Legal sector preparing for mergers

THE City’s law firms are ripe for a new round of mergers as falling fee income and the economic environment propels the industry towards a “tipping point”, says a report by PricewaterhouseCoopers (PwC).

Of the Top 11-25 firms, 83 per cent predicted more mergers in the industry are “fairly likely’, compared to half of those firms in 2009. The report found that those firms have seen their fee income decline by on average six per cent. Despite an eight per cent reduction in their partner numbers and a six per cent reduction in fee earner numbers, average profit per equity partner (PEP) still fell by nearly one per cent to £441,000. This follows a 28 per cent reduction in PEP in 2009. Top 10 firms were protected from the worst of the downturn by their scale and geographical reach.

“Looking ahead, it appears the legal sector is approaching a tipping point,” said Alistair Rose, a partner at PwC. “There is ongoing pressure on firms ranked 11-25 and it is inevitable that a number will need to consider their response to ongoing, difficult market conditions, client pricing pressures and new entrants to the market.”

Already this year Lovells has merged with Hogan Hartson, while Sonnenschein joined with Denton Wilde Sapte. Squire Sanders is in discussions with Hammonds and SJ Berwin with Proskauer Rose. Financial pressures might force others to consider link-ups, to avoid the fate of Halliwells, which collapsed in the summer, spooking investors.

“The crunch time for law firms often comes in January when they have to pay their rent and their partner tax bill,” said Tony Williams of legal consultancy Jomati. “Some are being watched quite carefully by the banks.”