All aboard? The legal sector M&A wave
By Jeff Zindani
Jeff Zindani examines a recent rise in firms’ mergers & acquisitions
Our in-depth survey of 100 UK firms found nearly half are considering mergers and acquisitions, indicating firms feel they need to move faster than organic growth allows.
A total of 47 of the 100 firms interviewed said they were considering M&A, nearly a quarter were already in talks about a possible deal– and a further 57 per cent were “actively” seeking it. The remaining 20 per cent were at the early stages of the strategy and had not acted on it yet.
These findings are borne out by the M&A boom currently underway across the legal sector. Recent weeks have seen a number of deals being announced – Shakespeare Martineau’s proposed merger with Mayo Wynne Baxter and Weightman’s planned merger with Radcliffes LeBrasseur being some of the most high profile. On top of those now in the public domain, there are also a number of deals very likely to happen in the next few months, particularly as firms emerge from the Covid pandemic in an even stronger financial position than before.
Geographic expansion is the biggest reason for firms looking at M&A, followed by a desire to expand into new practice areas and to scale-up and compete. Many managing partners fear if they don’t acquire, they could be acquired themselves – big fish eating little fish.
Of course, not all firms have M&A in their sights. Nearly 43 per cent of those not looking for M&A say it is simply because they don’t need it to grow. Other reasons are more negative: 36 per cent cite the cost of M&A, 30 per cent the loss of control, 23 per cent it is “too difficult/ risky” and 21 per cent concerns about a loss of identity.
These latter concerns can all be overcome if the right deal is out there. One of the reasons mergers go wrong is the informal way they often start – a chance meeting, or knowing counterparts in local firms from the golf club. The problem with this is proximity doesn’t necessarily mean affinity. Our report found word of mouth remains the main source of merger, which means firms are too often relying on inaccurate information. This can mean doing deals they shouldn’t do, or missing out on deals which would have worked better for them.
Firms which have adopted clear strategies around growth and know not just what they want, but also what they don’t want, are more likely to succeed. This is reflected by the success of firms which target specific practices that provide legal services they don’t currently have, or look to merge with a firm in a geographical location they don’t cover.
Alternative drivers of growth
There are alternative options for growth, although they may not always deliver. These include acquisition of a non-legal business, lateral hires, sales and marketing or flotation, which is in the minds of 18 per cent of large firms, 9 per cent of mid-sized firms – and even 4 per cent of smaller firms.
Most respondents identify investment in IT systems and infrastructure as a key driver, although it’s questionable whether this kind of investment will be sufficient. For many top firms, it’s an arms race – and more about keeping up than getting ahead.
Private equity investment is also cited by a surprising high number of firms – 37 per cent of those surveyed – but the reality is the few private equity firms interested in the legal market are generally looking at practices with non-traditional business models, such as subscription services which generate repeat business. They want to build scale. Any notion it is an easy way for partners to cash out will send them running for the hills.
There are a lot of good reasons to consider M&A. You can boost fee income and access larger financing pools for expansion, compete with bigger players and increase the overall value of your business.
We are in an era where customers expect slick, professional services, and that requires investment. Professional services need professionalising, and it may be being a larger, better funded operation is the way to achieve that more quickly.
Firm owners are beginning to challenge the conventional wisdom growth can only be attained by organic strategies, with many considering M&A, even if just on a modest scale.
How long this boom will last is impossible to say, but what it has done is to turn what, to outsiders, is a very conservative and steady sector, into a buoyant marketplace with significant opportunities.
Jeff Zindani is founder of Acquira Professional Services, and was partner at Russell Jones & Walker, now Slater & Gordon, for 25 years. The full report, Growth Agenda 2022: The New Era of Law Firm M&A, can be found at: acquiraps.co.uk