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Come TogetherAs change roils the U.K. legal market, British firms try to adapt with a wave of mergers.
As change roils the U.K. legal market, British firms try to adapt with a wave of mergers.
Focus Europe2013-01-01 12:00:00 AM
For Birmingham, Englandbased commercial firm Shakespeares, rapid growth has long been high on the agenda. Ever since the 2006 arrival of CEO Paul Wilsonone of a relatively small but growing number of nonlawyer managers heading U.K. law firmsShakespeares has been on an almost continuous merger spree. A few weeks after Wilson joined from London media and technology firm Olswang, his new firm doubled in size through a combination with a local rival. It has merged six more times in the past five years, increasing its revenue by over 500 percent. Yet Wilson believes further growth is needed to secure the firm's long-term future within a U.K. midmarket that is under threat.
Lacking the scale, client relationships, or expertise to compete with the global elite for premium mandates, and with process-driven work such as insurance claims increasingly been pushed down the legal food chain to the lowest bidder, British midsize firms are finding themselves squeezed. Many are struggling to meet increasing client demand for advisers able to handle a broader range of work across a greater number of jurisdictionsand often at a lower price. Midmarket firms are also facing the influx of new competition from commercial entities such as retailers and insurance companies, which are now permitted to offer legal advice following the liberalization of the country's £25 billion ($39.5 billion) legal services market. (The radical new legislation, enacted in October 2011 after multiple delays by the U.K. government, also allows nonlawyers to hold equity stakes in law firms.)
Nor is the economy helping: Thanks to the prolonged Eurozone crisis and a U.K. recession, the United Kingdom's 100 largest firms saw revenue grow by just 3.8 percent in the three months ending July 31, 2012, according to a report by Deloitte Touche Tohmatsu Limitedtheir slowest growth rate for six quarters.
"The U.K. legal market is vastly overlawyered and is changing faster than ever before," says Wilson, who also has experience as a manager in the banking industry. "Law is becoming more commoditized, meaning that procurement teams can increasingly make decisions based on price, not just quality, and the deregulation of ownership is going to affect things in a big way. The question for all firms is whether you can change yourselves quickly enough to stay ahead of that curve."
This growing pressure is creating a wave of law firm merger activity. There were 21 mergers involving the U.K. top 100 in 2011, according to management consultancy Jomati's MergerLine, which tracks publicly reported mergers among the country's leading law firms. And the rate shows no sign of slowing: At press time 23 more had already been announced in 2012 [see "Acts of Union,"], and discussions surrounding two further major deals were ongoing. Both Field Fisher Waterhouse, a 260-lawyer London firm with a strong technology focus, and Bond Pearce, a full-service firm from England's southwest with close ties to the energy and renewables sector, had other abortive merger negotiations earlier this year, with London's LG and Scottish "Big Four" firm Maclay Murray & Spens, respectively. Both are currently in fresh talks with new targets. FFW is pursuing a tie-up with national practice Osborne Clarke that would create a top 20 firm with revenues of £200 million ($320 million), while Bond Pearce is in negotiations with regional outfit Dickinson Dees that, if successful, would propel the combined firm into the U.K. top 40. FFW managing partner Matthew Lohn said in a statement that merger is now on the agenda for "the majority of midmarket firms."
But while the flurry of combinations has continued, their emphasis appears to be subtly shifting. Most recent mergers by U.K. law firms have been driven either by geographic expansion, such as the glut of moves into Australia by Ashurst (merged with Blake Dawson in March 2012), Linklaters (formed an alliance with Allens in May 2012), and Herbert Smith (merged with Freehills in October 2012), or by consolidation within a sector, such as the November 2011 combination of insurance rivals Clyde & Co and Barlow, Lyde & Gilbert. Marriages between two midmarket U.K. firms, on the other hand, have generally been scarce. That is beginning to change. In 2011 almost half of the 21 reported mergers involved U.K. firms expanding overseas. Of the 23 announced so far in 2012, 65 percent have been purely domestic in nature.
"Last year, most mergers were international developmentsthis year, the pendulum is swinging much more to the domestic," says former Clifford Chance managing partner Tony Williams, now principal at Jomati. "It's a tough market at the moment, and as is true in any industry, when in a relatively flat market you have to look at ways to protect and enhance your position."
Given the fragmented state of the U.K. legal market, most law firm partners and consultants would agree that consolidation was not only inevitable but necessary. "[Midsize firms] have a broader spread of practices and need a certain degree of investment in IT, marketing, and human resources, but don't always have the revenue to back it up," says Mark Dembovsky, CEO at London-based Howard Kennedy, which recently agreed to merge with London's Finers Stephens Innocent to create a new 200-lawyer firm with revenue of around £45 million ($73 million). "It's a case of being too big to be small, but too small to be big."
Shakespeares has been more proactive than most in its efforts to avoid such a fate. In 2009 its partners agreed to an audacious new strategy that would see the then 180-lawyer firm increase its revenue from £9 million ($14.5 million) to £50 million ($80 million) within the space of just five years. Having subsequently merged no fewer than six timeswith five coming since April 2010the firm has already hit its target a full two years ahead of schedule.
Its most recent deal came last September, with fellow Midlands outfit Harvey Ingram, which had more than doubled the size of its own equity partnership from 16 to 34 through a 2011 merger with Borneos in Milton Keynes, a city near London. The combined business, Harvey Ingram Shakespeares, comprises more than 400 lawyers across seven U.K. offices. With revenue of around £50 million, it is now the second-largest law firm in the Midlands regionbehind U.K. top-25 member Wragge & Co, which has 450 lawyers and revenue of almost £120 million ($193 million)and is on the cusp of the U.K. top 50.
Wilson says this increased scale permits the firm to both generate cost savingsShakespeares recently announced 54 layoffs, comprising 41 support staff and 13 lawyers, and closed three of its smaller regional officesand to support a broader range of practices. It has launched small specialist teams in both real estate planning and intellectual property since the merger, for example, and is now considering establishing dedicated tax and pensions groups, which Wilson says the firm "couldn't have afforded to do" previously.
But Shakespeares isn't done merging just yet. Despite its transformational growth, Wilson believes the firm is "still vulnerable" in the medium term. There are opportunities for further growth in the Midlands, he adds, but to attain the necessary scale, the firm may "have to go further afield"either to London, or to one of the country's other main legal and business centers, such as Bristol, Leeds, Liverpool, Manchester, or Newcastle. So, rather than taking its foot off the gas, the firm will continue to mergeas often as every six monthswith the aim of doubling in size within the next three years. Wilson says he is "not particularly concerned" about the potential risks of such breakneck growth or the prospect of having to continually integrate new practices"we've done lots of mergers now and have become pretty good at it," he saysbut he admits that finding suitable firms will become more difficult as the market consolidates.
Like Shakespeares, 230-partner insurance specialist DAC Beachcroft, which was created through the October 2011 merger of London-based Davies Arnold Cooper and Beachcroft, a national firm headquartered in the southwest of England, has continued to expand by bolting on new practices. The combined firm secured a tie-up with 40-lawyer Scottish outfit Andersons in March, signed a two-year alliance with Canadian insurance litigation boutique McCague Borlack in May, and merged with its two Chilean associate firmsSegurosLex and Amunategui y Ciain November. (In a statement announcing the McCague alliance, DAC said that it also ultimately intends to merge fully with its new alliance partner.)
DAC board member Ruth Winterbottom says that consolidation within the insurance industrypublicly listed investment company Resolution Limited, for example, has since 2009 acquired Friends Provident Group plc, the majority of AXA UK plc's life insurance businesses, and Bupa Health Assuranceis driving the same process among the law firms that focus on the sector.
"The way the insurance industry has [consolidated] over the past 10 years has meant that insurers are able to put a significant amount of pressure on their advisers," she says. It perhaps explains why, in the two years prior to their merger, both DAC and Beachcroft had seen significant slumps in their profit marginsfrom 27 to 18 percent, and from 23 to 19 percent, respectively.
Winterbottom, a legacy partner of the largely U.K.centric Beachcroft, says that the firm's insurer and health clients, which include Allianz Insurance plc, Zurich Insurance plc, and QBE Insurance Group Limited, were keen for it to develop its international network to better service their increasingly global needs. Winterbottom says that the firm's clients are particularly looking to develop their businesses in emerging markets such as Latin America and Asia, which have "growing middle classes and relatively low insurance penetration."
Beachcroft established an office in Singapore in 2011, but the merger with DAC secured access to the fast-growing South America market through DAC's office in Mexico and its associations in Chile and in Brazil. The combined DAC Beachcroft, which in its first fiscal year postmerger saw revenue inch up 2 percent to £182.2 million ($294 million) on a like-for-like basis, says it is now looking at establishing bases in Colombia, Panama, and Peru, while also investigating opportunities in Southeast Asia.
"The larger we've become, the more able we've been to deliver the service our clients want," adds Winterbottom, who recently relocated from Leeds to Glasgow to oversee DAC's postmerger integration with Andersons, which specializes in insurance litigation.
Scotland has been a hive of merger activity of late. The small and intensively competitive market is still dominated by independent Scottish practicesDLA Piper, Eversheds, and Pinsent Masons are the only English firms to have ventured north of the borderbut the Scottish firms' traditional reliance on property and financial services work meant they were hit harder than most by the financial crisis. There have been five Scottish law firm mergers so far in 2012, involving some of the market's biggest names. DAC and Andersons got the ball rolling in March, and Bristol-based TLT merged with Glasgow firm Anderson Fyfe in May. Then, in June, Edinburgh debt recovery specialist Archibald Campbell & Harley combined with fast-growing English firm Shoosmiths, while expansionist Manchester firm DWF agreed to a merger with Glasgow-based Biggart BaillieDWF's third acquisition in just six months. (DWF took over Newcastle insurance firm Crutes in 2011 and Birmingham insurance boutique Buller Jeffries last April, although its talks with 240-lawyer local rival Cobbetts collapsed last January. DWF has seen its revenue climb to £120 million, or $193 million, as a result of its various additions.) Most recently, in October, Glasgow-based Burnessa 150-lawyer firm best known for its expertise in corporate finance and litigationunited with 40-lawyer Aberdeen oil and gas specialist Paull & Williamsons. The new business, Burness Paull & Williamsons, is now Scotland's fourth-largest law firm, with estimated revenue of £38 million ($60 million).
But perhaps the most significant combinations came in May, when Pinsent Masons, the U.K.'s 16th-largest firm by revenue, with its own offices in Edinburgh and Glasgow, announced a tie-up with Scottish "Big Four" practice McGrigors, a 370-lawyer full-service outfit with leading practices in construction and tax.
"Like the rest of the U.K., the growth that Scottish firms enjoyed up to 2007 has come to a shuddering halt," says former McGrigors managing partner Richard Masters, now head of client operations at Pinsent Masons. "It's a small market with a lot of very good law firmssome would say too many. [Client] panels are continuing to shrink, and if you don't have the necessary size to get onand stay onthose panels, then life can be quite challenging."
McGrigors, which has strong historic links to The Royal Bank of Scotland plc and BP plc, had already expanded beyond the Scottish borders through a combination of mergers and greenfield launches. In 2008 it acquired 10-lawyer London litigation boutique Reid Minty and opened an office in Manchester. The following year, it merged with 40-lawyer Northern Irish firm L'Estrange & Brett. Then, in 2011, McGrigors launched in Doha and signed a referral agreement with Husch Blackwell.
But the Pinsent merger has transformed its geographic reach and overall position within the market. Pinsent brings an international network that spans Europe, the Middle East, and Asia, including new offices in Paris and Munich, launched last summer after the termination of Pinsent's strategic alliance with French firm Salans in 2011. The united firm, which continues to operate as Pinsent Masons, boasts more than 1,500 lawyers and revenue of over £300 million ($485 million)more than either Seyfarth Shaw or Fried Frankplacing it just outside the U.K. top 10.
Other mergers between U.K. firms will surely follow. Jomati's Williams predicts that in the medium term, as much as 40 percent of the U.K. top 100 could merge. What has up until now been a steady trickle of law firm mergers is fast becoming a flood.
"The legal market is still hugely fragmented, but we're now at a stage where we're going to see a significant shift toward consolidation and more strategic thinking," says Huron Consulting Group managing director Alan Hodgart, who advised Australian firm Deacons on its merger with Norton Rose. Dembovsky believes that successful law firms will increasingly fit into one of two categories: small, niche players that focus on a narrow area of the market; or larger, full-service firms that are able to service clients across multiple practices and jurisdictionsa prediction that is likely just as applicable to the U.S. and global legal markets, where many midsize firms face a similar outlook.
Still, it's important not to get too carried away. Law firm combinations are notoriously tricky things to get right, and as such suffer a high failure rate. The already complex task of finding the right merger partner will become even more challenging as the market continues to consolidate and the pool of available firms diminishes. Even successful tie-ups will have to endure potentially disruptive periods of integration.
But with U.K. law firms now able to accept external equity investment, there's a real sense that the country's legal landscape is irrevocably changing. And as the weight of merger momentum continues to build, many firms may decide they have little choice but to join the partyor risk being left behind.