The benefits and drawbacks of law firm mergers and acquisitions

The benefits and drawbacks of law firm mergers and acquisitions

The pandemic was undoubtedly kind to those who practice the law. In 2020, after two lengthy lockdowns which brought about a multitude of operational challenges, UK law firms still managed to make £36.78bn – a marginal growth of 0.3% from 2019, but growth nonetheless. And then again in 2021, as the country gradually reopened, law firms generated a whopping £41.58bn in revenues.

In fact, the majority of law firms seem to have escaped the last two years relatively unscathed. Crowe’s Law Firm Benchmarking Survey 2021 found 81% of firms exceeded their expectations for the 2020/21 financial year (85% of City firms vs. 77% of regional firms).

Now, law firms have one thing on the mind – and that’s growth.

New LexisNexis report: The Laws of Organic Growth

How many law firms are looking at merging or acquiring another firm?

Findings from HSBC’s annual Law Firm Strategy and Investment Survey found the vast majority (92%) of UK-based law firms with revenues upwards of £18m are planning growth for 2022. Of the 80+ law firms included in the survey, more than half (54%) said they will look for growth outside their home regions in 2022, and a third (38%) are considering international expansion. In fact, just over a tenth (11%) are considering overseas expansion for the first time.

While larger law firms are clearly wanting to expand, a similar study from M&A advisors Acquira Professional Services found similar results for law firms of all sizes. Almost half (47%) of the 100 law firms surveyed said they’re considering merging with another firm, and a quarter are already in talks over a possible deal. Interestingly, geographic expansion was the most common reason for firms looking at a merger.

Finally, the newly published LexisNexis Bellwether 2022 survey revealed 16% of small law firms said M&As were part of their current growth strategy. And when asked how the pandemic has altered their views on merging or acquiring other firms, a fifth (21%) said it has made it more attractive, compared to only 14% in 2021.

The benefits of law firm mergers and acquisitions

One of the most persuading benefits of going down the M&A route is the ability to expand geographically. Sourcing, training and investing in a new team of lawyers in a regional or international office is challenging – and it can be time-consuming, too. It could also take months or years for this team to build a solid client base. Working with a preestablished team, on the other hand, allows firms to skip this teething process almost entirely.

Another core benefit is the ability to expand into new practice areas. Similar to the benefits of a geographic expansion, those who invest in a pre-established team with different practice area expertise allows firms to expand their offering without having to build it from scratch. Take the recent merger between Weightmans and RadcliffesLeBrasseur (RLB). The former is a modern, high-performing firm with ambitious plans to reach £200m by 2026 – plans which are largely reliant on their ability to diversify. The latter has an impressive healthcare business with a number of enviable medical defence organisations on their client list, but the firm has struggled to modernise. In this scenario, Weightmans adds to its already impressive list of healthcare clients and internal expertise while RLB gets the modern infrastructure it desperately needs.

Another compelling benefit is the diversification of resources, which can also be seen in the aforementioned example. The merging with, or acquiring of, a law firm with a strong digital or tech function or service offering could save a law firm from having to undergo a number of digital transformation and operational hurdles.

The downsides of law firm mergers and acquisitions

Growth through mergers and acquisitions is a commonly used approach, but there are some downsides. In our new Organic Growth report, we spoke with 20 of the UK’s leading law firms to find out how they feel about growth through the M&A route – and not only did they highlight the above advantages, but they also expressed some key concerns. 

One of the top concerns that emerged from our discussions was a loss of culture when merging or purchasing another firm.

Retaining their culture during a merger was a key priority for top 100 law firm Mills & Reeve, said Managing Partner, Claire Clarke.

“When we merged with Maxwell Winward in London in 2017, and George Davies in Manchester in 2013, we were mindful that success would rest on our ability to retain our award-winning culture, but also to flex and expand that culture to accommodate qualities that the new firms would bring,” she said.

The impact of a poor culture can have a negative impact on your bottom line, a new study by the Solicitors Regulation Authority (SRA) found. The study also revealed that law firms with a positive workplace culture have a competitive edge over those with a poor culture, especially with many organisations incorporating softer metrics like culture and employee happiness into the bidding process.

It is a risk of which smaller firms are acutely aware, with 20% of the small firms we spoke to stating their 'small firm culture' is their top priority when looking to attract and retain talent and appeal to clients.

Rosalind Connor, Managing Partner at workplace pension law firm Arc Pensions shared a similar opinion. “I feel that there are risks associated with M&A, that you end up growing for growth’s sake without looking at what it does to the quality of your work and your culture.”

Another disadvantage is the time taken to merge processes and infrastructure, which can be a real burden – especially when legacy systems are in place.

Alternative routes to law firm growth

One popular route to growth without permanently expanding legal expertise is by boosting headcount through flexible resources such as through legal consultants or barristers, or by relying on automation software to increase efficiency.

Our research also revealed many firms favour lateral hiring strategies – the poaching of well-established and highly experienced lawyers – instead of full-scale mergers. This is particularly true for small law firms, with 40% of small firms admitting lateral hiring was a priority for their overall growth strategy. However, lateral hires can act as unofficial mini-mergers, especially when a high-profile fee-earner comes into a firm, bringing new expertise, clients and, in some cases, entire teams with them. Therefore, firms that favour lateral hires over merging with another firm will not necessarily protect their current culture.

The majority of firms, though, are looking inward to create an organic growth agenda focused on their existing people, clients and processes.

Rachel Broquard, Service Excellence Partner, Eversheds Sutherland, said: "By combining legal advice with support from legal technologists, our teams can select the right technology solutions to achieve the best results for our clients and help to win new work."

Find out which organic growth strategies work – and which don’t. Read our Laws of Organic Growth report.

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About the author:
Dylan is the Content Lead at LexisNexis UK. Prior to writing about law, he covered topics including business, technology, retail, talent management and advertising.