Covid-19 stifles law firm M&A activity

Law firm mergers have reportedly dropped to a nine-year low, reflecting caution in the covid-19 environment - but a steep rise is expected.

Accountancy firm Hazelwords, which specialises in the legal profession, said just 107 mergers took place during 2020, 25 per cent down on the previous year and less than half the 278 mergers of 2011.

Hazlewoods said much of the recent M&A activity in the profession has been driven by ‘consolidator’ firms, often backed by private equity funds or listed on the London Stock Exchange. It said such firms “have a strategy of expanding their service line and geographic reach by acquiring mid-sized and smaller firms or by adding headcount to create economies of scale”.

Patricia Kinahan, a partner at the firm, said: “Many smaller law firm partners are still keen to exit to a ‘consolidator’ firm if they have no viable alternative options. Unfortunately, the economic disruption of the last 12 months has meant most of them have taken a step back from acquisitions until they have greater visibility over earnings.”

“The pipeline of high-quality targets is still there, which means deals should be back on the menu quickly once demand returns.”

“The share prices of some listed firms have already recovered, whilst PE-backed consolidators are still in a position to act quickly as they are likely to still have plenty of capital to deploy.”

Viv Williams of Viv Williams Consulting concurred that the merger and consolidation market has “definitely slowed” since the beginning of the pandemic.

“However, what has changed”, he added, “are the quantities of firms looking to acquire as part of a growth strategy. I have far more firms looking to acquire than ever before but they are very specific about the type of firm they are looking for.”

He observed that in any market, there are always firms looking to be acquired but “these at present, generally do not fit the buyer's requirements”.

Williams commented: “Many firms have had a far better year financially than in previous years by dramatically cutting overheads and costs and staff working from home, furloughing of staff, and the various government loan schemes that have supported these firms. However, if these firms had a succession issue prior to March 2020 then it certainly hasn't gone away.

"Additionally, by supporting the various firms with loans and deferring VAT and TAX payments we have merely 'kicked the can down the proverbial road' for potential troubles ahead.

“I know that most of the insolvency practitioners are not seeing any distress in the legal sector but my predictions and theirs is we are in for challenging time ahead and I would anticipate a steep rise in mergers and consolidation in the next few years,” added Williams.