Merger Mania and Megafirms

Merger Mania and Megafirms

Consolidation of the legal market heated up over the past 10-15 years as law firms look to mergers as a strategy for growth. The push to merge or acquire is fueled by the breakup of financially weaker firms and by partners who believe their clients are better served by a larger platform.  Most of the firms at the top of the 2012 AmLaw100 formed through merger of two or more firms over time.  The trend continues as the 39 law firm mergers through the first six months of 2013 puts the year on a potentially record-setting pace for U.S. law firm combinations.

An acquisition or merger immediately brings critical mass and an existing client base as well as making a splash in the marketplace. If a stand-alone firm is acquired en masse, rather than by addition of only a part of a firm, the result often is a turnkey operation, which is important if the acquiring firm is opening an office in a new geographic location. On the financial side, adding an up-and-running law firm brings work in progress, which cuts down the lag time for collection of revenues to offset costs of the merger.

Mergers succeed when they implement the strategies of the participating firms; they aren’t an end in themselves. The resulting firm should create a platform for further growth, which may necessitate shedding partners and practice areas that don’t contribute to the ultimate vision. The impetus for law firm mergers usually is geographic or practice expansion, either adding new capabilities or deepening existing ones. The combination should create opportunities that didn’t exist previously for either of the original firms.

Before seeking a merger, each law firm must identify its strengths and weaknesses. A firm may determine that it needs to increase its specialization, add complementary capabilities, enhance its ability to attract clients or industries not currently served, add areas of practice its current clients now need or will need in the foreseeable future, or solidify relationships with clients served by both law firm merger partners. This last factor is increasingly important as corporate clients winnow their lists of approved firms to which they send business.

Law firms shouldn’t use merger to cure financial problems, however. The combination of two financially weak firms doesn’t make a strong law firm; it merely results in a larger problem. Usually, those combinations don’t succeed and both firms end up dissolving. The key to becoming an attractive merger partner is to strengthen your existing firm first.

A smaller firm may wish to merge in order to grow along with its clients. This is especially true if a client is more comfortable with a larger law firm which has a greater breadth of practice or a particular specialization, or needs critical mass to staff large matters. Public company general counsel may feel more comfortable using larger, “name brand” firms for bet-the-company litigation or critical deals. A merger might be attractive for a small firm where the primary rainmakers are senior and there’s no clear next generation or heirs apparent for succession purposes.

In recent years, mid-sized firms experienced tremendous economic pressure as megafirms continued to grow. These days, firms with 50 to approximately 500 lawyers are considered mid-sized while, in the past, firms on the upper end of that range were considered large. In addition to acquiring lateral partners or groups that spun off from megafirms for various reasons, mid-sized firms are very active in the merger market not just as acquisition targets, but as acquirers themselves. Many pursued a regional rather than national or international strategy, however. For example, Thompson Reuters reported that mergers and acquisitions among smaller regional firms have been a trend since the second half of 2010.

Many mid-sized and smaller law firms banded together into networks to avoid merger yet compete with national and international megafirms. These networks are a viable alternative for clients seeking a single point of contact connecting leading law firms around the globe to provide seamless operation and cost-effective, efficient delivery of legal services. There are more than 170 such organizations world-wide. The largest network, Lex Mundi, has over 21,000 lawyers in 560 offices, in 160 jurisdictions around the globe. Membership in some of these networks is by invitation or referral only, but all cost thousands of dollars to belong. For firms benefiting from the networks’ cross-referrals and quality control measures, membership costs are a reasonable price of doing business.  Member firms maintain their independent identities yet can compete on a national or global scale.

Virtually every large, mid-sized, or small law firm flirted with the idea of a merger at one point or another. Many engaged in exploratory talks, but most such talks don’t result in a deal. Unfortunately, a completed merger doesn’t necessarily mean strategic success, and some unravel over a relatively short period of time. Expect some fallout in the form of lawyer defections even in a successful merger, however, because not all practices and lawyers will fit the new vision. Like any building project, a merger usually takes longer and costs more than the parties expected at the outset. Nevertheless, these obstacles neither dampen the merger mania nor slow the growth of megafirms.

Valerie Fontaine
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