Law Firm Mergers: Why do they happen?

Law firms tend to follow where wider business leads. With competitive urges sending business searching far beyond its own borders, sometimes even national borders, and the same is true for law firms. It is notoriously time-consuming and expensive to build a network of organically grown offices from scratch, so large-scale national and transnational tie-ups can provide a quick and easy way of earning a higher domestic profile or global tag.

A national merger allows two firms or more to extend their combined practices across the UK and cut expenditure on marketing, support staff, and office space. At this level, practice area domination is a more common reason to merge, however, globally, branding takes a greater priority.

The popularity of mergers waxes and wanes depending on the prevailing economic climate. At the time of writing, the market is highly active, and this is a crucial time for many law firms across the UK to develop their post-covid strategies, with mergers and acquisitions being a significant part of their thinking.

Emerging Markets

In recent years, emerging markets have provided lucrative opportunities and fuelled the impetus for many mergers, which explains the presence of US and UK firms in China, and until recently, Russia. Firms Herbert Smith, Ashurst, K & L Gates, and Bird & Bird have all pursued a similar strategy by pairing with Australian firms, with other overseas firms positively craving the opportunities a merger with a London firm might offer. Huge US firms frequently merge with UK firms, with the additional bonus of obtaining a European hub.

Practice and sector growth/expansion

Some firms decide to strengthen their existing practice areas or branch out into new ones via a series of lateral hires, however, a merger leads to speedier transformations. By bolting on a new team, a firm wins new clients, cross-selling services across the two legacy halves of the firm. If firms move towards more sector-based approaches, tie-ups can help expand a firm’s ability to offer comprehensive services to existing clients, or appeal to those clients in sectors it may not have served before.

On 1st May 2022, a merger of Royds Withy King and Goodman Derrick will take place, with Goodman Derrick’s London office set to close as a result. The newly merged company will be known as RWK Goodman LLP and will comprise around 360 specialist lawyers and will sit comfortably in the UK’s top 100 but fall short of the top 50. To put this in context, Royds Withy King ranked 83rd in 2021. The merger is a significant step for both firms and has significantly expanded and improved the breadth and depth of experience and services available to clients in both the corporate and real estate sectors.

Financial pressures

Because mergers allow for economies of scale, this makes it an attractive prospect for struggling firms, particularly for those with sluggish profits or high levels of debt. Mergers arising from such situations typically involve the bail-out of a financially troubled firm by one which is more secure. In practice, these are often between nominally equal firms, one of whom has a modicum of financial bother, while others consist of one firm buying the other out of administration in a pre-pack deal. DWF’s takeover of Cobbetts was a pre-pack purchase which took place in 2013 within 24 hours of it going into administration. A year previously, the two firms had  briefly flirted with a merger but called it off because of the ‘current uncertainty in market conditions’. At that time, Cobbetts had a mountain of debt and standing costs which DWF did not want to touch, so purchasing the firm out of administration was a much more appealing prospect.

As firms prune their costs in the wake of the pandemic, critics will presume that merger announcements tend to be about putting a brave face on financial distress. However, the real motivation may be more positive.

Law Firm mergers post Covid-19

The lockdown’s we experienced has focussed minds, leading to business plans being refined and firms becoming leaner than ever before. Firms have used Covid to get rid of underperforming employees and coupled with people working from home, they are realising they no longer need so many support staff and offices. Although turnover has generally been down by around 10%, costs have been cut by 15-25% and firms with strong balance sheets are considering merging with similar minded firms, which has been enormously positive from a merger perspective.

With such factors at play, it is predicted that merger activity is likely to be high for at least the next three years. Two trends seem to be emerging: strong firms financially acquiring an uplift in profitability by merging with a profitable small firm, and junior partners seeking control of a partnership via acquisition to do things their own way, with greater use of technology, flexible working and building firms they want to work in.

Although Covid may have made some firms less profitable, it has left them no less attractive to prospective buyers who are now fortified by reduced overheads and costs. This combination means there are surely many more firms declaring their symbiosis over the coming year.

 

RETURN TO INSIGHTS