Law firm mergers have had mixed results. By combining forces, firms have been able to accelerate growth, quickly penetrate new markets, and build some of the legal world’s most recognized brands. Transforming that new-found scale into stronger growth or greater profitability, however, has been more difficult than many firms anticipated.
ALM’s analysis of large law firm mergers (defined as those involving Am Law firms) since 2000 reveals that a majority of mergers have resulted in firms that struggle to both grow and manage costs effectively. Interviews with law firm leaders suggest that many firms have tended to view mergers with a positive bias, expecting that the benefits of greater scale will ultimately outweigh the downsides of managing a larger and more complex firm. ALM’s research suggests such a view may be too optimistic. Most law firm mergers do not deliver their promised benefits.
Notable findings within the report, entitled A New Approach to Law Firm Mergers: Lessons Learned From 15 Years of Consolidation, include:
- Partner Departures: The average merged firm lost 6% of its partners, and a corresponding amount of associates and revenue, within the first year due to merger-related departures.
- Revenue Growth: Merged firms largely underperformed their peers in terms of revenue growth in each of the five years following the merger.
- Cost Increases: Merged firms largely underperformed their peers in terms of cost increases, on a per-lawyer basis, in the five years following the merger.
- Certain Types of Mergers Have Higher Success Rates: Findings from interviews with law firm leaders, explored in greater detail within the report, indicated that smaller mergers and mergers targeted at fortifying firms’ existing strengths had higher rates of success.
ALM’s research offers a new approach to evaluating law firm mergers. This approach puts more emphasis on vetting the complexity of the proposed merger and on understanding the likely costs that will result from the merger’s execution. This approach will help firms evaluate the potential benefits of a proposed merger against the likely costs. In doing so, this research aims to help firms increase the success rate of future law firm mergers.
The report is available here.
Nicholas Bruch is a Senior Analyst at ALM Intelligence. His experience includes advising law firms and law departments in developing and developed markets on issues related to strategy, business development, market intelligence, and operations. He can be reached at NBruch@ALM.com.