UK law firms choose mergers for growth rather than cost cutting

An increasing proportion of law firm mergers are now being driven by growth plans and expansion, rather than a need to cut costs and restore profit margins, new figures propose.

Last year saw 174 mergers take place between firms as consolidation of the sector continued. However, finance provider LDF noted that the total number of mergers fell by 11 per cent, down from 196 in the previous year.

In fact, the latest figure is down 30 per cent from 2011, where 247 mergers took place. And, in 2012, there were 234 mergers. The figures suggest that, as the economy recovers, fewer firms are being forced to merge 'defensively' to cut costs.

A recent study by legal PR firm Byfield Consultancy and City firm Fox Williams found that 95 per cent of managing partners at the UK's top 200 law firms predicted 'massive consolidation' of the legal market, which would take place over the next two years.

Various commentators have suggested the legal market will lose up to 3,000 firms as a result of mergers, consolidation, or insolvency in the coming years.

Extending reach

Instead, LDF says that the economic recovery means that mergers are increasingly being used by firms to expand service offerings, explore new markets, and extend geographical reach.

Peter Alderson, managing director at LDF, said: 'Law firms that feel they are viewed as subscale are very keen to expand. With recovering fees, partners are getting more ambitious, looking to serve bigger clients in a wider range of sectors and geographies.

'The quickest way of achieving that ambition is to merge with a firm that already understands that market and has an existing pipeline of work.'

LDF advised that the legal profession is still seen as fragmented and expects further consolidation to continue. 'Many UK regional firms, in particular, are merging in order to bulk up and compete with top-tier London firms for work,' added Alderson.

Despite the overall fall in mergers, 2014 saw several high-profile legal mergers take place, such as Speechly Bircham and Charles Russell, Dundas & Wilson and global top-10 firm CMS Cameron McKenna, top 50 firms Wragge & Co and Lawrence Graham, and top-100 firms Blake Lapthorn and Morgan Cole.

Forced consolidation

Consolidation between firms is expected to increase in the legal aid sector following the Ministry of Justice's (MoJ) belief that there is overcapacity in the market, and that savings need to be made through economies of scale.

Ahead of the direct action taken by a host of legal aid practices, Bill Waddington, chair of the Criminal Law Solicitors' Association (CLSA), said it was 'ironic' that while the Lord Chancellor 'attacks the two nation system' in his first public address, he decides to proceed with cuts to legal aid and 'forced consolidation'.

John van der Luit-Drummond is deputy editor for Solicitors Journal
john.vanderluit@solicitorsjournal.co.uk | @JvdLD