In 2015, a record number of law firms, 91, merged with or acquired other firms, as reported by the legal consultancy Altman Weil’s Merger Line. The record is up from the 82 recorded in 2014 and 88 in 2013. The 2015 record represents an approximate 34% increase in M&A activity from 2011 and 2012, respectively, and more than 57% growth in firm M&A when you fast-forward from 2010.
Law firm M&A activity, like corporate M&A, is nothing new. M&A activity can signal a healthy legal market with high demands where law firms are growing in leaps and bounds by acquiring new practice areas or entering new markets. Law firms merge and acquire entire firms and often engage in cumulative lateral hires, from one or more firms, that sometimes include entire practice groups.
“Small firms merge with others to gain size and scale; large firms absorb smaller firms to fill in gaps in their practice areas and locations,” says Aric Press, former editor-in-chief of The American Lawyer and currently a partner at Bernero & Press.
“Small firms merge with others to gain size and scale; large firms absorb smaller firms to fill in gaps in their practice areas and locations.”
— Aric Press
When a large firm merges with a smaller firm, said Press, it really represents a wholesale acquisition of one or more practice groups. This strategy aims to “bring in experienced lawyers, who bring with them business and client work,” said Press. And according to the popular legal press, it appears to be an active market, said Press. “It’s good for lawyers who have clients that are transferrable and its good for recruiters.”
The strategy to gain new clients by acquiring the business of a competitor, however, can indicate a down-turn in demand for legal services. (Bringing to mind the ABBA song, I Know There’s Something Going On.) This is further evident simply because it’s not the case the world is getting more simple or there’s less regulation: Indeed, the world is getting smaller and more highly specialized and technologically complex.
Globalization & Technology
The globalization of law is a prime motivator for much of the recent, large M&A activity. In 2015, Dentons, with more than 2,500 lawyers, merged with a giant Chinese firm, Dacheng (3,681 lawyers), Gadens (500 lawyers) in Sydney, and Rodyk (200 lawyers) in Singapore; DLA Piper acquired Davis (260 lawyers) in Vancouver. Earlier this year, DLA Piper also consumed Peltonen of Helsinki (30 lawyers).
Law firms are following or perhaps leading their corporate clients into some global markets. The acquisitions seek local expertise and language support to service their client’s international legal needs, in tasks such as conducting cross-border transactions, complying with local laws in foreign jurisdictions, adhering to international market requirements, and staying within the boundaries of anti-fraud regulations.
When you pull out from the Merger Line all the Big Law M&A activity, such as Dentons and DLA Piper, you are left with smaller mergers and acquisitions that make up the lion’s share of transactions in 2015 — and that have started off 2016 to be another record year. For example, look to Davis Wright Tremaine (500 lawyers) acquisition of Wyman & Isaacs (3) and Nixon Peabody’s (613) buyout of Ungaretti & Harris (102). There’s actually something else going on here, too.
Besides globalization, technology is greatly affecting law firm practice. Corporate legal departments are using technology to smartly manage legal workloads. Inside counsel are retaining the types of legal work that can be accomplished most effectively and cost-efficiently in-house. And as for retaining outside counsel, corporations are distributing the legal work in smaller portions to matter experts rather than bundling it up and sending it to one, trusted outside counsel.
Hence, larger firms are acquiring smaller firms and incorporating whole new practice areas to gain back that lost market share. “That’s the equivalent of Jonah merging with the whale,” said Press.