Mergers and Acquisitions Within The Legal Sector

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The Anatomy of an Acquisition: M&A’s within the legal sector

Submitted: March 18, 2018

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Submitted: March 18, 2018

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Introduction

If you do not know what corporate law is or what corporate lawyers do, it is hard to know whether you will like it. I am going to discuss one aspect of corporate law: Mergers and Acquisitions or “M&A” and with any luck, convince you it can be exciting. It is the closest thing we have to Suits (mostly due to the multi-million deals and ego-driven negotiations between firms, investors and lawyers, mainly Louis Litt).

Acquisition

I will begin with an example. Last year, Amazon acquired Whole Foods and became the fifth largest grocer in the U.S. by market share. This single manoeuvre shed almost $40 billion in market value from companies in the U.S. and Europe.

Now, Amazon has the financial capacity to win a price war between supermarkets. It has the customer data to understand where, when and why you and I buy groceries. And it has the technology to integrate its offline and online platforms. When you are in the race to be the first trillion-dollar company (watch out Apple), acquisitions can take you a long way, if done properly.

Despite this, it would naïve to assume that all companies share Amazon’s success when it comes to calculated acquisitions. In fact, (thank you investopedia) out of 2,500 M&A deals analysed by the Harvard Business Review, 60% destroyed shareholder value. Simply put, the value of shares within said company dramatically declined after the take takeover of another company.

This then begs the question, why do firms merge or acquire in the first place?

Law firms: why do firms merge?

I will use law firms as an example throughout the rest of this article. Law firms often merge, or adopt structures called Swiss vereins (Baker McKenzie & Dentons anyone?) – which allow firms to share branding and marketing, but keep their finances separate.

In the legal world, it can be hard to find organic growth, or organic growth can be very slow. Commercial clients like to shop around, understandably so given the rise in legal fees. This tendency to ‘shop around’ can make it hard to retain existing business/clients. If, like myself, you are interested in commercial law, you will appreciate that it is extremely competitive. Well, you will be pleased to know that the very law firms you applied or are applying to face similar commercial competition. How so? I hear you ask. Well, look at it this way, other law firms can lure and poach valuable partners – who in turn – take their clients with them when exiting (major lateral hires should spring to mind).

Merging

Back to legal M&A’s, whilst entering new markets is attractive; it is expensive, often subject to heavy-regulation and ultimately means challenging existing and established players in that market specific market.

So, consolidation (merging) can help law firms – squeezed between lower-cost entrants and the global players – to at least compete. A combined firm is bigger, less vulnerable to external shocks, and has access to more lawyers and clients. For example, the three-way merger between Olswang, Nabarro and CMS is currently experiencing the advantages mentioned above. The year before its merger, Olswang had revenues below £100m and a 77% fall in operating profit. Now, under the new trading name, CMS UK, it is now part of one of the largest UK law firms by lawyer headcount and revenue (impressive). Perhaps a recent example could be that of Berwin Leighton Paisner and Bryan Cave merging together in early 2018 to form Bryan Cave Leighton Paisner (poor Berwin). It has been reported that before the merger, Bryan Cave experienced consecutive loses and therefore the merger could be the trigger that helps put the U.S. firm back on the right path, however like any other global merger, time will tell.

Ultimately, I would go as far as to say, mergers speed-up entry into new markets. If Dentons had opened an office in China, it would have been extremely difficult to compete against established law firms. It is a different market! Chinese clients, especially state-owned enterprises are less likely to pay high legal fees. Local expertise and personal relationships play a bigger role. There is also the issue of strict domestic regulation - non-Chinese lawyers can not practice Chinese mainland law, and there is competition from established Chinese law firms (this notion also applies to the Indian legal market). Instead, Dentons strategically merged with Dacheng - a firm with decades of experience and an established reputation in the Chinese market. And now, Dentons can serve existing or new clients looking to invest in China or Chinese clients looking for international work. Given its population and emergence as a global player, a market position in China could be worth billions in the future.

Best friend relationships

Mergers can also create synergies (collaborations). Firms can save costs by closing struggling offices and getting rid of support/administrative staff. A combined firm generates higher revenues and that means more options; it can often lower prices to win work from clients or negotiate better terms for its investments (investments in legal technology seems to be on the up, watch the space).

At this juncture, one may rightly submit that the future for law firms is to merge with or to acquire other firms. However, it could be argued, and rightly so, that mergers or acquisitions are not entirely necessary. Many law firms have grown just fine by organic means. Some attract new clients by developing their sector expertise. For example, Bird & Bird is renown for its intellectual property team and Slaughter and May for its transactional client work. Some firms achieve a global reach by opening up offices. Others, like Slaughter and May, operate best friend groups, and partner with established law firms to serve their international clients whilst having the luxury of selecting the best international firm depending on the needs of a client.

It is true that Swiss Vereins have led DLA Piper and Baker McKenzie to develop very strong brands. But, collaboration has not always worked out. Internal problems plagued the merger of Dewey & LeBoeuf and Bingham McCutchen (once powerhouses in the U.S. legal market). And most recently, (let us not forget) King & Wood Mallesons made the mistake of merging with an already troubled SJ Berwin which resulted in its downfall.

Conclusion

To this end, it is fair to reasonably conclude that M&A’s have the potential to be successful if due diligence is correctly conducted. However, as demonstrated in the latter part of this article, M&A’s are not a panacea to global success.


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