It was a record year for law firm mergers in 2019, with the announcements by two venerable Philadelphia institutions ranking as the nation’s biggest acquisitions of the year.
Most of the 115 U.S. mergers last year were small combinations, usually a bigger firm of 100 or so absorbing a smaller firm of four to 10 lawyers, according to Altman Weil MergerLine, which tracks law firm mergers.
But the Philadelphia mergers have created new behemoths. Drinker Biddle & Reath combined with Indianapolis’ Faegre Baker Daniels to create an AmLaw Top 50 powerhouse. Shortly after that announcement, Pepper Hamilton disclosed that it would merge with Atlanta’s Troutman Sanders to create another Top 50 industry giant.
What’s driving merger mania? Firms want to expand their geographical scope. They want to offer clients more specialized practices and increase profits. And, according to some experts, a merger can be a last-ditch effort to save a failing firm.
On top of that, the market for legal services has stagnated.
“Industry-wide, we’ve been in a relatively flat to declining environment for legal services,” said Michael Heller, CEO of Cozen O’Conner. “The pile of legal work is not getting bigger. You have the same firms fighting for a smaller amount of legal work.”
In addition, big corporate clients want one-stop shopping. They want to consolidate services and reduce the number of law firms that represent them, said Heller, whose firm is merging with Miller Law Group in San Francisco and its 13 lawyers.
“There used to be a time when the legal spend for a corporation was among 40 different law firms,” Heller said. “They’d spread around the work to get the best expertise. It was inefficient and difficult to manage.”
Firms naturally want to expand their scope as their clients grow. Local practices evolve to become regional firms. Regional firms naturally want to become national powers as their business clients expand to new markets. And some of the national firms have designs on developing a global brand.
“For many, mergers are a way of offering practices they didn’t have,” said Praveen Kosuri, practice professor of law and associate dean for clinical education at the University of Pennsylvania Carey Law School. “Merging is a quicker way to expand geographical reach or acquire substantive expertise.”
Kosuri said mergers are also driven by economic growth. “The metric firms pay attention to is ‘profits-per-partner,’ or PPP,” he said.
Duane Morris, the Philadelphia law giant, this month acquired Satterlee Stephens, a highly regarded New York City firm of 65 lawyers that focuses on the financial world, technology, and health and life sciences.
Matthew Taylor, chairman and CEO of Duane Morris, said the acquisition was the result of long hours of strategizing.
“I’d venture to say that 25 other firms would have tried or died to get Satterlee to merge with them,” Taylor said. “New York is the epicenter of the financial and legal world, and to be a strong player, you need to be strong in New York. We already had 100 lawyers there. This raises our practice there by 60%. It’s a game-changer.”
The Duane Morris roll-up of Satterlee may also result in a higher profits-per-partner metric, said Penn Law’s Kosuri. That’s because New York lawyers traditionally charge much higher hourly rates. “Their margins might not necessarily be higher, but it lets them ratchet up their PPP in terms of rates.”
Rarely do mergers come down to firms trying to find efficiencies.
“There are really no economies of scale,” said Tom Clay, a legal-industry consultant at Altman Weil. “Bigger firms are more expensive to run. The only way they save money is through a smaller real estate footprint. Anyone who tells you different is either ignorant or lying to you.”
Philadelphia’s two mega-mergers topped Altman Weil’s rankings, and those marriages were borne of different circumstances.
In what was called a merger of equals, Philadelphia’s Drinker Biddle & Reath combined with the Midwest’s Faegre Baker Daniels. Faegre Drinker’s legal army features more than 1,300 lawyers and consultants across the United States. It has offices in China and the United Kingdom. It is projecting annual gross revenues of nearly $1 billion.
Philadelphia’s Pepper Hamilton, after significant departures, was swallowed up by Atlanta’s surging Troutman Sanders. That marriage created Troutman Pepper, which will field 1,100 lawyers and consultants.
“Both mergers were efforts by non-East Coast firms to acquire a base in the Northeast, which is the home of financial services,” said John C. Coffee, director of the Center on Corporate Governance at Columbia Law School. “In each case, the non-Philadelphia firm was larger and had recently been more successful. While they may call it a merger of equals, I am skeptical that there will be equality in either case.”
The marriage of Faegre and Drinker created a national powerhouse and “was a way to develop an economy of scope,” Coffee said. “Economies of scope tend to spread your reach so that you can service additional clients.”
Thomas Gallagher, CEO of Pepper Hamilton, said the merger with Troutman “builds strength on strength, bringing together complementary industry focuses and office locations, with very little overlap.”
Gallagher said Pepper Hamilton’s revenue per lawyer — which he called the legal industry’s best metric for measuring a firm’s financial health — had grown consistently over the last three years, achieving a record level last year.
Smaller combinations in Philadelphia also carried large repercussions.
Saltz Mongeluzzi Barrett & Bendesky, one of the nation’s dominant personal injury firms, brought on the president and cofounder of its chief Philadelphia rival. Steven G. Wigrizer, a 40-year veteran of Wapner Newman, joined SMBB in January.
“You see professional sports teams going out and acquiring great talent when they can,” said SMBB cofounder Robert J. Mongeluzzi. “That’s what we wanted to do. Wigrizer is a renowned medical negligence lawyer who can only add to our firm. It also frees up Michael Barrett to concentrate on our relationships with referral firms. We strengthened our law firm both ways.”
The largest single merger came in 2015, when 2,600-lawyer Dentons combined with a 4,000-lawyer Chinese law firm, Dacheng Law Offices. Since then, Dentons has continued to roll up smaller firms. Last year, it grew to become the world’s largest law firm, commanding nearly 11,000 lawyers in 182 offices.
“And they’re still expanding,” said Coffee. “That’s certainly an economy of scope, and I imagine they’ll have a presence in Philadelphia very soon.
“But is Dentons the outlier or the cutting edge? Nobody would consider them the best firm in America, but they have a business model that says if we develop a good reputation, we want to market it everywhere.”
Coffee said that the legal profession is changing substantially and “it’s not a healthy change.”
“You can’t run an 11,000-lawyer firm like Dentons and think you’re really practicing law — you’re running an acquisitions business,” he said.
Though mergers appear to be fashionable, Kosuri of Penn Law warned that they don’t always work out.
Very often, big firms might have to lose clients to avoid conflicts with businesses they already represent.
Also, when firms merge, what they’re counting on is keeping the relationships the acquired lawyers have with their clients.
“But there are no noncompetes in this business,” Kosuri said. “You can buy the firm, but all those lawyers can leave the next day and start their own firm. I’ve seen that happen. You have to make sure the cultures in the firms match so you don’t get left holding an empty bag.”