In Tough Market for Law Firms, An Eye on New Horizons

By Brian Baxter

June 22, 2012

On Friday, Shoosmiths, a 550-lawyer firm with nine offices scattered across England, announced it was entering the Scottish legal market through a merger with 's Archibald Campbell & Harley. Shoosmiths cited client demand for a firm with a pan–U.K. presence as the driving force behind the merger, the latest in a string of tartan-tinged tie- ups that global accounting firm PricewaterhouseCoopers—citing too many Scottish lawyers chasing too few clients—predicted earlier this year.

Since then, the country's legal market has been ablaze with activity. Scottish firm McGrigors merged with London-based ; Edinburgh-based firms Tods Murray and Fyfe Ireland combined operations; British firm DAC Beachcroft sealed a joint venture deal with Scottish boutique Andersons ; Scottish firms Blackadders and McKay Norwell joined forces, local litigation specialist Anderson Fyfe tied up with TLT Solicitors; and - based DWF announced it would merge with Scottish shop Biggart Baillie. (Another potential deal, between 's Maclay Murray & Spens and U.K. firm Bond Pearce, fell apart in March.)

Of course, law firm consolidation is hardly unique to Scotland. England itself has seen a boom in midmarket law firm mergers this year that coincides with the introduction of new rules that allow for external investment in law firms, according to our previous reports.

London-based law firm adviser Jomati Consultants, a strategic alliance partner of U.S. legal consultancy Altman Weil, has been tracking the rise in merger activity across the pond since March. Jomati founder Tony Williams, a former managing partner at firm , recently spoke with The Am Law Daily after returning from separate trips to Edinburgh and Indonesia.

Williams, who was headed to Buenos Aires on business this week, says the international legal market continues to change rapidly, with firms struggling to keep pace while also trying to weather one of the worst global economies in decades.

"Law firms have never seen a downturn that lasts more than two years," says Williams, noting that the last stretch of robust growth involving large law firms ended in early 2008. "The European debt crisis has ripples everywhere around the world because it suppresses business confidence."

Lawyers and law firms, Williams says, are anxious to see he calls a "degree of market momentum"—either an economic upswing or downturn—because the current state of stagnation brought on by Europe's ongoing financial woes has stalled growth opportunities throughout the continent's legal industry. While a recent annual survey by U.K. publication Legal Week showed the desire on the part of international firms with London operations to find a British merger partner is greater than ever, Reed Smith global managing partner Gregory Jordan told sibling publication this week that his firm backed off of picking up the Italian offices of now-defunct Dewey & LeBoeuf because of regional economic concerns. (Those offices have since branched off under a different name.)

Williams understands the reluctance by U.S. firms to plunge into the European market given current conditions. "It's going to be hard to sell [an overseas merger] in the U.S. until the euro crisis is over," he says. "Once the end of the downturn occurs in 2013 or 2014, I think that's when we'll see more merger movement. Right now firms will take a more measured approach."

In the meantime, those seeking growth opportunities overseas have turned their attention elsewhere, including Asia, where a herd mentality among international firms has fees falling due to increased competition, decreased deal flow, and a quieter market for initial public offerings, according to sibling publication The Asian Lawyer.

Williams notes that although economic growth has slowed in many Asian countries, such as China, it still remains strong compared to what is happening in Europe and North America. (Certainly, the region's legal industry continues to be in flux. This week, for instance, partners at Australian firm Freehills and London-based began voting on a plan for full financial integration—the fourth such merger proposed between one of Australia's six largest law firms and a U.K. shop within the past year.)

For his part, Williams believes that Indonesia, Brazil, and Africa—whose nascent legal market was the subject of a recent Am Law Daily story—offer the best growth potential for international firms keen on seizing new opportunities abroad, and that those in a position to do so should pounce.

"Clients want broader and deeper service with an international scope," says Williams. "The downturn is the time to grow and pull away from the pack, but doing so requires quality management, and we're in the most difficult period right now for many firms."

Hogan Lovells and London-based LG are two firms that appear to share Williams's sentiments. The former, a byproduct of a trans-Atlantic merger in May 2010, entered the Indonesian legal market in April through an association with Hermawan Juniarto, a 22-lawyer firm based in Jakarta, according to The Asian Lawyer. LG, which in addition to engaging in merger talks with British rival Field Fisher Waterhouse, announced this month a local association with 70-lawyer Motta Fernandes Rocha Advogados, a Brazilian firm with offices in Rio de Janeiro and Säo Paulo.

With so many factors affecting large global firms these days—the U.K.'s alternative investment rules, the outsourcing of certain legal tasks to India and other offshore jurisdictions, the way in which cutting-edge technologies are affecting clients' operations around the world—Williams sees a future in which law firms are forced to adapt to survive, and where choices on how to grow will only get tougher.

"Lawyers want all the facts before making a decision," Williams says. "But a lot of these are judgment calls in places with real cultural and business differences."