More mergers than ever as firms cut costs

Law firms are merging at a faster rate than ever to keep costs down and help convince banks they are still a good credit risk, accountants Wilkins Kennedy have said.

Research by Wilkins Kennedy, based on SRA data, has shown that the number of mergers rose from 220 in 2011 to 234 in 2012. The figure for 2009 was only 146, rising to 168 the following year.

Tommy White, partner at Wilkins Kennedy in Egham, Surrey, said law firms were using mergers as a chance to "strip out excess costs and achieve of economies of scale".

White said firms wanted to ensure their operations were as "lean and efficient as possible in order to fight off increasing competition" and needed to re-evaluate which areas of work they should be concentrating on to ensure they did not undervalue the services they provided just to compete.

Another reason for firms to merge, White suggested, was the need to convince banks they were a good credit risk.

"In the wake of the recent high profile law firm failures, and with many more on the SRA's danger list, it is likely that the banks will become increasingly wary of lending to a sector which was once seen as so solid, particularly where there is no evidence of a clear business strategy being in place," White said.

"Firms that can show they are proactively taking dramatic steps to turn around poor profitability and planning for future challenges are more likely to be able to convince the banks that the firm is still a good credit risk.

"Securing a strategic merger with a firm with complementary operations to shore up revenue streams could be a good example of this."

White added that the complete withdrawal of legal aid from certain types of work and the fall in the number of no win, no fee cases following the Jackson reforms were "felt keenly" by local and regional firms, while bigger firms were under pressure on fees from cost-cutting corporate clients building up in-house teams.