Is small beautiful?

The last nine months has seen a surge in merger and acquisition activity in the Scottish legal market. The profession, both north and south of the border, is going through a period of unprecedented change and this, combined with the continuation of the worst recession in living memory, is encouraging more and more practices to seek out strategic alliances.

Running behind

Alternative business structures (ABS) are now a reality in England and will soon also become reality in Scotland. The Legal Services (Scotland) Act 2010 is some three years behind its English counterpart and allows for up to 49 per cent ownership of Scottish legal practices by non-lawyers.

It took four years for the English version of this enabling legislation to reach fruition after enactment and there seems to be no rush either to implement the legislation north of the border. Even though external investment is more limited in the Scottish model, it is important for Scottish legal practices to prepare early for the opportunities that ABS presents.

There have already been a number of cross-border tie ups, including the merger between corporate and technology specialists MBM Commercial and Stuart Malcolm LLP in September last year, commercial law specialists Anderson Fyfe with TLT announced in May and most recently the merger of Biggart Baillie with DWF. More seem likely.

Servicing needs

Increasing globalisation is another factor to consider. As has been found in the accountancy profession, clients with a global reach increasingly seek to work with professionals who are able to service their needs globally.

The biggest of the mergers that has taken place in the last nine months is that between McGrigors and Pinsent Mason. Pinsents has had a presence in Scotland for some time, but their merger with McGrigors will increase their reach across a wider range of services and locations.

Many in Scotland will mourn the passing of the McGrigor name which will not be retained in the merged firm (unlike the DWF/Biggart Baillie merger). However, the merger will provide McGrigors with greater access to international markets and customers than previously. Staff are also in a position to gain from the opportunities for international experience which a global firm offers through overseas secondments.

A number of top 30 practices have also been looking for strategic mergers. Morisons LLP joined with Macrae, Flett and Rennie in September last year, following this up with Bonar Mackenzie in December. Both smaller practices had strength in private client work including property and small business partnerships, an area where Morisons wished to expand. Similarly, Tods Murray’s merger with Fyfe Ireland in January combines two long standing private client firms with well-established client bases to provide a platform for further expansion in this area.

Strategic mergers have not all been entirely about expanding client bases – geography is playing an increasingly important role. In May, Lindsays announced a merger with Shield & Kyd. The combined practice will extend Lindsays’ reach from its current base in the central belt and borders area into Tayside, through the Shield & Kyd offices in Dundee and Arbroath.

More recently, the merger announced between Blackadders, which has a strong presence in Dundee and Tayside, and McKay Norwell, based in Edinburgh, shows that strong regional practices are also keen to establish a foothold in the major markets in Edinburgh and Glasgow. In all cases emphasis is placed, understandably, on the cultural fit between merging practices and commonality in the approach to client care and service.

Market share

ABS could be seen as a threat to traditional local practices, particularly with the expansion into the legal services market by banks such as the Co-op. The Co-op was among the first group of three organisations granted an ABS licence by the Solicitors Regulation Authority, and was significantly the largest. Supermarkets such as Tesco may also expand their customer offering with legal services.

For those customers with very basic needs such as wills, executries and conveyancing, who are probably the mainstay of small local practices, a fixed-price service supplied by already known and trusted brands will be attractive. Small practices could find themselves squeezed out of the market and may therefore look for safety in numbers by joining with other local practices. There is evidence that some firms in the mid-market are also struggling and this may provide further fuel for merger activity.

However, not all of the recent changes in the Scottish legal market have been mergers and there are those in the profession who do not believe in the ‘mega-firm merger’. One such group is MTM Family Law which has recently been set up by three specialist family lawyers who were previously with HBJ Gateley and who believe that small is beautiful in the sector.

Mergers and acquisitions in the legal market are not new. Whether for strategic reasons or simply to manage succession, the current economic and regulatory climate suggests that further consolidation is all but inevitable.

Shirley McIntosh is a partner and George Bull the chair of the professional practices group at Baker Tilly https://www.bakertilly.co.uk/pages/home.aspx