Saffery has launched a report on merger and acquisition (M&A) activity in the legal sector in the year to 30 June 2023. It has found there has been a 60% increase in transactions involving UK law firms during the period of analysis, with much of this activity stemming from the wider benefits that M&A brings, including broadened service offerings and economies of scale.
Throughout Saffery’s period of analysis, there have been a number of competing pressures for law firms including business uncertainty following the Covid-19 pandemic and ongoing inflationary pressures. It also found that M&A is now either a strategic priority or, potentially, a necessity to maintain earnings and continue to develop service lines and depth of expertise.
The well-established listed law firm model continues to be a driver in some of this activity, although the period has seen some turbulence.
Jamie Lane, Partner, Saffery adds, “Private equity interest in professional services looks to be increasing, while interestingly, but perhaps not surprisingly, the majority of acquisitions are of smaller firms with 20 or less employees. Cost pressures, particularly professional indemnity (PI) insurance renewals, are becoming increasingly painful and therefore merging with another firm is helping to mitigate the impact on profits.”
Saffery is also seeing mid-size firms looking to acquire smaller counterparts to provide critical mass, and small firms looking to merge with larger equivalents, which, according to Sheryl Davis, Partner, Saffery, “will likely increase activity, especially with the potential for further PI insurance pricing challenges. Succession, and lack of planning for this, is another driver for merger activity, and we may be seeing a generational shift in attitudes to risk. Plus with a continual change in economic conditions across the UK and globally, we may see further consolidation in the market.”
Key findings include:
- A total of 69 transactions completed involving UK legal firms during the 12 months to 30 June 2023*. This represents a significant increase on the 43 deals completed in the 12 months to 30 June 2022.
- Business uncertainty following the Covid-19 pandemic, followed by ongoing inflationary pressures, has limited wider industry growth. Additionally, rising professional insurance costs are adversely impacting partner profits, particularly with smaller firms. However, a number of legal sub-sectors are counter-cyclical, which has helped to mitigate the adverse impact of the wider economic landscape.
- UK legal firms have broadly adopted two strategies to counter these industry wide challenges. Firstly, firms have sought to invest in IT solutions to make use of artificial intelligence and smart contracts to minimise the risk of human error and drive efficiency gains in routine work.
- Secondly, firms have undertaken extensive M&A initiatives in order to both broaden service offerings and benefit from economies of scale. This is the key factor which has driven the significant increase in transaction volumes in the year to 30 June 2023. Transaction volumes have been buoyed by significant acquisition sprees having been undertaken by both Gately (Holdings) plc and Knights Group Holdings plc since their IPOs in 2015 and 2018 respectively.
- Despite the relatively high levels of recent M&A activity in the UK legal sector, 92.9% of UK law firms have less than 20 total employees. The prevalence of such small law firms demonstrates how fragmented the sector remains and represents a key opportunity for continued consolidation in the market.
- Average share prices in the UK legal sector decreased 35.9% over the 24 months to 30 June 2023, in comparison to the FTSE AIM All-Share Index which decreased by 14.3% over the same period.*
- Whilst activity in the legal sector has improved post-Covid, adverse broader economic conditions have impacted the average share price of UK legal firms. The sector has faced subdued demand for corporate legal services due to the adverse impact of both continuing high levels of inflation and a weak global economic outlook. Economic conditions have also dampened demand for M&A related legal services.
- The general pattern of movement in legal firm share prices broadly matches that of the FTSE AIM All-Share Index across the year to 30 June 2023. However, the adverse movements are significantly more pronounced in the share prices of the legal firms in comparison to the wider market.
- Corporate (25.7%), personal (20.8%) and property (16.4%) represent the largest individual sectors of the UK legal services market by revenue share.
To read the report in full, please visit Saffery: UK legal sector – Review of mergers and acquisitions activity
