Why Law Firm M&A May Rebound In 2023
Law360, January 4, 2023
By Xiumei Dong and Aebra Coe
Law firm combination activity in 2022 outpaced the year before, with small and boutique firms making up most of the acquisition targets. The trend is likely to continue in 2023, law firm consultants said, while recessionary fears are also driving up merger discussions among larger firms.
Several BigLaw firms have kicked the combination trend off in the new year, with Holland & Knight on Wednesday announcing its merger with Nashville-based Waller Lansden Dortch & Davis LLP and Detroit-founded Clark Hill PLC saying it has absorbed Philadelphia-based real estate boutique Larsson & Scheuritzel PC.
Hogan Lovells and Shearman & Sterling LLP were also reported in late December to be in an early stage of merger discussion, but the two firms neither confirmed nor denied the report.
Law firm management consultant Kent Zimmermann of the Zeughauser Group told Law360 Pulse that he had noticed an uptick in merger discussions between larger firms, including those that historically were less focused on the possibility of a large combination.
One of the biggest factors driving the uptick is the increasing competition to attract and retain excellent lawyers, particularly in highly compensated practices and cities, Zimmermann said, adding that many firms are having a hard time keeping up their attorneys' net growth.
"That causes them to realize if they really want to move the needle and develop greater market leadership in chosen practices and cities, it's in the firm's best interest to put all options on the table on how to do that, including the possibility of a combination," Zimmermann said.
Law firms announced 101 combinations in 2022, exceeding the 84 deals and 67 deals reported in 2021 and 2020, respectively, but still behind the high-water mark of 115 deals in 2019, according to the Law360 Pulse Merger Tracker.
The vast majority of target firms were smaller than 50 lawyers, with just five combinations involving target firms larger than that. And the majority of acquiring firms were small or midsize — made up of fewer than 300 lawyers. In total, 22 acquiring firms were larger, with 16 having more than 500 lawyers.
Two of the largest acquirees in 2022 were Michigan-based Jaffe Raitt Heuer & Weiss PC, which merged with Taft Stettinius & Hollister at the end of the year, and India-based law firm Link Legal, which Dentons acquired in October.
Looking into 2023, industry experts expect merger activity to stay in line with or edge past these 2022 numbers. They also anticipate that more small and midsize firms will seek mergers with larger firms, citing reasons such as the inability to recruit and retain the talent needed to serve clients, increased business costs, lack of succession planning, and concerns about economic uncertainty.
"I think you'll see a lot of activity in 2023," said Avery Ellis, a Los Angeles-based recruiter at Mestel & Co. Ellis also noted that a down economy can create more opportunities for larger firms to acquire smaller ones. But because larger acquisitions are often very complex, he does not expect many firms to go through with their plans.
"The most profitable firms are unlikely to do large transactions because there are fewer suitors that won't dilute their profitability," Ellis said.
Legal consultant Bill Johnston also noted that large firms that have already acquired a firm in a market would be less likely to make another acquisition in the same market. Instead, he said they may "cherry-pick laterals" to bolster their presences.
In 2022, the states with the most target firm headquarters were New York and California, with 12 acquired firms based in each, followed by Pennsylvania, with 11 firms that combined with others, according to Law360 Pulse's tracker.
However, firms are still eyeing growth in the secondary markets, such as Nashville, according to Ellis. He expects that more will be looking for regional firms as potential targets in 2023.
Jenny Swan Meyer, the chief operating officer at Swan Legal Search, also said geographic expansion and strengthening practices were among the key reasons that led to several of the 2022 acquisitions in California.
"Specifically with these midsize firms," she added, "they have been around quite some time and they have long-term clients that they can bring with them that are dedicated to that firm."
https://www.law360.com/pulse/articles/1552735/why-law-firm-m-a-may-rebound-in-2023