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2013: Year for more law firm mergers

SENIOR lawyers at some of Scotland's largest firms believe more mergers are on the way in 2013 but are warning quality deals will be harder to find.

INTEREST: Lorna Jack expects more law firms to adopt new business structures next year. Picture: Steve Cox
INTEREST: Lorna Jack expects more law firms to adopt new business structures next year. Picture: Steve Cox

The prediction comes after the most active year for mergers in the sector in recent history with English firms such as DWF, Beachcroft, Pinsent Masons and Shoosmiths all making further inroads into the Scottish market.

There is a belief pressures such as a need for greater scale in a tough economic environment and demand for wider coverage from large clients are unlikely to ease.

Kirk Murdoch, from Pinsent Masons, which merged with McGrigors in May, said: "Legal panel consolidation and pressure on fees are set to continue.

"Firms without sufficient size, scale and reach will find those competitive pressures hard to resist, with the most likely outcome being more mergers and the potential even for more dramatic outcomes.

"The strategic reality for those firms is that there is a finite number of quality merger partners out there and firms with national – let alone international – ambitions will already be finding their options limited."

That view was echoed by Chris Smylie of Maclay Murray & Spens, who said: "A merger justified solely on scale and cost savings is a short-term, defensive measure ultimately doomed to failure. Clients may want greater geographical reach, more specialist expertise or more strength in depth, for example, and these are all good reasons to merge. Trying to stave off the inevitable decline of an outdated business model is not."

Stephen Gibb, chief executive at Shepherd and Wedderburn, said: "The most successful mergers will be those which bring tangible benefits to clients in terms of enhanced service, economies of scale and geographical reach, rather than being for defensive reasons."

Martin Darroch from Harper Macleod has rejected merger approaches and has heard some firms described as the "walking dead".

He said: "If you look at the balance sheet and accounts and number of partners of many firms, they are simply not capable of merging or being taken over as they carry too much debt within the business and they have too much debt off balance sheet through partners' professional practice loans.

"They [also] have very significant long-term liabilities through their property commitments and pension deficits."

The New Year may also finally see the introduction of alternative business structures (ABS) in Scotland, which would allow non-regulated professionals to take up to a 49% share in a Licenced Legal Services Providers (LPs).

In England and Wales a firm can be fully owned by an external investor but in Scotland at least 51% must be kept by lawyers or other regulated professionals, who may include surveyors and accountants.

Lorna Jack, chief executive of the Law Society of Scotland, said: "The Society submitted its application to become an approved regulator to the Scottish Government earlier this month (December) and we hope to be authorised as a regulator by spring next year.

"A number of solicitors have expressed interest in adopting a new business structure so we expect applications to follow quickly."

At Brodies the long-serving Bill Drummond shows little inclination to pursue mergers or move away from the firm's Scottish focus, which has served it well in recent times.

He said: "We are watching what happens in the ABS arena with interest but we are focused on having structures that develop Brodies as a traditional Scottish legal practice.

"With our balance sheet there is no compelling need for us to get involved in ABS from the point of view of raising external capital.

"We sense an opportunity as we look different from most organisations as a consequence of the [mergers] in the sector."

The new challenger to the traditional top tier is Burness. The merger with Paull and Williamsons showed the ambitions of the firm and it is now likely to be close to some of the traditional big players in terms of fee income.

Burness chairman Philip Rodney is confident on the prospects for his firm but believes the economy will "zigzag" for a few years yet.

He said: "There will of course be activity in our sector. But a lack of growth combined with increased competition will mean that it will be tough for many.

"Firms that are well resourced, really understand the world their clients inhabit and are prepared to put themselves in their shoes rather than just advise on the law will get a bigger share of the action."

Few expect the economy to improve during 2013, which raises the prospect of further redundancies in the sector, although it appears unlikely to be close to the scale of the 95 roles under threat when DLA Piper announced restructuring plans and the closure of its Glasgow office.

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