Mergers ‘very likely’ for nearly a third of northern law firms – PwC

NEARLY a third of law firms in the North are “very likely” to merge in the next three years, according to a survey out today.

Research from PwC says that 29% of law firms in the North think it is very likely they will merge by 2016 while 43% believe it will be fairly likely.

The latest annual survey of the Top 100 law firms shows 2013 has been a watershed year for the legal sector in the North. Merger activity and restructures are consolidating and polarising the market, from those that are growing, to those that are struggling to survive.

However, the region remains optimistic and is the most positive of all the English regions surveyed, with 37% of firms very confident they are on track to see revenue growth this year, compared to just 20% in The Midlands and 26% in London.

And this increases to 50% when looking at revenue growth over the next three years.

However, when looking at the sector as a whole, only 50% of northern firms are somewhat confident there will be growth in the next three years, with 50% not confident at all.

David Thurkettle, director and co-author of the report, based at PwC Sheffield said: “Against a challenging backdrop, 2013 could be seen as a turning point for the legal sector as certain firms remain resilient and grow, while others continue to struggle, with the gap between best and worst performing widening further.

“The legal sector has come under increased scrutiny from banks and the sector’s regulator following a number of well-publicised law firm insolvencies, mergers and acquisitions in the region. And this trend is set to continue with further consolidation of the market very likely.”

The PwC survey also notes that certain northern firms achieve higher profits per equity partner (PEP) than any other region outside of London, with 13% receiving £501k-£750k. Nationally, PEP for the Top 10 law firms averaged £1million, up 6.1% on 2012.

The trend in net profit margins remains a concern for smaller and regional law firms with one third recording net margins of less than 20%, and a number approaching single figures. Productivity in law firms, relative to the height of the market in the mid-2000s, remains low and consequently pressures remain on both headcount numbers and salary levels.

Mr Thurkettle added: “Continued focus on cost reduction and innovative delivery is required across all firms to maintain profitability in a highly competitive UK market. We expect many firms to look carefully at their strategy, focusing on whether there is a sustainable presence in each region of operation.

“Looking ahead and despite some encouraging signs of a pick-up in activity, it is clear firms remain concerned about continued economic uncertainty and the changing needs and behaviours of clients.

“Some clear winners and losers will emerge over the next few years as all firms strive to take market share from their rivals.”