – but, when things go less well, a firm’s management can often find itself under pressure from partners and often this leads to thoughts of a merger as a way of demonstrating that change is being made.

So where might we see more mergers?

If we assume that economic growth will continue for the foreseeable future, where are we likely to see offensive mergers taking place:

• Cross-border expansion: as firm’s look to increase their international reach, a cross border merger can be a quick way of achieving critical mass overseas.
• Regions/London firms: if the balance is right, both parties can benefit from such a tie-up, with the London firm gaining access to lower operating cost resource and the regional firm gaining access to the London client base.
• Acting as a lifeboat: another area where we are likely to see more ‘mergers’ will be where failing firms run out of options and they euphemistically ‘merge’ with the rescuing firm. While this can be a great opportunity for the acquiring firm to secure almost instant additional clients, resources and skills, it is obviously not without risk.

Growth through acquisition

One other area where we are likely to see activity is acquisitions – i.e. where a dominant firm acquires a team or smaller firm. Our Law Firm Survey 2017 indicated that, although less than a quarter of firms saw mergers among their top three priorities, a fifth (21%) said that they expected to make an acquisition, up from just 7% in 2016.

The principal appeal to acquisitions is that the benefits of a merger can be achieved, but without the integration time, costs and risk. Essentially, the acquired business joins the larger firm as ‘mass lateral hires’ adopting the brand, operating procedures and IT systems on day one.

Ultimately any merger or acquisition comes with challenges and the key is to be clear what the upside benefit of the transaction will be and as far as possible mitigate the downside risk.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.