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Does size matter? Why UK law firms look to merge.
Experts in the legal market have predicted that over 100 law firms in the United Kingdom will seek to merge in the next 12 months. Recent reports reveal that McGrigors is on the look-out for a merger partner in London, while Watson Farley & Williams has merged with Munich-based private equity firm Oldenbourg Plus. And the impending union between Lovells and Hogan & Hartson has been hyped as one of the biggest mergers in the legal market to date.
In the last 20 years the legal sector has continued to grow in size and strength, both nationally and internationally. UK firms have enjoyed an increase in turnover and profits, and have seen more groundbreaking transactions and international expansion. However, as a consequence of the credit crunch, many law firms have recently been forced to downsize by making redundancies, cutting back on hiring and even in some cases closing some of their international or regional offices. The decline in transactional work across the City caused by clients' unwillingness or inability to take risks has also greatly impacted on the UK legal market. Despite the effects of the economic downturn, the strategy of many partners has been to continue to pursue the same level of growth seen in the last two decades, which in the current climate can often be achieved only by merging with another law firm.
Law firms practise in a highly competitive arena, where size really does matter. Large UK firms provide their clients with legal expertise in a range of different specialised areas, which means they are well equipped to ride out the recession. They can also afford full-time managing partners and marketing and public relations teams which promote the firm, manage the (often negative) press and help to maintain the firm's reputation at a time when the public expects corporate entities to fail. Some smaller firms which over-rely on one area of work, such as property, are not as well insulated from the recession and may therefore consider merging in order to stay afloat.
In the next year the bulk of predicted merger activity is likely to involve mainly small and medium-sized firms. Yet these practices should not rush to merge with just any firm in order to save themselves from drowning in the economic crisis. They should look for firms with a similar culture and financial ambition, which will allow for a smooth transition after the merger. Additionally, merging with a firm that offers different services and specialisations will encourage expansion and improvement, and therefore an eventual increase in profitability.
But it is not only the smaller firms struggling for survival that are seeking to merge. The upcoming Lovells/Hogan merger is set to create a top 10 global law firm, with combined revenues of $1.8 billion, 3,000 lawyers, 566 equity partners and more than 40 offices worldwide. Hogan/Lovells will have a strong UK and US presence and a breadth of coverage in key areas of law. It is a merger which, if integrated successfully, could finally close the seemingly ever-increasing gap between the magic circle and the rest of the top 10 UK law firms. Lovells, which belongs in the top 10, has decided to remove itself from the contagious environment of fear and conservatism which is currently stifling the UK legal market by trying to push its way through to the magic circle. It is this gutsy approach which is needed to encourage the rest of the United Kingdom to snap out of its depression and attempt to grow, strengthen and compete in the legal market once again. They are law firms, after all, and therefore should always be poised for a good fight!
Alice England is a trainee in the energy, infrastructure & project finance department of Denton Wilde Sapte.