Fashion trends come in waves. Apparently, so do law firm management strategies.
After a busy decade of trans-Atlantic mergers, including 10 combinations of U.S. and U.K. firms between 2000 and 2011, there was a distinct slowdown. Only one major trans-Atlantic merger was completed between January 2011 and February 2017. Then word of the Eversheds Sutherland merger broke. Soon after, rumors began emerging that Womble Carlyle and Bond Dickinson were to merge. Then came news of the Bryan Cave and Berwin Leighton Paisner combination. Beyond those three examples, others have been whispered about, both privately and publicly, as is the case of the rumored merger between Allen & Overy and O’Melveny & Myers. Clearly, something is in the air.
There are many differences between the last round of mergers and the current one. But a key difference is the knowledge that comes with experience. In the early 2000s, law firm leaders were boldly going where no law firm had gone before. Trans-Atlantic mergers between law firms had not been experimented with. There was little knowledge of the complexity involved or the benefits that might come from increased cross-selling or cost synergies. Today, law firm leaders have significantly more information. Much can be learned from examining past mergers. Given that these mergers are once again en vogue, it’s time to take stock of past mergers and see what they achieved.
The Forces at Play
Before jumping into the track record of past mergers, it’s worth examining what today’s combinations hope to achieve and why law firm management teams are considering them.
It is often said that law firms face difficult market conditions. This understates the issue. Law firms face three related problems. First, growth has slowed significantly. Second, clients have become savvier, more demanding and more cost-conscious. These problems are well known by most law firm leaders.
The third issue facing law firms is less appreciated: law firms face a daunting amount of competition from other law firms. Within the Am Law 200 there are 185 self-described full-service firms. If that number does not impress, look closer at regional markets. Within the Midwest there are 27 Am Law firms that could be described as full-service regional firms—defined as firms that self-identify as full-service, have little to no international capabilities and have more than half of their lawyers within the region. Beyond those Am Law firms, there are another 66 NLJ 500 firms within the Midwest that fit the same criteria. These 93 firms, to some degree, are all competing for the same clients and talent. Other regions are equally competitive—74 regional firms in greater New York vie for full-service market share, and 69 regional firms in the Southeast compete.
Mergers, it is said, offer law firms solutions to each of these problems.
- For slow growth: Mergers offer the possibility of cross-selling. If more services can be sold to the same clients, growth will inherently come.
- For clients’ cost concerns: Mergers offer the tantalizing possibility of cost synergies. The combination of two firms, at least in theory, should create some reduction in overhead cost. This should make law firms cheaper and more competitive.
- For clients’ increasing sophistication: Instead of managing dozens of law firms, larger firms can offer GCs a one-stop shop. If the quality of services can be made similar across geographies and service lines, this should be compelling to corporate clients.
- For differentiation from competitors: The quickest, if not the most effective, way of differentiating a law firm is to grow, either domestically or internationally. There are far fewer national and international firms than there are regional firms. Given this fact, law firm leaders might be forgiven for thinking that a trans-Atlantic merger would give them a unique selling point among corporate clients, which, after all, have been expanding globally themselves.
Many firms see mergers similarly to Jeremy Clay, the managing partner of Mayer Brown. When asked by The Lawyer to summarize his firm’s logic for its 2005 merger with Rowe & Maw, Clay reported that “our sense was that there was an overcrowded mid-market. We wanted to stand out from that group and move ourselves further up the London market.”
Clay’s comment raises a few important questions. Do trans-Atlantic mergers allow firms to stand out? Do they act as catalysts for transformation? If so, does that facilitate growth? A look at past mergers sheds light on these issues.
A Look to the Past
First, the good news: Trans-Atlantic mergers have, unquestionably, been catalysts for transformation. Nearly half (47 percent) of the world’s 15 largest law firms this year, by revenue, are products of trans-Atlantic mergers. By combining with U.K. peers, U.S. law firms have transformed themselves from regional players to global behemoths.
But what about growth? One of the key benefits law firm mergers are said to bring is enhanced growth opportunities. Here, the story becomes more complicated. Measuring revenue growth in global law firms is fraught with difficulties for several reasons:
- Currency changes: Large changes in major currencies can greatly impact the dollarized reported revenue of global law firms, creating difficulties in comparing growth between years.
- Organic vs. inorganic growth: Most global law firms have undergone multiple mergers. This makes it difficult to parse out what growth is organic and what has been acquired through mergers or group lateral hires.
- Reporting issues: Most law firms do not report revenue by region. This makes it difficult to assess which parts of the business are growing.
These difficulties create the need for a proxy, a variable other than revenue that can speak to growth. In most law firms, growth in head count and growth in revenue are very closely linked, making head count a good proxy for measuring overall growth.
Analyzing lawyer growth in trans-Atlantic mergers suggests that the supposed benefits of organic growth are exaggerated at least and, at worst, just plain wrong.
Most trans-Atlantic combinations have not facilitated growth in head count after adjusting for additional mergers. In fact, a majority of the trans-Atlantic mergers analyzed by ALM Intelligence saw the firms shrink. The average law firm reported a decline of 0.4 percent in head count per year in the years between its first trans-Atlantic merger and today. Such declines sound minor, but they stand in stark contrast to the growth that was promised. More concerning is the fact that U.S. and U.K. offices performed particularly poorly. If trans-Atlantic mergers between U.S. and U.K. firms facilitated cross-selling and made firms more attractive to clients, we would expect the U.S. and U.K. practices of these firms to be benefited disproportionately. The data suggest the opposite is happening.
A closer look at the offices of law firms that have undergone trans-Atlantic mergers provides additional information. In almost every case, the firm’s existing offices—those offices which were open in the first reporting year after the merger was completed—have seen declines in head count. Growth, in every case except Hogan Lovells, has only come from offices opened after the completion of the merger or through additional mergers.
What could explain these trends? Why are firms’ legacy offices shrinking?
It’s possible that global expansion makes local offerings less competitive. This seems unlikely at first glance. That said, a 2017 report by ALM Intelligence on domestic mergers suggests that costs rise disproportionately after a large merger. There is good reason to think international mergers would create similar outcomes, which could raise costs and make firms less competitive. Another possibility is that big mergers distract law firm management teams from the day-to-day duties of growing their legacy offices. This seems like a real possibility. Mergers are highly complex after all. A third possibility for the loss in head count is that some number of lawyers do not want to take part in the transformation the law firm is undergoing. It is entirely believable that the practice of a significant share of lawyers, at a once-regional firm, would no longer fit into the business of a global giant.
Lessons for Leaders
What should today’s law firms make of these findings? Does this data suggest law firm leaders shouldn’t consider global mergers? No. At least not entirely.
For firms looking to boost growth, mergers are likely to be a disappointment and potentially even a hindrance. Some cross-selling opportunities will be created. But they are likely to be offset by complications from increased conflicts, increased costs, partner departures, and other difficulties created by mergers. The bottom line is that faster growth is not a likely outcome of a merger—at least not without additional changes.
For firms looking to make a major strategic shift, however, trans-Atlantic mergers may be worth considering. Combinations between U.S. and U.K. firms have been successful at transforming firms. Many of the most well-known brands in the legal space today are products of trans-Atlantic mergers.
To take full advantage of the merger, however, firms will have to go further than just combining. Law firm leaders should leverage mergers to have a larger discussion with their partners about how their firm can differentiate itself and become more competitive. Mergers should be pitched as the first step. Partners should know that broader operational changes, connected to how services are sold and delivered, will be needed if the firm wants to take advantage of its newfound scale. Such plans are more likely to create sustainable growth opportunities in the future. They may also usher in a new generation of trans-Atlantic law firms.
Nicholas Bruch is a senior analyst with ALM Intelligence.