Merger Activity Continues… Why?

Editor’s Note: The author of this post is a law firm consultant with Fairfax Associates. 

By Kristin Stark, Principal, Fairfax Associates 

Merger activity remains high. Between January 1st and March 31st of 2015, there were 19 completed mergers among law firms with a minimum of five lawyers, according to research conducted by Fairfax Associates.

This number is down from the 27 completed mergers in Q1 of 2014. But 19 mergers in Q1 of 2015 is consistent with the 22 and 20 completed mergers in the first quarters of 2013 and 2012 respectively.

As usual, a large number of mergers were rather small — eight of the 19 mergers completed thus far in 2015 involved a firm between five and 10 lawyers.

The Dentons/Dacheng cross-border combination was the largest by far, resulting in a firm of around 6,000 lawyers. However, in terms of the volume of mergers, major cross-border and very large firms combinations represent a relatively small segment of the activity.

As seen in prior years, multi-regional combinations are still predominant, with seven of the 19 mergers completed thus far in 2015 falling into this category (Source: Fairfax Associates Merger Analytics).

So… why the ongoing focus on consolidation? A number of factors contribute to current merger activity. First, firms continue to see benefit from additional scale and feel ongoing pressure to demonstrate to clients that they offer both breadth and depth. Among regional firms, a smaller firm acquisition or merger of equals is often perceived as an opportunity to improve competitiveness (e.g. depth and/or breadth), without as much of the organizational change and loss of identity that comes along with a large firm merger.

In addition, a number of firms — regional, national and global — are looking for combinations outside their largest markets in order to reduce dependency on slow growing economies and move into markets offering higher growth rates and access to an expanded client base. This is particularly true for international growth where law firms are seeking to participate in emerging markets, but can also be observed within the U.S.

Many multi-service regional firms operating in mature markets have recognized that future growth will likely require entering new geographic markets, as they have already maximized market share in existing geographies. Of course, the trick is making sure that markets identified for expansion are growing and client rich and also synergistic with the firm’s client base, core areas of practice and existing geographies.

Lastly, in a handful of mergers, we see the most compelling of cases – merger interest is driven by major clients seeking to use the firm across a broader geography or in additional areas of expertise. We often view these mergers as offering the strongest business case, particularly when supported by clients’ commitments to deliver new work to the firm. These mergers generate immediate new revenue as a result of the combination and also allow for more effective integration – getting lawyers working together across the firm sooner rather than later.

These are only a handful of the reasons behind recent mergers. We will explore others, such as succession, fortifying existing offices, instability, and size based strategies in a future post.