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ABSs will accelerate legal sector consolidation, experts say

7 February 2012

Takeovers and acquisitions will be the most common form of consolidation in the age of alternative business structures, experts have said despite being divided as to whether ABSs will play a major role as acquirers.

“Consolidation will take place as a result of sales rather than mergers, with more and more firms trying to become attractive targets,” said Christopher Lewey, head of strategic projects at Irwin Mitchell.

Speaking at the Mergers and Consolidation Summit yesterday, Lewey said ABSs would lead to more potential buyers in the market but that the number of acquisitions going through would depend on the financial architecture of each deal individually.

Earlier, Paul Harding, corporate City lawyer turned legal business adviser, said the recent high-profile investments – Slater & Gordon taking over Russell Jones & Walker and Duke Street buying into Parabis Law – were the tail end of a short burst.

Harding concurred with the generally accepted forecast that about 3,000 of the current 11,000 law firms were likely to disappear. Some, he said, would be absorbed by larger firms while others would simply close down as a result of competitive pressure.

More than half of 200 law firm CEOs or managing partners (56 per cent) canvassed by Harding in practices with an annual turnover of less than £20m said it was “possible, likely or very likely” that they would consolidate in the next five years.

“Private equity views the legal sector as ripe for investment; ‘you’re fat, dumb and happy and we want some of it’ is what they think about law firms,” he said.

However, he continued, private equity’s interest would be decreasing, adding that there was little live interest from private equity investors at present.

Most of the current consolidation was taking place in the volume market, Harding said, which could only absorb a small number of large players.

Both he and Lewey agreed the recent deals would set a benchmark for the valuation of law firms, with ‘good’ businesses likely to sell for between five and seven times their EBITDA, and others for four times or less.

Slater & Gordon, which is trading at nine times its EBITDA, bought RJW for 5.1 the firm’s EBITDA, and Silverbeck Rymer was sold for 3.1 times its EBITDA.

Viv Williams (pictured), chief executive of the 360 Legal Group, which organised the summit, said he had “no doubt” the sector would consolidate but that this would not necessarily spell the end of very small firms and sole practitioners.

The UK could go the same way as the US, he said, where the number of very small firms and sole practitioners was proportionately much higher than in the UK.

In a separate intervention, SRA chief executive Antony Townsend said he expected the regulator to authorise the first ABS in a matter of week.

Asked whether the Legal Services Board was too heavy handed in its supervision of frontline regulators, Townsend replied there was a risk the LSB could be “over-prescriptive”.

He added there ought to be one ABS regulator, and that this should be the SRA.

Townsend also said the role of the regulator in relation to access to justice remained an unresolved point. This, he agreed, would likely come to the fore if new entrants such as The Co-op used legal services as loss leaders.