We are currently seeing more “buyers” in the market than we have seen in the past 20 years. These firms have emerged from 2020 in a leaner state, with less office space and inefficient staff and are hungry for growth. Conversely, we are also seeing that unless a target firm’s partners are looking to exit there appears to be a reluctance for firms to engage in new merger discussions. Only about 50% of our initial approaches over the past 2 months have been actively considered whereas before the pandemic we would have expected this to be over 80%. No doubt this is due to current uncertainty and an understandable wish to concentrate on their own business for now, but what will happen as we start to pull out of the pandemic in the second half of the year?
Having spoken with numerous firms about their plans, there seems to be a sentiment that in the spring we should see a return to relatively normal trading and firms will be able to plan for the next 5 years rather than the next 5 weeks or 5 months. At this point we expect merger activity to increase as smaller firms seek the security of a larger parent and Covid will also no doubt have exacerbated any succession issue by adding to the concerns of the younger lawyers about ownership.
Coupled with this, we all know the PII market is hardening and that recessions drive an increase in claims, and it would be no surprise to see insurers either leaving the market or declining to write new business. The effect of this will be that firms who can still get insurance from their current insurers are likely to find premiums rising but there will be an increasing number of firms who are not offered terms at all. With 47% of firms renewing in October, this will again drive an increase in merger activity.
The lifetime of a merger process (in a normal world) is 6-9 months and October is only 9 months away. There are currently more active buyers than we have ever seen, but mergers take a lot of digesting and each buyer will only be able to properly integrate one firm at a time.
Therefore, we suggest that any firms who are concerned by size, succession or PII need to have acquisition at the top of their agenda at the next partners meeting. Then, if they decide to go for it, they need to start the process now to give themselves the best chance to find the right suitor on the right terms before someone else does.