Law firms merged at a record pace during the first half of 2017, with the year on track to record 104 law firm acquisitions—13 more than the next busiest year (2015) ever tallied by Altman Weil Inc.’s MergerLine.
Lest anyone get confused, this is primarily not a Big Law story.
The merger boom is fueled by small, independent firms in second-tier markets. And at no time was that more apparent than the month of June, when four of the nine recorded mergers involved small firms in the U.S. Midwest.
A 13-lawyer firm in Indiana nabbed seven health care litigators from boutique Hall, Render, Killian, Heath & Lyman. Louisville’s Stoll Keenon Ogden moved to absorb 10-lawyer, Evansville, Indiana-based Bamberger, Foreman, Oswald & Hahn. In a deal between suburban Detroit firms, Hewson & Van Hellemont picked up eight lawyers from Raftery Janeczrk & Hoelscher. Cleveland’s Nicola Gudbranson & Cooper climbed to 26 lawyers by bolting on Rosner, Ortman & Moss, a two-lawyer local immigration boutique. And Lewis Rice’s subsidiary estate planning firm, Tucker- Allen, snapped up a small group of estate planning lawyers in St. Louis.
Acquisitions involving between two and 20 lawyers made up 85 percent of deals in the first quarter and 71 percent in the second quarter, according to MergerLine. Norton Rose Fulbright’s acquisition of Chadbourne & Parke marked the lone deal between two Am Law 200 firms. The Midwest was also more active than usual, with 11 of the 52 firms acquired having roots in the U.S. heartland.
So, are small firms in the middle of the country in a particularly vulnerable state? Or is it a noisy signal in the data?
Data from Citi Private Bank shows that smaller firms, or at least the Am Law Second Hundred, are working through a tougher market than their larger brethren. Of that segment, 72 percent of firms reported a contraction in demand in the first quarter. More broadly, the Second Hundred firms saw more modest revenue and industry growth compared to Am Law 100 firms.
“We would anticipate consolidation in this segment, as this appears to be a segment under pressure,” says Gretta Rusanow, head of advisory services for Citi Private Bank’s law firm group.
Eric Seeger, a principal at Altman Weil, says the Midwest merger activity is likely a blip, not a trend. But he offers an explanation that applies to all cities and firms of any size. Among managing partners, law firm mergers can be contagious. “Especially when you get two or more firms merging, it causes [other] firms to look around and think, ‘Firms like us are deciding they can’t be successful or they have more opportunities joining a larger platform, maybe that makes sense for us, too,’” Seeger says.
The Midwest has caught the merger bug before. Chicago was a hotbed for Am Law 200 merger activity in 2015, when the market saw five entrants or expansions: Nixon Peabody, Cozen O’Connor, Shook Hardy & Bacon, Greenberg Traurig and Honigman Miller. And Chicago is in line to record another major merger to its list at some point this year. Arnstein Lehr, a firm dating back to 1893 with about 90 lawyers split between the Midwest and Florida, has been in advanced talks to merge with Philadelphia’s Saul Ewing, which would create a firm of more than 400 lawyers.
Of the five firms that entered the Windy City in 2015, Honigman’s office has grown the most by a head count percentage basis. It has nearly doubled to 29 lawyers from the 16 lawyers it started with by acquiring litigation firm Schopf & Weiss and adding a partner each from Skadden, Arps, Slate, Meagher & Flom and Paul Hastings.
Detroit-based Honigman CEO David Foltyn says the firm entered the market with hopes of attracting lawyers from “money center” firms who could better serve mid-market clients at a firm with a lower cost structure. The firm has primarily expanded in the life sciences and private equity practices.
“It was a talent acquisition strategy for us,” Foltyn says of the move into Chicago. “And in a lot of these areas we’re learning that having a Chicago practice speaks nationally for us. Using private equity as an example, being in Chicago adds a real level of prestige to those practice areas.”
While mergers can come in waves, it is rare that more than one large combination will happen in any given city within the same calendar year. The last time a Midwest city had more than one acquisition involving 100 or more lawyers in the same year occurred in 2007, when Chicago had two major mergers: 400-lawyer Locke Liddell merged with 300-lawyer Lord Bissell, and Reed Smith acquired 145-lawyer Sachnoff & Weaver.
When it comes to Big Law expansion into hot markets, the preferred entry strategy is typically not mergers but rather groups of lateral hires. Boston and Houston are two cities that have recently seen an influx of large law firms in that way.
This year, the Boston market has seen firms including Kirkland & Ellis and Wilson Sonsini Goodrich & Rosati open new offices in the city. Kirkland & Ellis in June hired Sean Hill and Stephanie Berdek away from Proskauer Rose. Wilson Sonsini opened its office in January with the hire of Mark Solakian, formerly general counsel at Bedford, Massachusetts-based Joule Unlimited Technologies Inc. That comes on the heels of firms including Gordon Rees Scully Mansukhani, Morrison Foerster, Polsinelli and White & Case entering the market since 2015. Kent Zimmermann, a consultant at The Zeughauser Group, says Boston’s large life sciences and tech community is a draw for many firms.
As for whether there is another city ripe to see a domino effect of mergers in the short-term, some consultants point to Minneapolis, where one source says law firms from the Pacific Northwest have expressed interest in the Twin Cities’ swathe of Fortune 500 headquarters and medical device expertise.
In order for that to occur, Big Law has some convincing to do among people like Steven Ryan, chair of Briggs and Morgan, a roughly 150-lawyer firm with a proud, 100-plus year history representing large companies in Minneapolis, including the Minnesota Twins and the Vikings.
Ryan says he has heard plenty of pitches from firms—local, regional, national and global—about merging. “There is a lot of interest in access to the Twin Cities market,” he says. As a rational businessman, Ryan says it makes sense to hear offers.
But none have been compelling and, in his estimation, most mergers are a way to patch up holes in aging partnerships or to solve some other problem he doesn’t see within his own firm.
“I think people figure, ‘If I’m part of something big enough, I’ll always have that to fall back on,’” Ryan says. “I’m not sure that’s necessarily a great plan, at least for serving the markets we do here. We do national work for largely regional clientele.”
In other words, the merger bug may not have quite struck Minneapolis. But at the current rate of law firm combinations, there are plenty of other managing partners likely to catch it.