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So far this year we have seen: CMS Data’s Australian parent Solution 6 enter into merger talks with Elite (at the time of writing the US Federal Trade Commission still has to approve the deal); the legal systems integrator The Data Base has been acquired by Ramesys, an acquisitive new software holdings group; floundering merger talks between a major case management supplier and a practice management systems vendor; and rumours – strenuously denied – that the founder of another legal systems supplier wants to sell out for £4m.So does this mean the long-predicted shake-out and consolidation of the UK legal systems supplier market is about to take place?The accepted wisdom is that any such move would be to the benefit of the law firms that buy these systems. Rather than spend so much time and effort competing for sales with the 90-plus other suppliers operating in this market, larger suppliers would have more resources to focus on product development (a key issue as we move into the era of complex web-enabled software), system implementation and after-sales support. If larger suppliers had larger market shares, economies of scale might be passed on to customers in the form of lower prices. Thus addressing another long-standing grievance among law firms that, compared with ‘commercial’ shrink-wrap packaged software, legal systems offer poor value for money in terms of functionality versus cost.This whole issue was summed up by Dibb Lupton Alsop’s IT director, Daniel Pollick, when, at a recent conference, he complained the quality of the majority of legal IT suppliers was “woeful”, with too many “Mom and Pop companies” having a “doubtful record” on the delivery and realisable benefits of the products they sell.But, by way of balancing this remark, he also admitted lawyers often only had themselves to blame, as their ignorance of technology meant suppliers “had it easy”, with the result that users could be “blown along by more technology crazes than Toys ‘R’ Us”.But, if consolidation is such a good thing, will it ever happen? The answer is yes – providing the deal is right.For example, it is true a lot of the smaller suppliers have an ageing management – typically the owners/directors who founded the businesses in the late 1970s and early 1980s – who would like to sell out, realise their investments and retire. On the other hand, there is no great urgency for them to do so in the near future.The legal systems market, along with the rest of the economy, is booming. So why not get a few more years’ positive trading results under the belt to bump up the company valuation?And, as every serious player has now gone through the pain of investing in major rewrites and redevelopments of all their applications to achieve Y2K compliance and/or migrate to a modern 32-bit Windows platform, the next couple of years are also going to see their businesses recouping the return on their investments. So why not stick around to enjoy the profits a little longer and treat themselves to a new BMW – the industry’s preferred mode of transport?The point often overlooked, particularly by some consultants keen to earn their 1% commissions on any merger/acquisition deals they can arrange, is that, despite all the apparent inefficiency within the market (too many small firms competing for the same customers in a relatively small niche market), most legal software companies are nice little earners.Typically they have a solid core of loyal users who have been with the same supplier for many years – some vendors have customers dating back to the 1970s – providing a steady flow of revenue from annual maintenance contracts, additional licence sales and software upgrades. The problem these companies face is that a merger or a takeover with another supplier may not add substantially to the growth prospects or profitability of the business, and could actually be counterproductive.While the idea of acquiring market share by buying out a direct competitor is tempting, experience has shown that too can be problematic.For example, at the end of 1997, Applied Computer Expertise (ACE) informed the market it intended to pull out of the solicitors’ software business within four months (it is still active in the software sector of barristers’ chambers) and was looking for someone to buy its 25 law firm user base. However, there were a series of misunderstandings with potential purchasers and rows with users of its Infinity software By March 1998 almost the entire law firm user base had migrated to alternative suppliers.To date, just about the only consolidation the market has seen has taken place in fire-sale situations, where one company has had to sell out because the receivers had been sent in – Resolution acquired the InControl case management business when Mercury Computing failed; AIM acquired the Law Data and HG Usher/ULegal businesses when those companies failed – but even then the transactions often proved to be more trouble than they were worth.For instance when Admiral Legal (itself now part of Sanderson Systems) acquired the failed Hay Logic user base, instead of buying a 60-firm strong share of the market, it found it had inherited a support nightmare with almost every firm running a different, individually customised version of the applications software.A similar fate greeted would-be buyers of the Ulrex system, one of the big names in case management in the late 1980s, when, at one stage, two rival IT suppliers plus the original developer of the software and the official receiver all claimed they owned the legal rights to the program source code.Currently the going rate for buying a supplier’s user base averages out to about £5,000 per law firm – although one company recently picked up a 70-site user base for just £250,000.But given the inherent risks – you may be exchanging good money for a lot of unhappy users – there is not much enthusiasm for this option. Instead, what suppliers are really interested in are deals where the potential value of the new combined business is worth more than the sum of the two halves.Legal systems suppliers are looking for deals that can offer dramatic, rather than merely arithmetic, growth and that means mergers or acquisitions not with direct competitors but suppliers of complementary products and services – such as between PMS suppliers and case management software or internet services developers.So yes, one day there will be some consolidation within the market – but at the moment there is no great urgency, with most suppliers preferring to keep their options open and wait for the killer deal to emerge.

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