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Pressure on law firms to force more mergers

THE heads of some of Scotland's largest law firms believe further mergers are in the pipeline but they are hopeful improving economic conditions may ease some of the pressures in the sector.

IT ALL ADDS UP: Bill Drummond, of Brodies, points to a convergence of factors affecting legal firms. Picture: Steve Cox
IT ALL ADDS UP: Bill Drummond, of Brodies, points to a convergence of factors affecting legal firms. Picture: Steve Cox

Growing internationalisation, demands from clients - such as minimum turnover levels for tenders - and opportunism by English rivals are among the reasons suggested for the continuing trend for mergers.

Historic names such as McGrigors, which merged with Pinsent Masons in 2012, have disappeared from the Scottish legal landscape with Dundas & Wilson the next in line to go as it is scheduled to formally complete its merger with CMS Cameron McKenna in May next year.

Kirk Murdoch, chairman of Pinsent Masons in Scotland and Northern Ireland, said: "One thing for certain is that in an increasingly globalised market, where our clients have customers, suppliers, employees and financiers all over the world, the idea of a 'Scottish' firm is increasingly outdated. Without a doubt there will be further merger activity and sadly there is the prospect of potential failures."

So far Semple Fraser and Ross Harper are the highest profile firms which have fallen into insolvency.

Martin Darroch, chief executive at Harper Macleod, believes many of the merger deals seen in the past few years have come at "considerable cost" to the Scottish firms involved.

He said: "While there's no doubt there are too many law firms in the country, the main driver has been necessity for firms which, to put it bluntly, are in no shape to continue as they are in the long term.

"For major English or international law firms the attraction is not to acquire a Scottish brand, but to acquire some talented teams or individuals in particular sectors. They may also see it as a way to set up offices with lower cost bases than in London."

Craig Turnbull, managing partner at MacRoberts, felt the number of independent Scottish law firms still thriving is a positive for the sector but Philip Rodney, chairman of Burness Paull, warned: "Some firms have been performing badly over the last few years and will look for shelter elsewhere."

Brodies managing partner Bill Drummond suggested greater competition, poor balance sheets and a growth at all costs agenda were among the reasons likely to drive mergers.

He said: "It just needs a few of those factors to converge for firms to feel vulnerable. These days the law isn't that different from many other business sectors and is just as affected by the long-term economic slump, especially the drying up of too-easy debt finance."

While few big Scottish firms are expecting any surge in activity levels in 2014 there is a more positive outlook than at the start of the previous year with most looking to add to staff numbers and anticipating greater fee income.

Stephen Gibb, managing partner at Shepherd & Wedderburn, said the real estate and corporate deal sector are among the areas which he anticipates will be busy.

He said: "Our expertise and profile in energy and renewables has also reaped substantial returns and this is an area where we see considerable opportunity in 2014.

"Whilst not sector specific, our competition team and dispute teams are both much busier on a like-for-like basis than last year."

Meanwhile Philip Rodney, from Burness Paull, suggested food and drink, financial services and oil and gas as particularly busy sectors.

He said: "I think the economy will gradually improve in 2014. We won't see anything dramatic though. As a firm, we are looking forward to next year with a lot of work in the pipeline and some exciting plans."

That cautious optimism was echoed by Chris Harte, at Morton Fraser, who said: "We spend a lot of time speaking to our clients about how they see the future, and their feedback on prospects for 2014 is generally more positive than it has been for some time. This in turn allows us to look forward to 2014 with much more confidence."

However the pricing of work continues to be an issue as competition between firms remains fierce.

Chris Smylie, from Maclay Murray & Spens, said the flow of work in financial services, real estate, energy, regulation and corporate deal work is looking promising.

He said: "In terms of challenges, we are seeing some unsustainable, low-ball pricing on some tenders, which I suspect is a symptom of some firms finding themselves in the position of having to chase turnover at any cost. Where such pricing fails to recognise the difference, in value terms, between high volume/low margin and premium work, that is unhelpful for both the profession and, ultimately, clients."

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