What factors do we think will drive merger activity in 2022?

Firstly, happy new year to you all from all of us at ALFMA. I expect we can all agree that 2021 was a surprisingly good year for law firms, the market was unexpectedly buoyant, money was cheap and most law firms enjoyed increased profits.

The great news from our perspective is that firms who pre-Covid might not have entered into discussions, seem now at least open a first conversation. But is it just positive sentiment driving this new openness, or maybe something a little darker? The perennial problem of succession has if anything got worse now that the hybrid / WFH model seems to be the norm. Larger firms are using this to attract talent from localities that previously were too far away for a daily commute. If a good assistant from say, Bristol, can add 25% to their salary plus be involved with more international work by travelling to London overnight once a week then that is an attractive proposition that just wasn’t there pre-Covid. This means that London firms are hunting wider afield for talent, and the regional firms are forced to do the same – in this example Bristol looking at Cardiff or Cheltenham for their replacement talent and so the ripples continue through the market.

Alongside this is the growing threat from the fee-share model firms who are proliferating at a rapid pace. Good associates who in previous generations would have been future equity partners have been successfully working remotely for 18 months, loosening their ties to their firm. They are also being attracted to these diversified firms paying them 70%, 80% even sometimes 90% of their billings.

I think there is a real potential for these factors to hollow out the centre of the talent market which will create push factors for firms to merge, or at least consider merger. They are a key driver behind the increased number of discussions we are seeing and also it has already been noted in the US that firms are merging for access to each other’s talent rather than access to each other’s clients which is a complete change of emphasis.

Whilst this may seem a threat to only the larger commercial firms, the ripples will spread wider and the war for talent will get hotter, meaning, I believe, that inevitably the number of mid-large firms (i.e. today’s top 200) will reduce, as they merge with each other to stay relevant and even stay alive.

The author of this article is Andrew Roberts of Ampersand Legal. Andrew can be contacted at andrew@ampersandlegal.co.uk or 07956 961404. Other members of ALFMA can be contacted here.

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