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Law Practice Today

2020

How Will Your Firm Survive in Today’s Merger Mania Marketplace?

Micah U Buchdahl

Summary

  • When it comes to business development, nothing is more strategic than making sure you survive. 
  • Many practices that require extreme specialization—areas such as trusts & estates, where the knowledge needs to be practice-specific and often state-specific.
How Will Your Firm Survive in Today’s Merger Mania Marketplace?
iStock.com/Inna Polekhina

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While I can’t vouch for the rest of the country, here in the Cradle of Liberty—Philadelphia—major law firm mergers feel like a daily occurrence. I have to believe this major market—a stone’s throw from Washington, DC and New York City—is more typical than an anomaly in replicating the state of the legal industry.

When it comes to business development, nothing is more strategic than making sure you survive. And I’ve lost a client or two due to merger or dissolution. In one instance, the bulk of my efforts over a multi-year period were geared more toward packaging the firm as attractive to suitors than it was to grow the business. For that midsize firm, “merging” (or being acquired in reality-speak) was the best route to financial success for the majority of its practitioners.

What’s Driving Merger Mania?

When researching recent big law firm mergers in Philadelphia on the website of the local daily newspaper, The Philadelphia Inquirer, I saw an interesting list dating back nearly 10 years. There was “Law firm mergers are on a record pace” in July 2017 (noting that there were 52 mergers nationally through the first six months of 2017, topping 48 combinations for the first six months of 2016, 85 mergers in 2016, and 91 the year before, the most ever). Before that was “A record year for law firms' M&A activity,” in January 2016. Even earlier was “Law-firm mergers soared in 2013,” in January 2014. And “Law firm mergers kept up pace in 2012,” in January 2013; “Law-firm mergers returning to prerecession levels,” in January 2012; and finally, “Lull in law firm mergers a bad sign?” in April 2010, which noted, “Like the mixed signals the economy overall has been sending in recent months, key indicators for the health of the legal marketplace have been pointing in different directions.”

In other words, this is not exactly a new phenomenon, but a rapidly continuing long-term trend. It was after the recently announced combos of Troutman Sanders with Pepper Hamilton, and Drinker Biddle with Faegre that Inquirer reporter Sam Wood detailed what’s driving the big law firm mergers in Philly and across the U.S.?

As that article pointed out, mergers are driven by a number of factors. The biggest driver is typically a strategic decision that a larger geographical footprint will increase revenue and profits. Of the eight Philly mergers in a six-month span—with the “smaller” merging firm ranging in size from 4 to 546—the expanded reach ranged from across the state (to Pittsburgh), over to New York, south to Atlanta, to the middle in Minnesota, and out west to Los Angeles and San Francisco.

With these mergers and acquisitions come some new practice areas. It also means case and client conflicts, and attorneys who no longer fit the scheme. Everyone is not a winner. And the loss of control—of culture, of decision-making, of independence—means they don’t all work out in the end.

For some of these firms, there is less a sense of “merger” than “acquisition” of a firm that was likely on the road to failure or folding anyway. Unfortunately, folding firms are an increasing occurrence as well, and there is usually a last-gasp attempt to find a partner before shuttering the doors.

Corporate Belt-Tightening

Particularly at the BigLaw level, many of these mergers also stem from continually increasing pressure from corporate clients to bring costs under control and increase efficiency. National or global clients may see more value in consolidating their buying power with a handful of firms that have the breadth and depth to serve the client everywhere it does business, in almost every area of practice. By creating a “mass production” atmosphere, the idea is that costs are lowered and profits increase. Expenditures on items like technology, pricing specialists, and large legal project managers also are easier to bear in a larger firm.

In the mega-firm, more practice groups take on the “service” tag, and more offices lose a sense of authority and control. But if the client sees a matter as fungible (and that is often the case), it is going to come down to price and convenience. The assumption is that the outcome in the bulk of situations will be the same.

One-Stop-Shop

A pet peeve of mine has always been the use of the term “full-service law firm.” I’ve always argued that there is no such thing. If you can’t represent me in a billion-dollar M&A deal and help a member of my family with a workers’ comp claim that you are not truly “full service.” Many firms that tout themselves as full-service are far from it—limited by attorneys, expertise, or geographic and jurisdictional scope. But clearly client pressure is increasing to lower the number of outside law firms to a more manageable level—where you also can squeeze a few more concessions from rates and write-downs.

A Tougher Road for the Main Street Lawyer

One of the most discussed and debated resolutions in front of the ABA’s House of Delegates at the recent Midyear Meeting in Austin, Texas, was Resolution 115, which passed by an overwhelming majority. Resolution 115 encourages state regulators and state bar associations to explore regulatory innovations that could improve access to legal services and to collect data on those programs. However, much of the controversy was quelled by the caveat that it should not be construed as recommending any changes to the ABA Model Rules of Professional Conduct, including Rule 5.4, as they relate to nonlawyer ownership of law firms, the unauthorized practice of law, or any other subjects.

The bar has and continues to feel significant pressure to increase “access to justice,” as more and more states allow for nonlawyers to handle various matters that previously required an attorney. In many of the conversations I had in Austin, one of the central arguments in favor of the resolution was simply getting out in front of this surging change that you might slow down, but won’t stop. That was the (successful) argument for getting it passed. The detractors and reluctant understood that this involves lessening some market share and opportunities—which most likely have the greatest negative impact on solo and small firm lawyers. The hardship is on the Main Street attorney counting on these types of consumer-oriented matters. The ABA needed to find a middle ground between understanding the need for change while highlighting the potential negative impact on ethics concerns as they relate to law firm ownership and those engaged in the unauthorized practice of law.

So while boutiques and midsize law firms have to battle and counter the big law and bigger law firms, the solos and small firms also have to worry about losing clients and matters to nonlawyer entities. This is on top of the additional lost market share in some related practices to online, automated or assisted ventures that continue to grow via the Internet.

Survival at the Big Law Level

So what does this all mean for the BigLaw firms that haven’t yet merged to join the ranks of the mega-firms? Many big law firms have shied away from merger conversations in previous years for any number of reasons, but for the most part, firms with less than 1,000 attorneys that have eyes on being or remaining national or international in scope are increasingly feeling forced to consider finding the right dance partners. Those are also partnerships that will be able to maintain or increase profits-per-partner for the long term.

But completing a merger is not easy for big firms. Things like the firm name, or even the logo and website color palette, can take on outsized importance in the context of a merger. Nobody wants to lose their identity, and I’ve seen a few big law firms continue to shake off the call of a merger because they can’t come to grips with being “acquired,” insisting instead on finding someone willing to say it is a “merger of equals.” Internal political battles over practice group leadership or key committee roles also can destroy a merger before it begins. It is quite clear that survival for the big law firm in today’s marketplace requires an inherent willingness to go bigger, and a culture that permits both firms to put egos aside in pursuit of a bigger and (presumably) better firm.

Speaking of culture, once firms reach a certain size, can they really have a true shared culture? When you consider Dentons, with 11,000 lawyers in 182 offices, you wonder what the difference is working in the Albany, New York office as opposed to Seoul, South Korea. I assume you don’t even try to make the attorney bios consistent or play with practice area designations—things that can be a struggle for some six-attorney firms. From solos to 10k-plus, with disparate rules and regulations by jurisdiction (and I don’t even pretend to know anything about the Rules of Professional Conduct outside the USA), the profession has been forced to change with globalization, technology, and a shifting marketplace.

Survival at the Midsize Law Firm

Midsize law firms still grow and prosper—because many small and midsized businesses are more comfortable dealing with similarly-situated businesses in a local or regional market. Plenty of great lawyers also simply have no interest in working for a mega-firm. A part of the pursuit of reaching partnership is getting to have an actual say in the business function. Maintaining control over your book of business, rates, marketing, client relations and quality of life is still a big plus at a midsize firm.

Many solid midsize firms are made up of lawyers who did not like life in BigLaw—and that was before it became Bigger Law. They have the same pedigree, representative matters, and skillsets as larger law brothers and sisters. They’ve often been able to bring clients with them. And those clients appreciate not paying for the overhead of a lot of people, practices, and locations that have no impact on them. Survival in today’s mega-merger mania is to best define your market—and position yourself with clients and prospects as a healthy alternative. If you try to be too “full service,” or expand beyond comfortable geographic boundaries, you will lose some of that selling advantage.

Survival of the Boutique

A niche is a niche, and that is not going to change anytime soon. Knowing the local court and the judges never hurts. Many practices that require extreme specialization—areas such as trusts & estates, where the knowledge needs to be practice-specific and often state-specific. While some intellectual property boutiques have been acquired by large law firms, plenty of others occupy a specific space in the market. Business law boutiques can provide a personal touch, and with today’s technology, fight the good fight against much larger law firms.

Boutiques (and in some cases, midsize firms) also provide a home for huge opportunities from their friends in BigLaw. The bigger the law firm, the more likely the chance for conflicts. While firms have become more “creative” in figuring out how to hold onto a possible conflict, they do send work daily to many small and boutique law firms—sometimes because the niche is needed, and other times with the confidence that the boutique will stay in its lane and not take on additional work from those clients or matters in the future. Lawyer-to-lawyer referrals, niche experience, knowledge as “local counsel,” and other variables such as a corporate client meeting a diversity requirement are all ways to thrive and survive as a boutique.

Survival as a Solo

Let’s face it; a client is not likely weighing sending a matter to a solo versus a 5,000 lawyer firm. Like with boutiques, solo practitioners carry the value of the niche, the personal relationship, the local counsel knowledge, the cost savings, and the opportunity for conflict work (or simply stuff that does not fit the other models). Growing virtual law firms have provided a nice alternative to the solo lifestyle—sharing “space” and resources while basically living where you live, working where you work, and operating as a solo in what looks to the client like a larger firm setting—a best of both worlds.

Of course, all solo practices are created differently. As discussed earlier, the Main Street Lawyer—in practices that count mostly on local individuals and small businesses—is competing against Internet-based operations that may or may not be engaged in the practice of law. There are further concerns about other legal services—as referenced in the aforementioned Resolution 115—that might provide services that clients previously relied on an attorney to do. In many markets, small plaintiff’s firms are competing against large, national firms (maybe not in the thousands, but in the hundreds)—in a way not dissimilar to the virtual law practice model for business clients, with the “local” national firm supplying advertising and branding recognition to the local lawyer. Solos have options. But relying on the market as if 2020 is 1980 probably will not work in the long term.

Another great opportunity for sole practitioners is what amounts to a “talent drain” in certain practices and locations—midsize and boutique law firms looking for someone just like you. While it might involve giving up total independence, you are still working in the world of small business.

What Will the Legal Market Look Like in 2050?

There will be one two-million attorney law firm with offices in 1,000 cities, with 100,000 or so disgruntled holdouts doing their own thing. Obviously, I’m kidding (I think). We still will see mega, big, midsize, boutique and solo practices. Just like there are many approaches to business, there will still be those inclined to go with the strengths of a law practice that best fits the matter. A small business will still often seek out a smaller law firm. Family law attorneys probably will stay local and niche. As an aspiring attorney, you may choose the practice more specific to the style of law firm (and life, and compensation) that is most comfortable for you. Factors such as work-life balance and other priorities that come from the successors to Gen X and Millennials will play a role. Not to mention what the global market and planet might have in store for us. It is simply a matter of maximizing your advantages and maintaining flexibility.

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