Why are law firms so fearful of mergers and acquisitions?

12 September 2017

For many firms a merger or acquisition or making lateral hires is the logical progression to expand and develop services and new practice areas.  This is also a more immediate approach than having to invest resources and develop the skill sets necessary by a firm on its own to tackle a particular sector, a new market segment or area of law.

There have been very few significant mergers in the Irish Legal Sector over the last five years. Most of the mergers or acquisitions have been between smaller firms as a means of dealing with succession issues or to improve scale in a particular market segment. The growth of the larger legal firms has been mainly organic supplemented by lateral hires and expansion into international markets.

Evidence from our annual survey

The Smith & Williamson Annual Survey of Irish Law Firms in each of the last five years, suggested that the level of merger activity was expected, by most firms, to increase over the following year. In terms of activity, the number of firms approached, with a view to a merger, has remained fairly consistent at about one in three firms each year.

Firms that have considered merging have stated that their primary reasons centre on increasing their scale of operations or offering a more diversified range of services.
 

Lateral hires

Many practices have in fact grown by taking on lateral hires to fill gaps in service lines. This can be easier as sometimes individuals are approached (who are known to the firm) or the individual approaches the firm as they have hit a glass ceiling.  This can definitely assist a practice to grow with less risk attached. 


The obstacles 

For all the discussions taking place few mergers have actually occurred. Why is this?
  • Is it that the partnership structure of law firms proves a major obstacle and trying to get all partners on board can be immensely difficult?  
  • Is it the financial risk of cash or equity being given to the merger partner(s)?  
  • Is it that firms have unique cultures and it is hard to get all partners working effectively without adding to the mix?  
  • Do leadership teams in firms prefer organic controlled growth or see lateral hires as a less risky route to their growth ambitions?  
When you look at other sectors mergers seem to happen more frequently as for example in the accountancy profession.

Risk aversion?

The legal sector is made up in the main by small legal firms with in excess of 90% of firms having less than five solicitors. This suggests that lawyers prefer to be in control of their own destiny. There is no doubt that in most firms the managing partner is working a client block and the growth of the firm is based on his or her ability to network with new clients and ensure they have sufficient chargeable assignments on their desk.

Lawyers are trained to be risk averse and may often lack confidence that a merger would produce the benefits perceived. This is not without foundation as there have been many unsuccessful mergers across many commercial sectors.

Risk and reward

So it may well be a matter of priorities with insufficient time to look at growing the firm. Many in the professions put their clients first and their business needs last. It is essential that partners take time out, often with a trusted independent advisor, to review the objectives and strategy for their firm. They need to look at their growth strategy and how this can be achieved without adding to their workloads.

Whilst mergers present many risks and obstacles they can deliver an added immediate impetus to growth. For a merger to be successful there must be proper planning, due diligence and set objectives for the merged entity to achieve. Sufficient time must be given to the merger discussions to ensure the key stakeholders, people and clients, in each organisation are positively engaged and an agreed strategy forward for the merged entity is in place and the necessary time is given to properly integrating the businesses.

 

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