Last year may have missed out on setting a record for law firm merger activity, but it did confirm a trend: In the post-recession legal market, managing partners are more acquisitive than ever.
Following a record year for law firm tie-ups in 2015, legal consultancy Altman Weil Inc. reported that law firm deals stayed hot in 2016, with 85 combinations recorded. That’s just off the record of 91 in 2015, and it brings the four-year running average dating back to 2013 to 86.5 deals per year. From 2009 to 2012, that figure came in at just 53.
The largest deal measured by Altman Weil last year—the Newtown Square, Pennsylvania-based firm counts deals when they’re announced—was the transatlantic combination of 1,900-lawyer British firm Eversheds with 400-lawyer Sutherland Asbill & Brennan. An international union, the deal also highlighted another aspect of the 2016 merger market: It set a record for cross-border combinations with 11 such deals, Altman Weil said.
A separate survey of mergers by Washington, D.C.-based Fairfax Associates also said last year saw a surge in international mergers, driven primarily by acquisitions made by the world’s largest firm, Dentons. The survey said Dentons closed deals in Australia, Colombia, Costa Rica, Luxembourg, Mexico and Singapore.
The vast majority of deals in both surveys, however, involved small, domestic firms. Eighty-four percent of all deals were acquisitions of firms with 20 or fewer lawyers, Altman Weil said, and 52 percent of deals were same-state combinations.
Large law firms still compete in a flat-demand environment, making acquisitions one of the few attractive avenues for growth, said Altman Weil principal Thomas Clay. And smaller firms continue to struggle with generational planning, making it easier to convince merger-resistant partners that a deal is in their best interest.
Consultants don’t see a cool down coming, but for one potential problem: With four years of a hot acquisition market, it is increasingly difficult to find attractive smaller firms to absorb.
A client recently asked Altman Weil’s Clay to provide a list of firms and acquisition targets with a midsize corporate practice in a northeastern U.S. city. To the client’s surprise, Clay said there were 24 such firms in the market.
“They thought there must be dozens and dozens of firms,” Clay said.
Chicago is one example of a market that may be experiencing a dearth of attractive targets. In 2015, five Am Law 200 firms, including Cozen O’Connor, Greenberg Traurig, Honigman Miller Schwartz and Cohn, Nixon Peabody and Shook, Hardy & Bacon all made acquisitions in the Windy City. Altman Weil data shows that no firm did any merger deals in Chicago last year.
It is difficult to find, for example, a 30-lawyer corporate boutique in New York, said Fairfax Associates principal Lisa Smith, a veteran law firm merger expert. She said the legal market has a long way to go until consolidation is finished, noting that even the country’s largest firms only hold about 2.5 to 3 percent of market share in the Am Law 100 market. Latham & Watkins’ record $2.65 billion in gross revenue for 2015 represented about 3.1 percent of the $83.1 billion collectively taken in by Am Law 100 firms.
“There are definitely some markets where there is a challenge,” Smith said. “But we’ve been saying we think there is a diminishing supply of candidates for probably 10 years, and yet the mergers continue at a pretty high rate.”
Among the many challenges facing Big Law in 2016 is finding new growth opportunities, according to a report last month by The American Lawyer. Some potential combinations are already in the works for 2017, with sibling publication Legal Week reporting Thursday that Hunton & Williams is continuing its ongoing tie-up talks with Addleshaw Goddard, a British firm also engaged in discussions with Germany’s Luther.
Atlanta-based Smith, Gambrell & Russell bulked up its New York office by bolting on local boutique Balber Pickard Maldonado & Van Der Tuin, according to sibling publication the Daily Report, while Texas Lawyer noted Austin-based trademark and copyright boutique Pirkey Barber’s acquisition of two-lawyer Vold & Williamson in McLean, Virginia.