Law Firm Mergers on the Rise

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Summary: Legal experts predict that law firm mergers will continue to grow in popularity.

Early this year, Dentons announced its plans to merge with Dacheng, a Chinese law firm. The new combination resulted in a 6,600 attorney firm. Since that time, there have been dozens of announcements of merger deals, the American Lawyer reports.

  

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Altman Weil, a consultancy group, noted 48 combinations between firms in the first half of 2015. This was the highest number of mergers since 2008, when Altman Weil began collecting such data. The New York Times added that Houston and Chicago were hot spots for such deals.

McKenna Long also merged with Dentons.

However, this does not mean that the legal industry is going for the level of mergers seen in other professional service industries, according to experts.

The largest law firms only control a small portion of the total legal services industry. Last year, the 200 highest-grossing firms on the globe earned $115.2 billion. The top 5 earned $11.7 billion, which was about 10.1 percent of the market share, according to ALM Legal Intelligence.

Tony Williams, a principal at Jomati Consultants, a legal advisory firm in London, said that he has seen reports that the global legal market is worth about $600 billion. Due to conflict of interest rules, and the principle that the law is largely a national, rather than an international product, the market has not expanded further. He said, “I suppose you’ve also got the natural conservativeness of lawyers.”

Dentons aims to change the practice of law altogether.

One major factor that impedes law firm growth is that there are “relatively few markets around the world which would give the firms the profitability that they want,” Williams added.

Williams commented that there is not the same correlation between size and profitability in the legal industry as in the accounting industry. Williams said that some firms may find that geographic depth allows them to provide better services to their clients.

A law firm strategist from London, Alan Hodgart, said that consolidation primarily happens around certain types of legal work, instead of the industry as a whole. Just a few firms handled the biggest mergers and acquisition deals. The group cannot reduce its size, because roughly eight firms are needed for each large transaction.

Just how big will Dentons become?

Clients want to be able to choose from several high-quality firms in case their attorneys have conflicts of interest in certain cases. Hodgart noted that the most successful firms have structured themselves differently to address this concern. Sullivan & Cromwell and Latham & Watkins have such models.

Hodgart added, “In the accounting world, if you weren’t doing the audits at the Global 500, you’re out of the top group. But in law, you can have two or three different business models.”

Hodgart and Williams think that the trend toward mergers will continue, for now. They predict that at least one more major merger is on the horizon as well. However, there are significant challenges in these deals. Williams said, “When the merger closes, you’ve done about 25 percent of the hard work to make it a success.” According to Bloomberg Business, successful mergers are largely the result of the culture of the firms.

Source: American Lawyer

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