law firm mergers

Asking The Big Question About Law Firm Mergers: Do They Work?

There are more law firm mergers than ever in the US but an important – if not leading question – has arisen:  Do they work?

Law firm consultants Altman Weil has been tracking the legal marketplace for such matters since 2007 and 2013 saw the largest number of  law mergers since they began, with a total of 88 arising.

Mostly they were smaller deals with firms focused on attempting to increase their revenues and profits, as well as ensure their client base was intact in the face of slowing demand for legal services and increased competition from both new entrants and inhouse law departments.

As the Wall Street Journal reports, the proposed merger between DC’s Patton Boggs and the larger Squire Sanders has created high interest, as it would create a firm of 1,700 lawyers with offices in 22 countries.

Global law firm Dentons also has made overtures to Patton Boggs, which is known for its lobbying clout but fell on hard times in the past two years, the WSJ reports.

 

Mergers can provide law firms with instant access to new markets or help them bulk up in high-profile practice areas. But not every combination lives up to its promise.

 

The 2008 merger that produced New York’s Dewey & LeBoeuf LLP created a firm with 1,300 lawyers world-wide. But both sides went to the altar saddled with debt, including more than $140 million in combined retirement obligations. As demand for legal services dropped during the economic downturn, the new firm failed to make headway, then sank further into debt amid sweetheart compensation deals meant to keep rainmakers from leaving.

 

Dewey & LeBoeuf sought bankruptcy protection in 2012—the largest U.S. law-firm failure in history. Prosecutors last month indicted the firm’s former chairman and two top executives on charges relating to the firm’s demise. All three denied the charges.

 

While such spectacular flameouts are rare, industry experts say there are a several ways that mergers can go south.

 

Teaming up with a weaker firm can drag down both sides if underlying problems, such as runaway expenses or unproductive partners, aren’t addressed quickly. On the other hand, a merger between two firms with equivalent financial strengths can devolve into power struggles.

 

“Clients don’t automatically say, ‘We will give you all our business,’ ” says legal consultant Brad Hildebrandt.

 

As clients expand operations and push into emerging economies, more firms nevertheless are teaming up with rivals in hopes of grabbing a bigger piece of the global market for legal services, which is estimated at $277 billion, according to BTI Consulting Group Inc.

 

Some mergers have created sizable and successful firms, including Wilmer Cutler Pickering Hale and Dorr LLP, which is known for its expertise in litigation, regulatory and white-collar matters. And Sidley Austin LLP was among the 10 top-grossing firms in 2012, according to American Lawyer magazine. DLA Piper, the world’s largest and highest-grossing firm, was created through two large mergers in 2005 and has engaged in several subsequent tie-ups.

 

But integrating staff and lawyers is costly and can take years to complete. A challenging postrecession legal market could slow the pace further. Law-firm revenues rose about 2.5% last year, compared with compounded annual growth of 9.8% between 2004 and 2008, according to Citi Private Bank, a major lender to law firms.

 

“I think it takes longer for the benefits [of mergers] to manifest themselves in your financial performance than it did in the past,” says Warren Gorrell Jr. , co-chief executive of Hogan Lovells. The 2,300-lawyer firm was created in a 2010 merger between U.S.-based Hogan & Hartson LLP and Britain’s Lovells LLP.

 

Performance at some merged firms have sagged. Revenue at Edwards Wildman Palmer LLP, which was created in 2011, dropped last year to $311.5 million—down more than 11% since its postmerger debut. The firm last week said it was laying off 42 staff and 10 lawyers.

 

A spokesman for the firm called the decline “a foreseeable, short-term development” as the firm repositions itself.

Read more about the merger efforts of law firms at the Wall Street Journal

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