The number of mergers between law firms has soared 65 per cent in the past year, with 385 taking place in 2013, up from 234 in 2012. Thia compares to  five years ago when  there were just 146 mergers in the same 12 month period. The figures were compiled by accou tancy firm Wilkins Kennedy which says that firms with an appetite for acquisitions that will improve their profitability and capture market share are increasingly snapping up smaller players in order to grow profitability and combat the increased competition from other providers of legal services.

No slowing down

Partner Tommy White says: 'These figures show that the rising trend for mergers shows no signs of slowing down, as financial pressures, increased competition, and to a perhaps lesser extent regulatory issues, are still having a major impact. M&A, corporate finance and property work for lawyers, particularly in the south of the country are all recovering but are generally still below the heady days of pre-2007. In addition the long term, secular decline in litigation work continues – despite a helping hand from recession linked disputes.' He added that whilst some firms need to find 'a white knight quickly in order to stave off potential financial collapse, others are turning to mergers to deliver that boost in profitability that a merger will achieve from cost savings. Economies of scale from a merger – especially where the merged firms can better utilise staffing levels – can be substantial.'

However Tommy White says that there has also been a trend for mergers, particularly international ones, that are based on longer term strategic thinking, and are aimed at gaining access to new sectors and services, or to achieve greater global exposure.'  He noted that mergers were also a useful way for firms to diversify their business to broaden their appeal to wider markets. 

Pressure on UK smaller firms

Wilkins Kennedy says that a variety of measures are putting pressure on smaller firms in particular. One of the most recent is last year’s ban on referral fees for personal injury cases, which comes on the back of changes to legal aid and Conditional Fee Arrangements and new rules allowing non-law firms to enter the legal market. Other new measures, such as criminal legal aid reforms consulted on in April last year, could also have an impact on merger activity. The final package announced earlier this year includes cuts to solicitors’ fees and changes to the procurement system for criminal work to consolidate the number of Duty Provider contracts. 

Tax changes

Wilkins Kennedy adds that new HMRC rules introduced in April targeting fixed profit share partners in LLPs could  also have an impact by increasing costs if the required conditions are not met and individual partners are reclassified as employees for PAYE and national insurance purposes.