Law Firm Mergers: What's the End Game?

What's Driving This Merger Activity?

There are a number of drivers of this unprecedented level of law firm merger activity. They include the following:

' Consolidation. Maturation of the legal services market is following the same pattern as other professions and service industries, such as accounting, investment banking, consulting and financial services. One aspect of marketplace maturation is consolidation ' rapid growth in the size of service providers, much of that growth driven by merger. That is how the Big Eight became the Big Six, then Five (now Four). The pace of consolidation in the legal market has been a bit slower, due to regulatory constraints that do not affect these other professions and service industries, most notably provisions regarding conflicts of interest. However, that has not precluded mergers on the scale of, for example, DLA/Piper Rudnick Gray Cary (2700 lawyers), Jones Day/Gouldens (2000+ lawyers), Kirkpatrick & Lockhart/Nicholson Graham & Jones (almost 1000 lawyers), and others of comparable scale under negotiation.

Hand in hand with consolidation by merger goes the 'shakeout' or business failure of firms unable to compete. Notable recent examples include significant firms like Brobeck Phleger & Harrison, Testa, Hurwitz & Thibeault, Altheimer & Gray, and Arter & Hadden. Dissolution of large firms frequently fuels consolidation as large groups of lawyers from those firms join other firms, accelerating their growth. Sometimes firms experiencing economic difficulties on partner defections will seek a 'white knight' for a defensive merger, putting themselves up for acquisition by a stronger firm.

' Client Mergers. Mergers in business and industry create larger clients with greater, more sophisticated legal requirements, and they frequently seek representation by larger law firms that presumably have greater breadth and depth in their specialty areas. Some law firm mergers are driven by a desire to represent these larger clients.

' Market Share Strategies. Some mergers are driven by law firm strategies to capture market share and achieve dominance in a market segment. If a supplier can dominate or even just survive in an oligopoly, it can influence pricing and arguably convert the current buyers' market (where clients dictate price, staffing and strategy) back to the sellers' marketplace of 20 years ago (where suppliers dictate price, staffing and strategy). Achieve-ment of this type of dominance is possible on a geographic, practice area or market segment basis, but is difficult to sustain. New competitors will target such markets and compete on the basis of price, restoring competition.

' Law Firm Growth Strategies. The growth imperative in professional services is driven by a need to provide opportunity for professional development, advancement to partnership, and access to bigger and better clients and more sophisticated work. Organic growth by addition of new associates is often supplemented by lateral growth or growth by merger. Growth by merger can be driven by scope (increasing practice areas or geographic reach), or by scale (increasing depth in existing areas of practice and in existing offices, to appeal to bigger clients and clients with more sophisticated needs). An objective of growth by either scope or scale merger is not only to attract bigger and better clients, but to improve a firm's ability to recruit at both the associate and lateral partner levels. This is especially true for mid-sized firms seeking to achieve status as a leader in their marketplace, thereby improving their competitive position in the marketplace for legal talent.

' 'One Off' Merger Strategies. There are also merger strategies that address specific needs, such as filling age or experience gaps, providing an exit strategy for aging owners, or 'trading up' by first increasing specific capabilities then culling the weaker components of practice areas or offices.

There are some rationales for mergers that are essentially flawed. For example, the myth of economy of scale, in the sense that there is none in law practice. Surveys consistently show that larger firms spend more on overhead, on a per lawyer basis, than smaller firms. This is counter-intuitive, but nonetheless consistently true over the last three decades, as demonstrated in the annual Altman Weil Survey of Law Firm Economics. Mergers driven by ego (generally first-generation firms), or 'follow the leader' strategies (everyone else is doing it) also are likely to fail.