Law firms are set for a period of ‘merger mania’ over the next two years in the face of growing competition in the sector, with increased pressure coming from accountancy firms who have added a legal services arm after adopting an alternative business structure (ABS)
Research conducted by legal communications specialists Byfield Consultancy and partnership law advisers Fox Williams shows 95% of managing partners at the UK’s leading law firms, some of which have merged recently and others which have not, forecast major consolidation at the top end of the sector in future.
In addition, 45% of firms which have yet to merge said they would consider doing so over the next two years. According to the survey, growth is the key driver for mergers cited by 81% of merged firms and 73% of non-merged firms, well above the need to increase financial stability.
Anthony May, partner at executive search firm Hedley May, says the stampede to merge is caused in part by the need for law firms to face ‘the elephant in the room in the legal market’, which is the advent of alternative business structures. PwC, EY and KPMG all set up legal practices last year.
‘There are very few [among] general counsel that are saying, we have not started using some of those alternative providers. That sort of work used to go to all sorts of different law firms of different scales. The attraction of the alternative business structures is that they offer much more flexibility to GCs in relation to billing structures, secondments and staffing up for specific projects. Lawyers think they sail on the brilliance of their own legal abilities; but clients buy an outsourced legal solution, whether they are using a traditional law firm or an alternative provider,’ May said.
Peter Gamson, partner and head of the professional practices group at the London office of Grant Thornton, said: ‘More consolidation is inevitable. The most positive reason for this is that the market – and clients in particular – have begun to realise they have more bargaining power. They expect more from their advisers, they want something that is right for them rather than just someone who charges them for doing something. The market expectation is for a greater quality of service and a greater value being delivered.’
Accountancy firms also have a role to play in helping law firms looking to merge with their choice of partner and in handling valuations and negotiations over the deal. The survey indicated that only 16% of merged firm respondents engaged a third-party to approach a prospective merger partner with 61% saying they had not done so.
Tina Williams, chair and head of professional practices at Fox Williams, said: ‘Many firms adopt an approach to finding merger partners that is surprisingly lacking in rigour and that there is a reluctance to use the skills of third party specialists to get deals done. The latter is remarkable, given that most firms’ business models involve selling the benefits to clients of taking independent expert advice.’
Instead, the research suggests many law firms first meet potential suitors in a setting such as a restaurant or club and usually expect negotiations to be handled in house – just 6% of merged firms confirmed they had instructed external lawyers for merger advice.
Gamson, who has advised on a number of law firm mergers, said: ‘A merger won’t work because everyone gets on well over a glass of wine. It’s got to be because the finances are properly forecasted.’
Accountants are typically brought in initially for a ‘quick-and-dirty’ view on the finances at the start of merger talks, according to Gamson, in order to see what the main drivers are and identify potential concerns. They will then perform in-depth analysis, particular of issues such as the value of work in progress.
Gamson warns that the predicted flurry of mergers forecast could cause as many problems as it sets out to solve, saying:
‘The danger is that firms get caught up in deal fever. One of our jobs is to pull people back from the brink. If problem issues far outweigh the prize, then we will advise pulling back and thinking again.’