As firms shrug off the effects of the recession and reassess their place in the market, the extra revenue brought in by a merger is an enticing prospect, reports Stephen Ward


R ic Martin, chief executive of City firm Kennedys, is a sceptic on the merits of law firm mergers. ‘Sometimes it is a nice fit,’ he says, ‘where two plus two equals five, but often in my experience, looking at them, two plus two equals three.’



There have been three examples of firms tying the knot this month in the hope of the elusive ‘merger dividend’, as described by Anthony Bunch, chairman of the partnership board at City firm Masons, one of this month’s newly-weds. This prize is ‘the enhanced revenue which neither firm would have obtained on their own’, he says.


Jones: firms should promote niche work

Only time will tell whether the unions of Pinsents and Masons, City-based Nicholson Graham & Jones with US firm Kirkpatrick & Lockhart, and, on a smaller scale, south-coast firm Lester Aldridge with London practice Park Nelson will live happily ever after. But many confidently predict that there will be plenty following their path in the coming two years.

Mr Martin, whose own firm’s growth to 75 partners included 25 lateral hires, and has been centred on an expertise in insurance litigation, says there are two reasons to expect an upturn in mergers after three or four years of difficult trading for the industry.


‘One is law firms who think they have weathered this recession, and now they need to think about why they didn’t survive it as well as they thought they might have done, and they think if only they had something different they would not be so vulnerable to a future recession.


‘Then there are the “positives”, who are saying “right, we’ve put that recession behind us, and we will take over the world. Now we need to become as big as Clifford Chance and what we have to do is merge”.’


Alan Hodgart, a leading independent management consultant specialising in law firms, and currently putting the finishing touches to a book on the pluses and minuses of mergers, has been predicting a spate of mergers for the past 12 months. His prediction is based on a detailed analysis of the profitability of the 30 firms in the top 100, which have a steady position in core mid-market work, across employment, litigation, real estate and corporate deals.


‘Progressively, that group is segmenting into an upper and a lower end,’ he says. The figures show a broad correlation between profitability and size. ‘A well-run large firm can cover more practice areas and be better at them than a well-run small firm,’ he says. ‘Bigger firms get more people out in the market place, have more contacts and present clients with a greater depth.’


The average size of those 30 firms is 509 UK fee-earners. ‘If you have just 200 or 250 [fee-earners], it is going to get progressively harder to compete,’ he suggests. ‘A number of firms who are in the bottom half on size are coming to the conclusion that they are probably going to have to merge in the next 12 months, two years or whatever.’


The merger partners they are identifying are either another comparably-sized firm, or a US firm.


Mark Jones, managing partner of Addleshaw Goddard, which has trodden the path already with a merger of the major Leeds firm with its Manchester equivalent in 1997, then in 2003 their union with City firm Theodore Goddard, to give a strong London leg to the tripod, has a similar view of the market-place to Mr Hodgart, who himself advised on the most recent tie-up.


Mr Jones says a discussion in 2002 with his chief financial officer, who was new to the legal business, concluded that half of the firms in the top 100 had no unique selling point, and that by 2007 half of those would no longer exist in their present form.


‘What is happening now to the middle-positioned firms is a rationalisation, like the banks, building societies and accountancy firms have been through,’ he says. The recession has been a factor. ‘Even a turkey can fly in a hurricane, they say, but times have not been that easy in the last three years.’ Some firms have been doing well and growing in turnover and profit, but that has meant others having to accept smaller slices of the same-sized cake.


Mr Jones says the unique selling point of a practice can be a niche, such as City firm Barlow Lyde & Gilbert’s insurance work. ‘If the niche is defined enough, the firm doesn’t need to be bigger,’ he says.


But among the others in the top 100 firms, outside the five in the magic circle, some practices are struggling. ‘There are no protected species,’ he says. ‘These firms either have to have a speciality they are clear about, or they need a business plan they are clear about. Otherwise they are potentially at risk.’


Although he does not see it as part of an industry-wide trend, Mr Bunch says Masons was driven by a clear business imperative to grow more quickly than would be possible from steady growth of the type advocated by Mr Martin.


He says: ‘ This was all about fulfilling a strategy, which was to remain pre-eminent in our fields of construction and engineering infrastructure, technology and projects. One of the drivers was that we maintain and improve our market position, and we really had to provide strength in depth in a number of crucial areas.


‘To do that organically is difficult, and we thought it would take a long time, arguably too long. To put together a string of lateral hires you’ve got to be pretty lucky. Our view, therefore, was that we needed to do something pretty fundamental. The merger initiative was the most obvious.’


Masons went to a lot of trouble to find the right fit for its business, and to identify a handful of target partners, with Pinsents at the top of the list. ‘We went through a long desktop study, without using firms’ names but identifying them by colours.’


It concentrated on the hypothetical new entity, rather than the two firms that gave birth to it. ‘We asked ourselves if we were to target a firm, how might it be written up in the Law Society Gazette?’


Not all the coming mergers will be for the right reasons, experts predict. Mr Martin says one factor is the psychology of watching others merging and being caught up in the excitement. ‘It feels like fun. There’s a lot of doing it out of a sense that everybody else is doing it. Lawyers are trained to follow precedents. So if everybody else is doing it, they think they’d better do it too.’


But he says firms should merge only as a well-thought-out strategy for the right business reasons. ‘It should not be a sticking plaster to cover over a crack,’ he says.


Mr Hodgart agrees. ‘A merger doesn’t solve a problem.’ If there are management difficulties in a firm, it should form a clear strategy, restructure the business, then look for prospective partners, ‘otherwise no one will want to merge with you’, he says. The exercise will also provide a guide to the right type of partner to seek, and give a firm more chance of succeeding with alternative strategies of lateral hires or takeovers.


If the business case is not right for both merging firms, problems will probably start to emerge two years afterwards, he says.


After that time, merged firms need to ask themselves a series of questions. Have we improved the client base? Have we improved the quality of work we are doing? Have we improved profitability? Some merged firms will not do that, and some will actually go backwards.


Mr Hodgart predicts: ‘We’re heading towards a bit of merger mania, and I think there’ll be some good ones and some disasters.’


Stephen Ward is a freelance journalist