Law Firm Mergers: Good Idea or a Fruitless Endeavor?

So far, 2015 has been the year of law firm mergers. According to Altman Weil MergerLine, the first six months of 2015 saw the most half-year mergers ever, with 48. One of these mergers was the biggest ever, as global law firm Dentons merged with China’s largest law firm Dacheng to form the largest law firm in the world by attorney head count, with more than 6,500 lawyers in 50 countries.

Even so, law is one of the few industries in which the market is not monopolized by a few top firms. Last year, the 200 highest-grossing law firms in the world earned $115.2 billion, according to data collected by ALM Legal Intelligence, but the global law market is roughly a $600 billion industry. By comparison, the Big Four audit firms Deloitte, PwC, EY, and KPMG audit 99 percent of the companies in the FTSE 100, and 96 percent of the companies in the FTSE 250 Index. As of December 2014, the top four wireless telecommunications carriers in the U.S. controlled approximately 70 percent of the market based on service revenues. The top 25 health insurance companies account for nearly two-thirds of market share.

Restrictive conflict of interest laws, coupled with the notion that law is a national, not international practice, have prevented the legal market from consolidating to the extreme degree of other industries. Furthermore, law firms do not benefit from economies of scale the way firms in other industries do. In fact, bigger firms spend more, not less, on overhead on a per lawyer basis, according to Altman Weil. Law firm strategist Alan Hodgart said that consolidation is happening around types of legal work, rather than across the industry as a whole. For example, only a select few firms can handle the largest M&A deals, but that group cannot get much smaller because eight firms are needed for every major transaction, he said.

When it comes to law firm mergers, bigger is not always better. Altman Weil outlines two questions every law firm should ask itself before considering a merger: first, will the economics of the combined firm be substantially better than the economics of each firm currently? Second, will the firm’s financial indicators improve?

Of the 200 top law firms Altman Weil surveyed in 2005, almost two thirds had merged within the previous two years, and 90 percent of firms indicated that their experience with the merger was “very successful,” or “successful.” So then, law firm mergers are a proven business technique to improve revenues. The challenge is in finding the right fit.

Dentons and Dacheng are still working out the kinks of their merger. Six months after the announcement, Dentons and Dacheng have yet to roll out a joint-name or a combined website. Some of the problems are straightforward: things like translating and standardizing over 4,000 Chinese lawyers’ biographies. Other problems are deeper, stemming from the incorporation of two vastly different legal cultures, which could prove harder than combining teams of engineers, scientists, or doctors. Then there are the radically different rules governing protection of client information and regulations in various industries. It will be interesting to see how the merger turns out, and whether it will positively or negatively affect the recent trend of law firm mergers.

Hyunjae Ham

Hyunjae Ham is a member of the University of Maryland Class of 2015 and a Law Street Media Fellow for the Summer of 2015. Contact Hyunjae at staff@LawStreetMedia.com.