By Peter Frankl.
With the volume of law firm merger announcements in Australia and overseas, it would not be a dumb question to ask, is there anyone left to merge? The answer seems to be a constant yes. Mergers seem to never end.
They are a normal part of the legal services market. It is a constant process of lawyers leaving firms, growing firms and merging firms.
Sometimes mergers have characteristics that make them look more like acquisitions than mergers but in the world of law firms, ‘merger’ is the all-encompassing term used for the vast majority of these combinations.
Consulting firm, Altman Weil tracks merger activity:
There were 106 law firm combinations announced in the United States in 2018 according to Altman Weil MergerLine. This is the highest annual total recorded since 2007 when MergerLine began compiling data, exceeding the record of 102 set in 2017.
“Law firms in every segment of the market are interested in merger right now,” says Altman Weil principal Tom Clay. “The largest firms are making aggressive national and international moves; mid-sized firms are bulking up regionally; and dozens of small firms are pairing up to fortify themselves in local markets. Almost everybody is a potential acquirer or an acquisition target in 2019 – we have never seen so many law firms in play.”
That was 2018. What about 2019?
There were 27 law firm combinations announced in the US in the first quarter of 2019 according to Altman Weil MergerLine. The volume of deals continues unabated after a record-setting 106 law firm mergers and acquisitions recorded in 2018. All deals announced in the quarter were acquisitions of small law firms with fewer than 20 lawyers.
In understanding the drivers of this heightened merger activity, two data points shed some light. According to analysis of the Altman Weil data, of the 106 mergers, 57 involved law firms acquiring practices located outside of their home state. Therefore, more than half of all merger activity in 2018 in the US had a geographic component. This proportion is even higher when you include geographic expansions within home state borders.
Does this mean that geographic expansion is the number one driver for law firm mergers? It would be easy to conclude that it was. Or is geographic distance a way to grow and achieve market ‘significance’ while at the same time reducing the downside of giving up independence. A geographic merger can provide the best of both worlds.
The other noticeable factor is that merger activity has been increasing as the economy has been improving. It might be best to treat this as a working hypothesis because it relies entirely on the Altman Weil data series which only began in 2007. If relied upon, there is a noticeable correlation between economic growth and merger activity.
Why should it be the case that merger activity increases when economic activity increases? All that can be offered is some speculation. When times are good, retaining talented lawyers becomes more challenging. Mergers are a way of showing that the firm is ‘going places’ and that lawyers should stay on board because opportunities, status, new clients and more financial rewards are on their way.