Competition from big brand names entering the legal market and the impact of Lord Carter’s legal aid reforms mean that mergers are becoming more common, as Jon Robins discovers


It could be that the January sales are on for firms of a certain size with ambitions and a bit of money, and which are looking to snap up a couple of small legal practices. New research has revealed that as many as one in seven smaller firms are now open to offers and see mergers as a way of staving off future threats to their practices (see [2006] Gazette, 9 November, 1)



But many of those firms would seem to regard their part in any merger as a last desperate bid for self-preservation rather than a strategic move. The Central Law Training survey of 124 firms revealed the rather unsurprising statistic that 97% of firms said they thought running a profitable small to medium-sized law firm was ‘going to get more difficult’. The research was aimed at firms with between four and 12 partners. When asked to identify the single biggest threat, it was the prospect of household brand names such as the Halifax entering the market that was scaring the living daylights out of most firms, followed by Lord Carter’s reforms of legal aid.



Some commentators have raised an eyebrow at the findings on mergers. ‘I would have thought that 100% of smaller firms would be wondering what they should be doing now,’ says Roger Zair, head of professional practices at accountancy firm Grant Thornton. He predicts that small practices are going to struggle, with the exception of specialist niche firms with national client bases and a small number of local practices ‘that have really worked on client service, local reputation, and where the clients love them to bits. But there are an awful lot of firms who simply don’t fall into these categories’.



Andrew Otterburn, founder of Otterburn Legal Consulting, reports that, even though he often goes into small firms with ‘a sense of gloom and doom’, he detects a mood of ‘we might just be okay’, especially among the better-quality conveyancing practices. It is not a view that he necessarily shares. ‘There is a big danger that, just as personal injury used to be bread and butter for high street firms but has been siphoned off by larger practices, the same is happening to conveyancing.’



He flags up a warning delivered by Max Pell, managing director for specialist services at the call centre giant Capita, at the recent Legal Aid Practitioners Group annual conference. Mr Pell pointed out that by the end of 2006, Capita was on target to be the largest provider of remortgaging services and could easily undercut law firms on commoditised work. He went on to predict, as a result of the degree of cross-subsidy from vulnerable areas such as conveyancing and will writing, ‘a culling’ of high street firms.



So is the small high street practice past its sell-by date? ‘Instinctively, my reaction is that it is,’ Mr Otterburn replies. ‘Maybe there will be versions out there that will survive. But they’ll need to look ahead at what they might be doing in the future and make contingency plans.’



Is merger the best way out? ‘The question is whether one plus one equals two,’ Mr Zair says. ‘The answer is that it depends. The whole process of merging can be a distraction, especially when what firms really need to do is focus on what they do best and do it very, very well.’



Mr Otterburn agrees. ‘Mergers are hard things to put in place and can take months to get right,’ he says. ‘Why would firms want to take on a lot of baggage from somebody else? Why would they want to become a successor firm from the professional indemnity point of view? It might be far better to cherry-pick two partners who you want from another firm.’



On the positive side, Mr Zair points out that small firms can move quickly. ‘The speed of response can be a lot greater, and even though you can hear the heavy footfalls of the elephant coming closer, there’s still time,’ he says. ‘These new entrants have to do their advertising and marketing campaigns. There still may be 18 months to two years for the smaller firms to react and get it right if they really want to.’



For legal aid firms, change is being foisted on the profession by Lord Carter of Coles, who has made it clear that consolidation delivering economies of scale is the future of legal aid procurement. The Legal Services Commission (LSC) also appears to anticipate merger through its strategy of community legal advice centres (CLACs) and networks (CLANs), not least if all public funding in an area is to be directed through a CLAC.



Penny Owston, managing partner of Scunthorpe legal aid practice Martin & Haigh, hopes that future publicly funded provision will not simply be about forcing firms to merge. ‘It will be really risky to merge a firm on the basis of a short-term two- or three-year [legal aid] contract,’ she says. ‘That would be folly.’



Instead, Ms Owston suggests the LSC will not want to ‘be faffing around auditing individual bodies’, but instead seek to devolve responsibility for supervision, compliance and quality to the CLAC, which will be the hub of a group of firms. She sees one possible model as a network where providers appoint one person ‘part-owned by all of us in a subscription scheme’.



So how do firms make mergers work? Nottingham firm Nelsons based a bold strategic jump from small high street practice to regional player on two dramatic bursts of merger activity with small local practices. In 2000 it merged three Leicester-based firms – Ironsides, Tollers and Greene Deavin – to bolt on a 14-partner practice to its existing operation. The previous year, Nelsons picked up two other firms in the region – Derby-based Gadsbys and personal injury practice Alfred Sevier & Son. The smallest firm comprised three partners and the largest eight.



The firm in its previous incarnation had 200 staff, and 60% of its turnover was legal aid. ‘We felt that we were in a very vulnerable position,’ recalls Tim Hastings, the firm’s chief executive. ‘What we wanted to do was strengthen our commercial offering and reposition the focus of the private client work so we had more high-value work… Five years ago, our turnover was £5 million and now it is £17 million, and we achieved that without most of the types of work that was creating our turnover back them.’



Michelle Tatner, chief executive of Winchester-based firm Dutton Gregory, says merger fever is alive and well on the south coast. The firm recently joined forces with five-partner Southampton practice Bell Pope, and now has 16 partners. ‘We have been looking at a Southampton office for quite some time,’ she explains. ‘We view a presence there as being a springboard for the commercial side of our business.’



She reports that she has regularly been approached by smaller practices looking to consolidate. ‘I must have had discussions with ten different firms in the last year alone,’ she says. The driving factors forcing firms to merge are ‘general competition in the market-place, red tape and a real problem attracting staff’, she reports. Other common features are firms where partners are coming within five years of retirement and looking for ‘an exit strategy’, as well as sole practitioners struggling to stay afloat. They do not sound the most attractive proposition. ‘No, they are not,’ replies Ms Tatner.



How should those firms seeking a merger make themselves attractive? ‘Those that will succeed are the ones that have a firm idea of why they are doing it, whether it’s to access a particular market in a geographical area or work type, or whether they want to match a firm with a particular skill set,’ says Simon Young, Law Society Council member for the law management section. ‘It should be about reinforcing an existing strength that they have got, or trying to find complimentary strengths so that each is bringing something different to the new firm.’



What do firms look for in a merger partner? ‘The ethos and philosophy of the organisation has to fit as well as a type of work that we do,’ Ms Tatner replies. She reckons her firm has finished its period of consolidation, ‘but if something came along that we felt could bolster a team or give us a greater presence in a certain market-place, we would certainly consider it’.



Finally, what is the secret of a good merger? Mr Hastings’ view of the reason why Nelsons’ merger worked may not be the answer other practices want to hear. ‘Our success was working out that the right time to do it was then, and not now,’ he says.



Jon Robins is a freelance journalist