After some quiet years, the mergers and acquisitions market is growing. But it’s not necessarily the biggest law firms reaping the rewards as outside counsel. A new report from CounselLink, a division of LexisNexis, shows that the “second-largest” firms, those employing between 501 and 750 attorneys, are the ones grabbing up M&A matters.
“There’s more activity, and corporate counsel are dealing with a different set of firms to handle that increase in activity,” Kris Satkunas, principal author of the report and director of strategic consulting at LexisNexis, told CorpCounsel.com. “That’s a pretty important story when you put those two things together.”
CounselLink’s latest enterprise legal management trends report, titled “Growth in M&A Billings Benefits ‘Second-Largest’ Law Firms,” is part of a semiannual review by LexisNexis of legal department data available on law firm billing through its CounselLink Enterprise Legal Management platform. The data in the report (which will be reviewed in an upcoming webinar) was gathered in 2013 and covers more than $15 billion in legal spending on more than 3 million invoices. It follows up on a report from 2013 that identified the same kind of overall shift in spending outside of M&As from the largest firms and toward “large enough” firms.
The upward trend in M&A activity is certainly supported by the new report’s data. In 2010, CounselLink found that only 0.7 percent of the total legal fees incurred by companies studied could be attributed to M&As. In 2013, this number reached 1.6 percent, a dramatic uptick from 0.9 percent in 2012.
The report shows that the share of this work going to the largest law firms—categorized as those with more than 750 attorneys—is on the decline. “M&A work is traditionally sacred ground,” Satkunas said. “It has been worked on by these very prestigious—and in most cases, larger—firms.” In both 2012 and 2013, the second-largest firms surpassed the largest firms in their share of the M&A pie. But in 2013, the difference was even more dramatic, with the second-largest taking home 37 percent of the total.
What’s worse for the biggest firms is that the most expensive matters—those of more than $1 million—are going to their slightly smaller counterparts to an even greater degree. The second-largest set took home 52 percent of the total outside spending for high-fee matters in 2013.
Although she said it’s hard to draw broad conclusions from the data, Satkunas believes that the shift of M&A work to somewhat smaller firms is “kind of a wake-up call to large firms,” as well as an “indicator of the use of strategy by corporate counsel.” With many in-house counsel looking to make their legal spending more efficient, she explained, they are looking to smaller law firms that are perhaps more willing to offer more reasonable rates and more flexibility.
The report showed that there may be significant savings for companies that avoid using the 50 largest firms for M&As. Using weighted averages of partners, rates and hours allocated to M&A activities, CounselLink determined that median partner rate for firms with more than 750 lawyers was $706 per hour. This is significantly higher than the median rate of $597 per hour found in the second-largest category.
There are also some interesting insights in the report on such other trends as the consolidation of outside firms. “I think that the report validated that we’re seeing a significant part of our customer base consolidating the numbers of firms” on their outside counsel rolls, Satkunas said.
Some 54 percent of companies in the 2013 data have consolidated at least 80 percent of outside counsel spending to 10 or fewer firms. The level of consolidation differs across industries with manufacturing and finance on one end of the spectrum consolidating the most and transportation and warehousing actually expanding the number of firms used.
The report covered the prevalence of the use of alternative fee arrangements across matter areas as well. Not surprisingly, Satkunas noted, areas such as insurance, finance loans and investment, and employment and labor, which tend to have higher volume, used AFAs the most. “The other way that we see AFAs being used is in portions of matters,” she said. For example, there could be AFAs used before the trial phase of litigation.
The report also broke down hourly rate growth for attorneys across 15 major U.S. metropolitan areas, both by year-over-year increase and compound annual growth rates. Firm lawyers in New York, Washington, D.C., Atlanta, Chicago and Boston—but perhaps not their corporate clients—should be happy to hear that their rates have gone up by 3.5 percent or more by both measurements.