Wheeler-dealers

When a niche firm links up with a large practice, it could be joining the gravy train - or heading for the buffers.

Stephen Ward on the pros and cons of takeovers and mergers for specialists

A series of takeovers and mergers of niche players in several sectors in London over recent months might suggest the days of the boutique firm are numbered, and the future is with conglomerates.Sports firm Townleys has given Hammond Suddards Edge's sports team a major leg-up, while Hammonds has also taken over financing and asset-based lending law firm Wildes.

Farrer & Co absorbed media firm Crockers Oswald Hickson, Fairmays took in four-lawyer litigation firm Goldsmiths, and Gordon Dadds acquired litigation and commercial firm Camillins.

But niche property firms are the flavour of the year, with Keene Marsland, McGuinness Finch and Higby Hargreaves swallowed up by ASB Law, Osborne Clarke and Richards Butler respectively.For the bigger firms a merger is a straightforward way to increase their markets, either by expanding an existing team or bolting on a new specialism.

Christopher Honeyman Brown, chief executive of ASB Law, a leading south-east practice, says this is why firms like his are on the look-out for others to absorb.He says: 'The strategy we're following is to add people with particular expertise in a discipline, a market place or a market sector.'But Tony Willoughby, partner in London and Oxford intellectual property specialists Willoughby & Partners - which remains resolutely independent - sees no inexorable trend towards amalgamation.

'These things go in cycles,' he argues, taking a long view and making comparisons with other industries.He cites brewers who became linked first with spirits companies, then multi-national food giants.

'Now the emphasis seems to be on returning to core businesses,' he says.Mr Honeyman Brown can see the other side of the argument too, and acknowledges that staying as a niche or boutique player brings certain advantages: 'The congregation of expertise, and clients of a particular type, enables you to introduce efficiency into your process, and the ability to deliver precedent solutions and interpret them to specific circumstances at speed,' he says.'The market is certainly there for niche players either with a complete grasp of a particular area of law, or of the particular problems of a particular industry.

I think markets will always exist for them,' he adds.For any niche firm, there may come a time in its development or that of its partners which makes them want to move on.Rupert Grey was formerly senior partner of Crockers Oswald Hickson, and is now a media partner at Farrers.

He says: 'The dilemma we were facing was that while we could offer clients in-depth expertise on libel and allied fields, such as contempt, as well as any other firm in London, and at a pretty competitive price, what we could not do was offer them services outside our specialist expertise.

It proved difficult, and too expensive, to build authoritative new departments from scratch.'The primary motive behind the merger was to exploit in Farrers what we could not exploit at Crockers, namely the opportunity to bring in work outside our expertise.

The clients were not bothered, because they were buying the expertise elsewhere, but I was bothered.'As Mr Grey says, the decision whether a niche practice should go it alone or join a larger firm 'is a function of personal and professional aspirations, and the type of practice one attracts'.Four-partner Townleys, billed as the only totally specialist sports law firm in Europe, had been going for nearly 20 years.

Founder Stephen Townley denies it was a case of not being viable any more as a small firm, but that he wanted to expand faster, so as to take advantage of the multinational opportunities which the business of sport is now providing.The firm had expanded the corporate department, he says, 'but there was a long way to go to create a substantial corporate facility'.For Townleys it was the only way to expand as fast as the sports industry has expanded.

'For the way we were, it had got as good as it could get,' he says.Other niche firms decide to join with a bigger brother to free them from the pressures of running a business and serving clients at the same time, without the administrative support which comes with a large firm.

One major and growing demand on financial and managerial resources is from clients such as insurance companies, who want more involvement in case management and access to instant information on cases.

Mr Honeyman Brown says: 'The answers are usually found in technology to provide the efficiency and the openness of information.

And technology and ongoing training means investment.' Firms need to be able to pay either through partners' capital or by borrowing, if they are to remain competitive in the niche.Niche firms also have to work hard at recruiting the new blood needed to retain the vitality and identity of a firm, and in retaining existing fee-earners.

Mr Honeyman Brown says: 'That sustainability of your key people is pretty important for a niche firm, because without it you can't continue to deliver a niche service.

You need the sustainable pool of people with the relevant expertise and sector knowledge.

It is a continual issue that managers of niche firms have to grapple with.'Partners in a niche firm may decide sooner or later that they want to spend less time on these management matters, and more time on law and servicing clients.One issue with a merger is that the niche firm's fees may have to rise to bring them into line with the larger firm's charging rates.

Mr Willoughby, who used to be a partner at City giant Herbert Smith, says flexibility in fees is an important part of the relationship with a client which a niche firm can offer.Crockers, for example, despite having major publishers as clients, has traditionally charged slightly less than Farrers, and has guaranteed that rates will remain the same for at least the first 12 months after the merger.

But niche players do not automatically charge less.

As Mr Honeyman Brown says: 'The niche player who has a complete grip on a particular market sector is able to command a premium because it is the desired supplier for a client who will not cavil at paying a 10% or 20% premium for the best in the field.

It's a bit like the argument for using George Carman - that if you were going into the witness box you'd choose him because you'd rather have him on your side than against you.'One of the factors firms seek when they are merging with bigger partners is a suitor who would allow them to keep their identity and strengths within the larger whole.Mr Townley says the fact that neither side in his merger was entering a union through necessity meant they both looked long and hard at whether it would work for them.

'We spent a long time ticking the various boxes,' he says.

Mr Townley is confident his firm's brand will be protected within the larger whole.

Mr Grey tells a similar story: 'I spent some time looking for the right firm - namely a group of interlocking niche practices into which we could introduce our clients for advice in areas in which we were not expert, and which in turn would feed us back work from their clients.'But if a union is to succeed between conglomerates and niche firms, there needs to be a shared ethos, and a willingness on both sides of the union to make it work.Willoughbys - which already has informal agreements to act as an external IP department for many large and small firms - is repeatedly approached by intermediaries acting for big firms interested in the business.'It never gets very far,' Mr Willoughby says.

'Our culture is so different that they quickly realise it would be impossible to gel.

Their partners are probably earning five times as much as I am and working three times as many hours.'So for all the marriages, it seems there will remain some firms happy to be single.Stephen Ward is a freelance journalist