Law firm mergers increase by 65 per cent in 2013

The number of mergers between law firms has increased by 65 per cent in the past year, according to accountancy firm Wilkins Kennedy.

The calendar year 2013 saw 385 mergers take place, up from 234 on the previous year. Five years ago there were just 146 mergers in the same 12 month period. Wilkins Kennedy says it shows that the legal sector's push towards consolidation is continuing.

The news comes as the last financial quarter saw an increase in the number of new 'start-up' law firms suggesting that the legal sector is in recovery mode and as the Law Society's new president warns that the economy is not yet out of the woods.

Firm hunger

The research shows that law firms with an appetite for acquisitions aimed at improving profitability and capture of market share are increasingly buying up smaller firms in order to combat increased competition from other providers of legal services.

Tommy White, a partner at Wilkins Kennedy, says: "These figures show that the rising trend for mergers shows no signs of slowing down, as financial pressures, increased competition, and to a perhaps lesser extent regulatory issues, are still having a major impact.

"Mergers and acquisitions, corporate finance and property work for lawyers, particularly in the south of the country are all recovering but are generally still below the heady days of pre-2007. In addition the long term, secular decline in litigation work continues - despite a helping hand from recession linked disputes."

White continues: "While some firms need to find a white knight quickly in order to stave off potential financial collapse, others are turning to mergers to deliver that boost in profitability that a merger will achieve from cost savings. Economies of scale from a merger - especially where the merged firms can better utilise staffing levels - can be substantial."

Strategic thinking

However, White advises that there has also been a trend for mergers, particularly those of an international nature, based on long-term strategic thinking, for the purpose of gaining access to new sectors and services and to achieve global exposure.

Such examples in the last year include Midlands firm Wragge & Co who merged with City firm Lawrence Graham to create Wragge Lawrence Graham & Co and Manches who joined forces with Penningtons to create Penningtons Manches, following Manches dip into administration.

White adds: "The drive for consolidation appears to be more, not less, pressing as we leave recession behind. Yes, it is often about immediate survival, but it's also about securing on-going profitability and competitiveness.

"Mergers are also a useful way for firms to diversify their business to broaden their appeal to wider markets. It wouldn't be surprising to see national and international mergers gaining even more traction going forward."

External pressures

Wilkins Kennedy suggests that smaller firms in particular are feeling the pressure to merge due to last year's ban on referral fees for personal injury cases, changes to legal aid and conditional fee arrangements and new entrants to the legal market.

The new criminal legal aid reforms are also set to have an impact on merger activity with cuts to solicitors' fees and changes to the procurement system for criminal work likely to have an impact on the very existence of some firms.

Furthermore, new rules introduced by HMRC in April are set to target fixed profit share partners in Limited Liability Partnerships, and could have an impact by increasing costs if the required conditions are not met and individual partners are reclassified as employees for PAYE and national insurance purposes.