The number of law firms opting to merge has reached an all-time high as practices respond to the prospect of reduced income.
Analysis by accountancy firm Wilkins Kennedy found 234 mergers involving UK law firms in the past year, up from 220 in the previous 12 months. The number of mergers in the past year was 60% higher than four years ago.
Continuing reforms to the legal sector are thought to be the biggest driver behind mergers. Cuts to legal aid funding and restrictions to no-win, no-fee arrangements through the Jackson reforms have both cut off potential revenue streams.
At the same time, new entrants from the retail and insurance sector have slowly made their way into the legal profession following the advent of alternative business structures.
Wilkins Kennedy said top-100 firms are not enjoying the same level of work as before the credit crunch, particularly with regard to M&A, corporate finance and commercial property work.
Tommy White, a partner at Wilkins Kennedy, said: ‘Law firms are using mergers as a chance to review their operating model – strip out excess costs and achieve economies of scale. Some are also using mergers to broaden out their geographical coverage and add to their specialist service offerings.
‘Whilst some bigger firms are reporting more corporate finance work, that hasn’t made up for the overall downward pressure on legal fees from corporate clients who are building up their own in-house team.’
White said more firms will have to show lenders that are proactively taking dramatic steps to boost profitability and put in place a long-term strategy.
Banks have been increasingly wary of lending to law firms, he added, since the high-profile collapse of some firms and the news from the SRA that 30 of the top 200 are in serious financial difficulty.