MERGERS & ACQUISITIONS

Mergers and acquisitions (“M&As”) have become a popular business strategy for companies looking to expand into new markets or territories, gain a competitive edge, or acquire new technologies and skillsets. M&As are especially popular in the professional services space with the rapidly changing economy and marketplace.

So, what is the impact of all these mergers? More importantly, does an M&A make sense for your firm?  Here at Bernard LoVerde & Company, LLC | Advisory Services (“BJL”), we’ve studied the M&A market for service providers in the spaces in which we concentrate, the factors that drive premium valuations, high growth, etc.

In looking at M&As, there are essentially two kinds of mergers and acquisitions: strategic and financial.  A financial merger or acquisition is pursued, as the name implies, for financial reasons—often to pick up some quick cash or as an investment.  Strategic mergers and acquisitions offer a solution to a different business problem. Perhaps the acquirer is looking to grab a new product line, add some additional facilities, enter a new market, or gain expertise and intellectual property. For professional services firms, a strategic M&A is often about gaining credibility, adding intellectual firepower, or changing the balance of power in a particular market.  The bottom line is a strategic merger yields value for both the acquired and the acquiring firm. To reluctantly use a hackneyed phrase, it’s a “win-win” for both parties.

To “drill down” further, and in looking at law firm M&As, we see that, as law firms endeavor to survive in an increasingly competitive world, one strategy picking up steam is the law firm merger.  

For example, 2018 was a banner year for mergers as firms moved at a rapid pace to complete more acquisitions than in years prior.  Some advisors point to the challenges that small law firms are currently facing amidst all of the changes in traditional ways of practicing law, such as automation of many legal services and downward fee pressure as reasons for the uptick in M&A activity.  Artificial intelligence, for example, is making an impact in law firms as this new technology is reducing the need for hundreds, or in some cases, thousands of hours that would otherwise be spent by young attorneys performing document review tasks.  Clients simply would prefer that this new technology perform such repetitive tasks as opposed to a team of attorneys doing things the old-fashioned, and of course, more costly way. 

In this vein, we look at the law firm merger activity in 2018 and consider the economic outlook for law firm mergers going forward.  

Law firms completed a record one hundred six (106) mergers during 2018, according to Altman Weil, Inc. The 106 mergers represented an increase of five (5) mergers from the previous year and thirty-three (33) mergers above the average of seventy-three (73) transactions that have taken place over the prior ten (10) year period. Some law firms merged to get a foothold into a new geographic area. Of the 106 mergers, fifty-seven (57) involved law firms acquiring practices located outside of their home state. Fourteen (14) of such transactions consisted of acquisitions of firms situated outside of the United States. New York City, home to one of the world’s most high-profile financial services sectors was the geographic market most targeted in 2018 with eight (8) firms from the Big Apple being acquired in 2018.

Most of the firms acquired had between six (6) to twenty (20) partners. The largest merger of 2018 was the combination of Bryan Cave LLP and the UK-based Berwin Leighton Paisner, resulting in a combined law firm of over sixteen hundred (1,600) attorneys. The two firms sought to obtain a competitive advantage in the global marketplace through the combination of each other’s resources, which resulted in an expanded presence and set of service offerings around the globe.  Furthermore, law firm merger activity in major cities along the Mid-Atlantic was particularly vibrant with roughly 25% of 2018’s involving firms along the East Coast of the United States between the states of Maryland and New York.

This activity level continued in 2019 which saw fifty-nine (59) completed mergers (meaning the effective date of the merger occurred during 2019). While this is lower than the merger level seen in 2018, it is higher than the historical average of mergers per year when compared to the prior 10 years (from 2009 to 2018). 

Eighty-five percent (85%) of all the mergers in 2019 were small and involved firms where at least one firm had between five (5) and 20 lawyers. This is a higher percentage than in 2018 when seventy percent (70%) of the mergers involved firms between 5 and 20 lawyers.  

Despite the economic stagnation that occurred due to external factors worldwide in 2020, we at BJL continue to see ongoing interest among firms in strategic growth and a desire to build depth and scale. We anticipate comparable merger activity in the coming years, including among larger firms that either exit the marketplace or “right-size” their operations, as firms continue to look for ways to build their competitiveness, gain market position, and expand services for clients while reducing costs of operations.

We here at BJL are at the forefront of the marketplace in M&As and have parties ready to look at strategic opportunities in the marketplace on a national basis so please feel free to reach out to us and we can confidentially explore the options available.