Kent M. Zimmermann
Law firm merger madness swept through the nation at a record pace last year, and nowhere was the fever for consolidation hotter than in the Windy City.
A survey of local managing partners suggests the trend will continue.
More small and midsize firms will be acquired by Big Law brand names as competition in the business quickens and as those smaller firms worry over generational transitions, said Kent M. Zimmermann, a law firm consultant at Zeughauser Group who conducted a survey of 37 managing partners at firms with 10 to 300 attorneys in Chicago.
“The industry is rapidly consolidating,” Zimmermann said.
Of the 37 managing partners surveyed, 41 percent said they were open to considering a combination with another firm in the next three to five years. Twenty-five percent said they believed their firm would combine with another.
The urge to merge may result from another desire the managing partners expressed: growth. Nearly 70 percent of respondents said they hoped to grow in Chicago over the next three to five years. Outside of Chicago, the most common place they hoped to grow was Southern California, followed by New York.
At the same time, the leaders understand that growth is more difficult in today’s market. Nearly three-fourths of respondents said they expect increased competition this year to attract lateral partners — perhaps the most common growth method today. More than 60 percent expect more competition for associates.
Despite the perceived difficulties, 84 percent said they were optimistic about their firm’s outlook this year.
Longer-term pessimism is one reason Zimmermann said managing partners tell him they would like to pursue a combination. Handing over the business from the first generation of partners to the next has been historically fraught with peril. Client relationships don’t always translate.
“That’s a big issue,” he said. “To make the generational transition successful and to make the firm be what the people in leadership want it to be, combining with another firm can help bridge the gap to get the firm where they want to be.”
Last year, more law firms made the choice to combine than ever before, according to Altman Weil MergerLine, which tracks law firm mergers. There were 91 firm mergers last year, beating a record of 88 set in 2013. Five of those mergers involved a Chicago-based firm being acquired by a larger firm.
The largest Chicago firm to join with another was Meckler, Bulger, Tilson, Marick & Pearson LLP, whose 60 lawyers joined Cozen, O’Connor LLP, a 575-lawyer firm based in Philadelphia, MergerLine reported.
“The record number of deals in 2015 is a reflection of the intense competition among law firms for new work, and we expect the market to remain hot in 2016,” Altman Weil principal Ward Bower said in a release of last year’s statistics.
While a quarter of law firm leaders expect to make a deal soon, Zimmermann said there are a number of reasons for others’ reluctance.
The most pressing concern, he said, is a loss of the firm’s autonomy or culture. Some leaders also fear that exploring a combination could be perceived as a sign of weakness if word gets out. And a third concern is what leaders consider the cost of exploring a potential deal.
While the third concern is less a reality (in most mergers, the larger firm will pay the consulting fee), the other two concerns can be addressed by long-term planning, Zimmermann said.
“The questions are: What kind of firm do we want to be over time? How big do we want to be? What kind of practices do we want to be known for? And on what kind of geographic platform?” Zimmermann said.
There are essentially three options to achieve a firm’s goals, Zimmermann said. Hiring partners one-by-one. Hiring groups of lawyers. Or merging with another firm.
“My observation, focusing on this work, is that an increasing number of firms realize how hard it is to get to where they want to go on their own,” Zimmermann said.