**Editor’s note: This is the second installation in a two-part series about consolidation in the legal industry, and how it affects midsize firms. The first part discussed midsize firms acquiring smaller firms.**
As midsize firms use bite-size mergers to regionalize and specialize, an increasing number of large firms are jumping on the M&A bandwagon, taking bigger chomps out of the legal mid-market in pursuit of marketshare.
But some midsize firm leaders remain wary of mid-market consolidation, and contend that their segment of the legal industry remains strong enough to stay put.
In 2018, 11 midsize shops have been acquired by firms of 400 or more lawyers, according to Altman Weil’s MergerLine. (In five of those combinations, global firm Dentons was the acquirer.)
To be sure, acquisitions of small firms have been more numerous: 30 mergers this year have involved midsize firms acquiring small firms. Some become so acquisitive that they are suddenly no longer midsize.
Still, midsize firms are facing similar pressures as some of their smaller peers, and similar opportunities.
Filling Out the Map, or the Menu
Barry Genkin, an M&A lawyer at Blank Rome, who has worked on several law firm mergers, said midsize firms that choose to merge are rarely in desperate need of a lifeboat. Instead, he said, combinations often take place when midsize firms—particularly those without a niche focus—are looking for a way to keep their best lawyers from leaving. Oftentimes those lawyers are trying to grow their platform, through access to other cities and practice areas.
And for the larger, acquiring firm, a midsize shop can offer a strong entry into a new practice area or region.
“If a large firm is doing a combination with say a 100-person law firm in a geography they’re not presently in, that’s a strong enough foothold that you can then attract more lawyers,” Genkin said.
Nelson Mullins Riley & Scarborough, for instance, gained a strong, 10-office foothold in Florida earlier this year, when it combined with Broad and Cassel. The merger took effect Aug. 1.
Three Philadelphia-based firms expanded geographically through mergers last year. Ballard Spahr made an entry into Minneapolis and Sioux Falls, South Dakota, with its acquisition of Lindquist & Vennum. Saul Ewing gained a Chicago and Florida presence by merging with Arnstein & Lehr, and Fox Rothschild entered Seattle last year by acquiring a 39-lawyer firm.
Fox Rothschild may soon make its biggest addition yet, as the firm has reportedly been in merger talks with North Carolina-based regional firm, Smith Moore Leatherwood, which has about 130 lawyers. And it absorbed 23-lawyer Shaw Fishman Glantz & Towbin in Chicago just a few months ago.
With its acquisition of about 100 lawyers from intellectual property firm Fitzpatrick, Cella, Harper & Scinto, announced last week, Washington, D.C.-based Venable seized on the opportunity to grow both a geographic target and a practice group.
“We’ve got a longstanding commitment both to New York and to the IP practice,” Venable chairman Stu Ingis told The American Lawyer, calling the merger “a home run for us.”
Also zoning in on IP, Stinson Leonard Street, which was built to its current size through a midsize firm merger in 2013, recently announced another acquisition, of 24-lawyer intellectual property firm Senniger Powers. Managing partner Mark Hinderks said he has noticed a trend of large firms making acquisitions to get into “hot” cities. But his firm’s most recent merger was practice-focused, as the firm looked to add technical specialty to its IP group.
“Doing a merger is an opportunity to make more than incremental progress at one time to get mutual access to expanded client bases and to … extend into new practices that are already integrated pretty well together without you having to weave them together yourself,” Hinderks said.
Still, he cautioned against merging only for scale, noting that some large firms have been “a little more knee-jerk” about making acqusitions.
“We kind of have this routine down of how you put together groups without disenfranchising any subset of folks,” Hinderks said. “That idea that nobody is acquired, when you join us, you become our partner, that’s the theory behind everything.”
Open, but Skeptical
Still, not every midsize firm leader is eagerly awaiting the perfect large-firm suitor.
“We certainly are approached all the time by firms,” said James Goodnow, managing partner of Mountain West midsize firm Fennemore Craig. But “we prize what we have and what we’ve built.”
Paul Hughes, managing partner of New England firm Wiggin & Dana, said “you never say never,” but noted that his firm has nothing in the works, and hasn’t seen any viable offers yet. “We get phone calls for sure,” he noted.
Chad Williams, co-managing partner of Denver firm Davis Graham & Stubbs, has watched a number of mergers in his market in recent years. Some have been successful, he said, but he’s spoken with several former midsize firm leaders who merged into Big Law, and said they came to regret it.
“You lose your identity in the Denver market a little bit when you become something between a large Denver firm and a national firm,” Williams said.
Davis Graham co-managing partner Kristin Lentz said the law firm M&A conversations are “constant,” especially with Midwestern firms looking to become national. “We always entertain a conversation and want to understand someone’s strategy,” she said, but “at the same time, there’s an inclination to say no.”
A Future of Fewer, Bigger Firms?
Still, enough firms have been convinced to move up a weight class to make for a record year of law firm mergers in 2017. And the legal industry is on pace to break that record in 2018.
Eric Seeger of consulting firm Altman Weil said the law firm merger market is likely to stay active for a while. “I can’t remember a time when so many firms were calling us to find a firm to acquire, or to discuss a merger opportunity,” he said.
Like small law firms, which have increasingly looked to mergers in the face of increasing costs of technology, real estate and expenses, midsize firms are facing market pressures, even if less imminently.
Even Davis Graham, which has dedicated itself to being a one-office midsize firm, is not permanently opposed to the idea of a merger in the long term, co-managing partner Kristin Lentz said.
“You have to be realistic about the trend that a firm of our size sees. There are cost requirements, changes in the market that all firms are having to address,” she said.
But firm leaders said they expect midsize shops to remain an important segment of the industry, even if they shrink in number in a consolidating market.
Goodnow, of Fennemore Craig, noted that the legal industry cannot become dominated by too small a number of firms, simply by the nature of the work.
“Our conflict rules do not allow there to be a consolidation as you see in the accounting firms,” Goodnow said.
And Hughes, of Wiggin & Dana, recalled that now is not the first time the legal mid-market has faced threats of extinction. But, he suggested, history doesn’t back up those threats.
“It was sort of generally understood that in early 2000s merger mania world, that a 150-lawyer firm would be dead in the water in a few years,” he said. “But here we are, busier, more profitable with a bigger client list than we had then.”
But sticking around will require midsize firms to stay disciplined about their own efficiency.
“There’s a place for midsize firms with cost structures available that … we can provide the same high-quality lawyering at a much more cost-effective rate,” Goodnow said. “I don’t think there’s any demise of midlaw looming.”