Too many lawyers chasing too little work drives merger threat

SCOTLAND’S law firms expect “a major merger” in their ranks within the next three years as profits continue to be squeezed by a glut of lawyers scrambling for work north of the Border.

A tie-up between two Scottish mid-tier practices has long been mooted but the latest legal sector survey by accountancy firm PwC yesterday added weight to the case for a merger.

Nearly two-thirds of Scots law firms believe a major takeover is likely within the next three years as practices continue to face problems in growing profits.

Law firms are under pressure from falling revenues as clients cut back on their spending during the economic downturn and stiff competition, which has led to some cutting their fees.

While about 80 per cent of firms expect to grow their profits in 2012, many have had to massage their profit-per-equity partner figures by removing members from their partnerships.

Philip Rodney, chairman of Edinburgh-based law firm Burness, told The Scotsman: “There’s a lot of competition in the legal market, with more firms chasing a smaller amount of business.

“Those firms that are going to succeed when it comes to growing profits are the ones that know their clients’ businesses and the sectors in which they operate.”

While Rodney agreed that mergers were likely, he said that tie ups wouldn’t suit every firm.

“We will see some good mergers and some bad mergers,” he said. “Some weak firms going into difficulties will look at it as an option, but then also some strong firms will come together.”

Rodney’s view was echoed by Malcolm McPherson, senior partner for Scotland at HBJ Gateley, which was itself created in 2006 through the merger of Henderson Boyd Jackson and Birmingham-based Gateley Wareing.

McPherson said: “I’ve always thought we would see more merger but you have to ask why they haven’t happened yet? I think some of the factors that make mergers less likely – especially in the Central Belt – are the levels of debt that some firms carry, because the banks are no longer so ready to lend to firms or fund a big deal.

“Another factor is property – I certainly wouldn’t want to go through with a merger if there was going to be an expensive building lying empty.”

Earlier this month, Linda Urquhart – chairman of Edinburgh-based law firm Morton Fraser – revealed her practice had looked at possible tie-ups.

“We’ve talked to several smaller firms but haven’t made it down the aisle,” she said. “We’re open to offers.”

Morton Fraser has been active over the years in consolidating the market north of the Border, most recently taking over Skene Edwards in 2010.

Urquhart’s comments followed the annual legal sector survey by accountancy firm PKF, which revealed legal practices were being forced to clear-out under-performing partners. That finding was backed up by yesterday’s PwC report, which also highlighted a reduction in the number of support staff.

Mike McCusker, a partner at PwC in Scotland, said firms were being forced to “grasp the nettle” to cut costs and were outsourcing facilities management, payroll and travel functions. He added: “Pricing pressures appear to be here to stay, at least as long as there remains surplus capacity in the market.”