Seismic shift: Rise of the global law firms

 

With over a quarter of large UK law firms involved in a merger in 2012, the desire to augment one’s resources has never seemed more intense.

As clients have grown more international, seeking new markets, the downturn has caused them to rigorously focus on panel appointments and legal costs. For law firms, that has meant servicing a smaller number of large clients and thinking global, not just regional.

There were nine major international mergers in 2012, including Norton Rose with Fulbright & Jaworski and Herbert Smith with Freehills. In addition, 26 mergers were announced by the top 100 UK law firms over the past year, a 24 per cent increase in activity over 2011, according to research by Jomati Consultants. In the US, there were 60 law firm mergers in 2012, according to Altman Weil data.

K&L Gates’ long-serving managing partner, Peter Kalis, says that, while economic conditions may be gloomy, “such conditions can promote consolidation in the legal marketplace, and opportunistic law firms may use the moment to grow”.

David Willis, joint CEO of Herbert Smith Freehills, believes that “over the next few years, the market for premium legal services will become increasingly dominated by a small number of truly global firms”.

“Although market conditions remain challenging in some parts of the world, such as the UK and Europe, if you look at the combined revenues of the world’s largest firms, these actually rose during the past financial year,” he notes.

That favours larger law firms, says Willis, noting that the rise “can partly be explained because international firms with balanced practices are better equipped to take advantage of shifts in global trade and investment flows”.

Willis says he expects law firms’ internationalisation efforts to intensify. “Driving this trend will be clients’ preference to instruct one firm, rather than a patchwork of legal advisers on their cross-border matters.”

His views are confirmed by a recent client survey, which found that law firms ?that had invested in expanding their international presence and improving their client services were perceived as being better equipped to anticipate and meet clients’ global needs (see Global growth key to law firms winning new business).

Evidence of that demand is not hard to find. Willis notes that, since the October 2012 merger of Herbert Smith with Freehills, which created a US$1.35bn (£842m) global firm, the firm has received “well in excess of 200 ‘synergy’ instructions, most of which have a cross-border element and therefore demonstrate the origin-to-destination capability that clients increasingly require”.

An increase in client demand was also seen at SNR Denton, Salans and Fraser Milner Casgrain following their November 2012 announcement that they would combine in the first quarter of 2013.

“Even prior to our formal launch, we have opened dozens of matters based on outreach efforts among the legacy firms,” say SNR Denton’s global chair Joe Andrew and global CEO Elliott Portnoy (see Global and local: Creating a new global law firm).

The new global law firm, Dentons, is expected to have revenues of around US$1.3bn (£817m).

Seeking synergies

That cross-border element is also acknowledged by Norton Rose’s CEO, ?Peter Martyr, who includes it alongside ?legal quality, deep sector knowledge, industry awareness, size, scale and ?location as key client priorities.

Norton Rose has undergone five mergers in five years (with Australia’s Deacons in 2010, a three-way merger with Ogilvy Renault and Deneys Reitz in 2011, followed by 2012’s merger with Macleod Dixon, plus a June 2013 merger with Fulbright & Jaworski, giving it estimated combined revenues of US$1.9bn).

“Expanding our geographic platform” through mergers, he says, “allows us to take our industry focus to a new level in the areas of energy, healthcare and financial institutions in particular”.

In that respect, Norton Rose’s merger shares much in common with the Dentons merger, which also stressed the logic ?behind practice area consolidation in the energy market, where both firms will compete for business.

That, in turn, impacts on practice area synergies, which are informed by geography and also aim to transcend it in meeting ?client needs.

“Targeted growth in our key industry sectors will remain core to our geographic growth strategy,” says Martyr. “The development of a full-service global regulatory practice will be one of Norton Rose Fulbright’s key objectives for 2013.”

Dividing forces

To merger consultant Andrew Hedley, the increasing segmentation of the legal services market means that firms are “falling into quite clear categories, whether by size, practice capabilities, client sectors, geographic footprint or a combination of these factors”.

He lauds Willis’ and Martyr’s approach, saying that having clear strategies and targeting specific market opportunities enables firms to be much more coherent in their merger strategies.

He argues that “once a firm has clarity over its areas of focus and market position” (that place in the market at ?which it can build a sustainable competitive advantage), “execution becomes much easier”.

Hedley makes common cause with Canadian consultant Jordan Furlong, who argues that mergers are tactics that should support a law firm’s strategy.

Furlong writes that “some firms fall ?into the trap of using mergers as a substitute for strategy. Before you ?grow your firm, make sure you know ?what you hope to achieve”.

Both Herbert Smith’s experience in dispute resolution and Martyr’s regulatory and sectoral focus are the kinds of things that, to Hedley, enable them to “identify geographies and practice capabilities which will allow a compelling client proposition to be created for strategic target markets”.

But, there are always losers. Inevitably, Hedley says, that will “impact on independent firms insofar as they wish to compete for the same market space as the international entities”.

Such firms “will be at a competitive disadvantage when a client requires a multijurisdictional ‘joined up’ service”, he says. This may not occur very frequently, but it will often be for high-profile work that carries great reputational sway, he adds, and to ignore it would be perilous.

Hedley predicts “the gradual erosion of this segment of top-end work in the belief that there is still a huge amount of client business which is not dependent on multijurisdictional capabilities”.

That might leave top-tier independent firms competing for mid-market work which is increasingly price sensitive ?and does little to enhance reputations, ?he notes.

Mergers ahead

So, will 2013 be the year of big law ?firm mergers?

Jomati’s Williams is in no doubt. “We expect this trend to continue in 2013 because the strategic logic behind such deals is only growing stronger,” he told the legal media.

“There may well be two or three rounds of merger activity as firms first strengthen their domestic capability and then deepen their international offering,” he added.

John Grimley, author of the International Business Development Blog, agrees with Williams. “2013 is going ?to be a year of mergers of firms of all ?sizes – from large international firms, to ?medium-sized firms in regional tie-ups ?– to the acquisition of small practices by larger law firms.”

Further mergers can certainly be expected from Norton Rose and Herbert Smith Freehills.

“Growing the US practice will be a key consideration and, in particular, in New York,” says Norton Rose’s Martyr.

New York has also been a priority for Herbert Smith Freehills, which opened a seven-partner office in the city in September 2012.

Regulatory hurdles permitting, Martyr also plans to increase Norton Rose’s international presence. “We will also be seeking to enter new markets such as Brazil,” he says.

Like Martyr, Willis is planning strategic targeted growth for his firm, with moves to open in Guinea, South Korea and, significantly, Germany, “Europe’s largest economy”, during 2013.

Reflecting on Herbert Smith’s recent merger with Freehills, Willis notes that “Asia Pacific will continue to grow in significance for multinationals and will therefore remain a strong focal point for any international firms looking to follow their clients”.

Consultant Nick Jarrett-Kerr wonders whether law is going the way of the accountancy sector, which has shown considerable consolidation with the shift to the ‘big four’ of KPMG, Deloitte, PwC and Ernst & Young.

Jarrett-Kerr says it took accountancy firms several years to achieve their current status and he would prefer a cautious approach for the legal sector. He expects “a more gradual but steady build up over the next three to five years”.

Joe Bannister, a visiting professor at Nottingham Law School and partner at Hogan Lovells, similarly suggests that ?each merger should be considered on its own merits.

“Each of the firms appear to be tackling the question of how best to serve global as well as national clients in different ways,” notes Bannister.

To him, “Norton Rose’s tie-up with Fulbright seeks to replicate some of the coverage of the US market that we achieved with our combination with Hogan & Hartson in 2010”.

Bannister may be right. In many ways, as legal journalist Alex Novarese has argued, Hogan Lovells’ merger acted as a beacon for other law firms to follow, but it also indicated how much the industry was changing as a whole.

To Bannister, “2013 may be a year of consolidation rather than further deal-doing, as the scope for truly market-changing global mergers is relatively limited”.

Jarrett-Kerr agrees: “Lots of people have been predicting large-scale consolidation for over five years now, ?and it has not happened yet to the ?extent predicted.”

He sounds a caveat, though. “The accent however must be on the word ‘yet’ as the market remains pretty fragmented, with no single firm having larger than a single digit percentage market share of the main legal markets.”

Bannister is similarly sceptical: “The amount of market consolidation is still very small by comparison with the accounting sector.” He argues that, over time, a group of ten to fifteen ‘global elite’ law firms may emerge, but the drivers behind each law firm could be very different.

Hedley suggests that conflicts, both legal and commercial, and the need for multiple representation “will ensure that ?a larger pool of serious players is needed,” although he also feels that a “small ?number of firms [may] dominate certain sectors” internationally.

He warns that the scope for potential mergers may be constrained, saying ?“the number of viable mergers in the ?market is diminishing”.

This suggests that there could be significant early – if not first-mover – advantages in undergoing a merger.

For his part, Jarrett-Kerr believes that “one or two law firms [may] get into low double figures in terms of percentage market share within two to three years,” but says that would only be achieved through “some very dramatic merger activity”.

The importance of brand

If firms do merge, then the importance of brands will be reemphasised, something which is not lost on Willis in stressing Herbert Smith Freehills’ strong levels ?of integration, including a common brand and identity.

Norton Rose’s own brand has arguably been enhanced by merger activity; some have suggested that such mergers show that innovation and paradigm shifts are occurring outside of the magic circle.

Such matters emphasise the much stronger nature of competition outside that group at a time when the gap between those firms and the rest is closing. This is something that brand consultants are increasingly aware of, as are clients.

“The level of mergers of international law firms announced last year has highlighted the race that is on to create truly global top law firm brands”, says Thayne Forbes, co-founder of brand valuation consultancy Intangible Business.

To him, “clients that are global businesses want global legal services. And it is the clients, and the markets created for them, that drive law firm business. So global law firm brands will emerge and only a few will make it to meaningful top spots.”

More than scale

Pinsent Masons’ PR manager, Fred Banning, who has been involved in communications campaigns around the Hogan & Hartson/Lovells and Pinsent Masons/McGrigors mergers, says this is an exciting time, giving “firms a genuine opportunity to upset the established order”.

That disruptive quality alone, however, is not enough. Banning notes that “scale will not be enough to guarantee success”; more will need to be done by firms to differentiate themselves in a crowded market.

“Those firms that have a clear vision about what they want organisational change to achieve, and that communicate that vision energetically with their client base and their people, have the greatest prospects for success,” he says.

That vision, says Hedley, must be a coherent and strategic one. “Mergers will abound over the next couple of years – a number will be strategic plays, [some] forced by economic non-viability of one of the firms in the transaction, but the majority will be ‘greasy pole’ moves that stave off immediate collapse but do not alter the fundamental operating model of the merged firms.”

He adds: “With the same strategic weaknesses, it will only be a matter of time before the new business finds itself in the same position as the old.”

Without that strategic grip, the rush to merger is just that, supplying the sensation of achievement with the catharsis of union, only to leave both sides a spent force; a marriage without purpose, a merger ?without soul.

Ben Rigby is a freelance legal journalist