Exclusive: surge in merger activity as firms seek strength in numbers

Merger activity at small and medium-sized firms climbed by a third in the first half of 2010, according to new research published by the Law Consultancy Network in association with the Gazette. Three-quarters of firms surveyed said they had actively considered the option.

Information from 60 firms showed a 34% increase between January and June 2010 in the number of approaches made to or by firms with regard to a possible merger, compared with data for the second half of 2009. But while 75% said they had looked at the possibility, 47% said there was little likelihood of a merger actually taking place.

Five firms (8%) said a merger was ‘almost definite’, with 11 (8%) saying there was a ‘good chance’ of it and 16 (27%) saying a merger was possible.

Eight respondent firms had completed a merger in the previous year.

Responses differed depending on the size of the firm. Of those firms with 10 or more partners, 40% considered there was a ‘good chance’ of a merger or that it was ‘almost definite’. By contrast, 11% of firms with fewer than 10 partners rated the possibility of a merger as high.

Firms cited an improved size or structure, and better opportunities post-Legal Services Act, as the main drivers to merge or acquire another firm.

The median size of the firms surveyed was 11 partners/members and most were outside London. The sample encompassed 38 general practice firms; 15 commercial firms; 10 private client firms; nine legal aid firms; eight litigation firms; and three firms describing themselves as ‘commoditised’.

Andrew Otterburn, the consultant who carried out the survey, said: ‘The possibility of a merger or acquiring individuals from another firm is high on the agenda of many firms. However, most are approaching the issue with a degree of caution.

‘There are some real opportunities but also real risks. It will be interesting to see if the pace of activity increases in 2011 as the Legal Services Act 2007 implementation approaches.'

Fellow Law Consultancy Network member Simon Young said: ‘I would be surprised if any sensible firm was not at least considering merger. Whether they are actively pursuing it is another matter. It should be part of their determined strategy.’

Young warned that firms should approach the issue seriously: ‘It needs to be a more scientific process than just a chat between senior partners over a good bottle of something.’

Peter Scott, founder of Peter Scott Consulting, said: ‘There’s a need for wholesale consolidation in the legal sector. At present, law firms are far too fragmented.’

Scott predicted that over the next five years the number of law firms will fall by half. For firms with four or fewer partners, Scott said mergers will be necessary both to enable them to compete, and to build resources so they can deal with compliance and risk management issues more effectively.

‘The big driver over the next few months will be the professional indemnity insurance renewal, which will be a killer for many small firms,’ he said.