Law firms are increasingly seeking to boost their profits by acquiring departmental teams, according to new sector research, which suggests mergers have significantly lost their appeal.
A report by London-based business law firm Fox Williams and Byfield, a public relations company, states that 26% of the 76 top-200 UK firms that responded to their survey are looking to merge in the next two years.
More than eight in 10 respondents said that of all growth strategies mergers pose the greatest risk of reducing profitability.
In contrast, nearly all of the 101 firms which responded to last year’s survey forecast significant consolidation in the UK market over the following two years.
Team hires are considered to be a better way of increasing profitability, the report’s findings suggest. At least four in 10 respondents had invested more than £100,000 in the past 12 months in acquiring a team. Seven in 10 said their firm intended to initiate a team acquisition in the next 12 months.
Fox Williams chair and head of professional practices Tina Williams (pictured) said: ‘You can look at a team move as a merger with the benefit of cherry-picking. A large firm might eye up a smaller one but want only its very best departments. It can take those teams without picking up any of the liabilities of the other firm.’
However barrister Jeremy Callman, of Ten Old Square in London, warned that such acquisitions often end up in disputes.
Callman, who advises on partnership and LLP litigation, tells the report: ‘Losing a team is potentially a big financial hit – and often there is a feeling of betrayal; a feeling that the departing partners have been conspiring behind the backs of management.
‘There is also a need to set an example to prevent other teams from following suit. So they do often end up in disputes, although usually commercial discussion follows.’
Callman notes that most LLPs have a members’ agreement, which will contain obligations.
He says: ‘In effect, it is extremely difficult as a member of an LLP (or indeed as a partner in a traditional partnership) to actually pull a team together without breaking your obligations to your own firm.’
Firms facing the loss of a team can seek an injunction for ‘springboard relief’ (to prevent the new firm gaining a competitive advantage), hold team members to their notice periods, or separate them from clients by placing them on garden leave and enforcing restrictive covenants.
However, the report states that disputes normally settle out of court to avoid adverse publicity.
Fox Williams partner Dan Sutherland says: ‘Negotiations between firms most commonly result in the poaching firm making a significant lump sum payment to buy out the team, or agreeing to pay over a percentage share of the revenue from that team over a given period.’
At least eight in 10 respondents chose technology as having the best prospects for increasing profitability. However, half of respondents consider technology to be a bigger theat to firms than alternative legal providers and in-house legal teams.
More than a quarter foresee a time when solicitors no longer hold a dominant position in the legal market.