A survey has shown that the increase in law firm mergers has been caused by cost cutting.
A survey by leading independent finance provider, Syscap, has shown that cost cutting is behind the increase in law firm mergers. 69% of firms surveyed stated that cutting costs by sharing investment in marketing and IT was a large incentive behind law firm mergers.
53% of law firms polled said that reducing support staff costs was a major factor for mergers of law firms and 44% said that reducing property costs was a major factor behind mergers.
The number of law firm mergers in the UK has jumped dramatically in the last year with 220 merging in 2011 – a 31% increase on the 168 law firms that merged in the previous year.
Whilst law firms have traditionally merged in order to expand their service offering or increase their geographical reach, since the start of the recession, law firms have increasingly been merging for defensive reasons.
Philip White, CEO of Syscap explains: “Stripping out costs through a merger is seen by an increasing number of law firms as the simplest way to restore their profitability.”
“Low levels of corporate takeover activity and property transactions have hurt even the biggest law firms.”
“The recession means that many clients are asking their lawyers to cut the fees on the work they do give them. Up until the credit crunch the biggest law firms had found it relatively easy to increase hourly rates so this downward pressure on fees has come as something of a shock.”
Syscap says that whilst merger related cost cutting is seen as focusing on non-staff related overheads, 38% of law firms admitted that reducing professional staff costs was a major motivation behind mergers.
Adds Philip White: “Cost cutting tends to focus on non-fee earning staff and only then moves onto the lawyers. However, this far through recession we were a little surprised that so many respondents still feel that there are easy efficiencies to be found through trimming staff.”
“Smaller law firms are also pursuing mergers so that they can diversify their revenues away from a particular business sector – at the moment that seems to be more of a priority than moving into a faster growing sector or country.”
Over a third (36%) of firms polled said reducing the debt burden of one of the law firms merging was also a major factor behind mergers.
Explains Philip White: “Law firms as with all other sectors, are finding it hard to increase and even sometimes to maintain their credit lines with the banks. If a law firm is at the limits of its banking covenants one thing they can do is to merge with another firm with a healthier cash and funding position. Anecdotally we believe that a lot of mergers between law firms have happened because of the pressure from banks.”
However, Syscap points out that not all mergers are just about cutting costs or reducing risks - 62% of law firms said that offering clients a wider range of services to clients remains another reason for mergers.
Concludes Philip White: “Mergers in the legal sector have traditionally been about pursuing growth, or delivering a better service to clients. Once the recession is over we expect those more ambitious motivations to come to the fore again. At the moment, however, law firms are telling us that mergers are about controlling costs, removing excess capacity and securing funding lines.”
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