Could a strategy of widespread consolidation safeguard an entire sector? On the evidence of manoeuvres in 2011, and predictions for the remainder of 2012, law firms are trying to find an affirmative answer to that question. In both the UK and US, mergers and acquisitions (M&As) among law firms have reached fever pitch – and there are signs that the activity will only gather pace.
In November last year, the merger between Clyde & Co and Barlow Lyde & Gilbert (BLG) made history as the biggest-ever merger between two UK law firms – outstripping even the 1987 formation of Clifford Chance (by Clifford Turner and Coward Chance), and the union in 2000 that spawned Denton Wilde Sapte (now SNR Denton, formed by Denton Hall and Wilde Sapte). With estimated combined revenue of around £310 million ($479 million), the merged firm – which continues to use the Clyde & Co brand, having extinguished the BLG one – is poised to overtake Berwin Leighton Paisner, Simmons & Simmons and Ashurst to claim a place on the fringes of the UK Top 10. In the process, it will also become the world’s largest firm in the specialist area of insurance law.
Meanwhile, another UK firm, Herbert Smith, is reportedly in merger talks with Australian firm Freehills. If merged, Freehills’ team of 1,000 lawyers – which includes over 200 partners – will be aligned with Herbert Smith’s team of 1,400, including 273 partners. The full complement of Herbert Smith’s staff is distributed across a host of international offices, including premises in London, Paris, Madrid, Moscow, Abu Dhabi, Dubai, Hong Kong, Shanghai, Singapore, and Jakarta. Based on 2010 figures, combined gross revenue of the proposed, consolidated firm could reach £750m (AU$1.1bn). The deal would provide Freehills with much wider international market access, and Herbert Smith with a direct presence in the Australian market.
Grasping the nettle
Amid the uncertain economic outlook in many Western countries, M&As can help boost law firms’ growth potential, enabling them to compete for larger contracts and offer clients a greater variety of services. In October, BLG CEO David Jabbari told American Lawyer that his firm’s growth performance over the past 10 years had been ‘pretty unflattering’.
He added: ‘There's also no question that we had taken our eye off the ball internationally – we hadn’t taken the bold moves required to access more profitable work. We urgently needed to recover that lost ground, and it was pretty apparent that the only way we would achieve that was through some form of merger.’
Research published late last year by accounting and auditing company PwC confirms that mergers have instilled a sense of optimism into the legal sector. According to PwC’s Annual Law Firms Survey 2011, seven out of ten law firms in the UK’s Top 11-25 tier expect to merge with other firms in the next two to three years. The renewed confidence is driving an uplift in other business areas. Alistair Rose – PwC partner and leader of its Professional Partnerships Advisory Group – said that despite recent, flat activity in utilisation rates for professional staff, headcount has surprisingly started to drift up again.
In fact, PwC found that mergers and rising headcounts were just two parts of a three-pronged strategy that law firms are currently employing to maintain their effectiveness – the third being an increasingly multishored usage of external service providers. Announcing the survey results, PwC noted that larger law firms ‘are starting to grasp the nettle when it comes to business-support functions as they try to remove complexity and cost from their businesses. For many firms it is early days – but the leading ones are using any one or more of the following: business process outsourcing, legal process outsourcing, onshoring, offshoring and now “North shoring” [in which firms relocate from London to less-expensive UK regions to keep overheads down].’
Turning elsewhere, legal consultancy Altman Weil revealed in January that a total of 60 law firm mergers were announced in the US during 2011 – up a massive 54% on M&As in the sector during the previous year. This marked the highest level of such activity since 2008. Many of the fireworks were saved for later in 2011, with 17 of the mergers falling in the fourth quarter alone. Across the year, some of the most significant deals were:
• August 2011: Edwards Angell Palmer & Dodge – a 500-lawyer, Boston-based firm – acquired the 160-lawyer Chicago firm Wildman Harrold
• October 2011: Minneapolis-based firm Faegre & Benson announced plans to merge with Indianapolis-based Baker & Daniels to build a firm with nearly 800 lawyers. This was finalised on 1 January 2012, with the creation of Feagre Baker Daniels
• December 2011: The 900-lawyer, St. Louis-based Bryan Cave merged with the 159-lawyer Denver firm Holme Roberts & Owen
For law firms, rapid expansion overseas can be a risky proposition. As NewLegal Review reported last year, global law firms were rocked by the implosion of US-based international outfit Howrey LLP. By spreading itself too thinly during a period of international growth – and failing to keep pace with changes in the legal services market – the firm found itself in financial difficulties and was forced into bankruptcy. However, Altman Weil principal Ward Bower thinks that mergers will embolden law firms’ global ambitions:
‘The momentum for law firm mergers built throughout 2011, and the year ended very strongly,’ he said. ‘We think that the trend towards larger deals will continue, and the pace of mergers could accelerate. The 2012 law firm market is global. We expect to see new US-UK and UK-Canada combinations this year, as firms seek to serve an increasingly global client base.’