80% of ‘top 20’ Irish firms report merger offers as UK firms seek EU toehold

A Smith & Williamson report has found that confidence in the legal sector has dipped dramatically in the past twelve months.

And 80% of the top twenty firms surveyed have been approached about mergers as UK law firms eye Irish practices for a potential EU foothold.

McDowell Purcell recently joined forces with Fieldfisher while O’Grady Solicitors and Galligan Johnston merged with Clarkhill.

But the partnership structure of Irish law firms remains a significant barrier to merger and acquisition, because of the difficulty of securing the commitment of all partners.

Culture

And since each firm has a distinct culture, issues emerge during negotiations that make it difficult to merge firms, the survey says.

However, the survey indicates that 59% of firms, or 87% of the top twenty, will move to the new LLP structure in the near future.

Two in three Dublin firms signalled their intention to become LLPs in contrast to only two in five of their regional counterparts.

Three in four firms surveyed expect more mergers in the next year.

Equity

Yet, questions remain over how the financial risk of cash or equity are passed on to merger partners.

Profitability differentials, premises issues, technology integration costs, compensation model differentials, capital management issues and cultural differences all go into the mix and can prove difficult to resolve.

This eighth annual survey also shows that only 19% of all firms and none of the Top 20 largest firms believe the legal sector will see an improved outlook in 2020.

This is down from over 40% in 2018.

Pressure on fees

Although confidence has dropped, profits and revenues continue to increase in more than half of firms despite continuing salary inflation, increasing operating costs and downward pressure on fees.

Revenues continue to grow in most firms while profits increased in over half of all firms and two in three of the Top 20.

Revenues improved in two thirds of all firms and in 87% of top twenty firms. A significant 43% of firms saw revenue growth of 10% while profits grew in 53% of all firms and 67% of the top twenty.

One third of top twenty firms saw profits grow in excess of 10%.

Despite these buoyant figures, there is a discernible drop in confidence with most firms expecting a stable or deteriorating outlook.

Pessimistic

This is particularly evident in top twenty firms where around 40% are pessimistic and none of those surveyed expect an improvement in conditions.

Just 19% of those surveyed have a Brexit strategy in place though 67% of top twenty firms view it as a threat to their revenues.

Brexit is also worsening competitive pressure for staff as more UK firms set up in Ireland. It is also generating increased merger and acquisition activity and prospective discussions.

A full 50% of firms report early stage merger activity and approaches from potential suitors.

Merger approaches

And 80% of the top twenty firms have been approached about mergers.

Salaries are rising in response to competitive pressures. And firms increasingly recognise that they need to invest in technology to remain competitive.

There is also continuing downward pressure on fees with one third citing this as having a significant impact this year.

Clients want ‘more for less’, those surveyed report, and maintaining profitability levels is a key challenge. 

Slowdown

While staff numbers continue to increase, there is a slowdown in the rate compared to previous years, showing a reluctance to grow overall staff numbers.

Yet, 93% of top twenty firms report that they have vacancies and 42% of firms awarded pay increases in excess of 6% in the last twelve months.

A full 50% of firms prioritise hiring laterally from rival firms yet many recognise that lateral hires are not the only answer to the challenges ahead.

Remote working

And 55% of firms are planning to increase remote working as a way of hanging on to their best staff.

The demand for skilled qualified professionals is at an all-time high, particularly in the Dublin market, the survey notes.

No firm considered the availability of office space to be an issue this year, compared with 40% last year, pointing to the increasing levels of ‘grade A’ office space available in Dublin.

Commenting on the survey, Smith & Williamson’s Paul Wyse, said: “Our eighth annual survey is, as always, a vital benchmarking tool for the sector.

Drop in confidence

“The findings highlight a substantial drop in confidence for the year ahead due to a squeeze on margins, continuing tough competition for talent and a negative economic outlook.

“Despite this drop in confidence, and continuing inflation beating salary increases, Irish legal firms continue to perform well across the key metrics of revenue, profits and staff numbers, all of which are up year on year.”

Paul Wyse added: “Attracting and retaining talented solicitors continues to be a key issue. The arrival of UK and international firms to the market either through merger or greenfield setup is driving competition for talent. 

Lateral hires

“Lateral hires of individuals and teams is an increasing concern and it is driving significant salary inflation for incumbents.

“In addition, 65% of legal firms believe the level of competition has increased in the past year with consequent downward pressure on fees, having a significant impact on nearly a third of firms.”

The survey shows 38% of all firms and 67% of top 20 firms believe attracting and retaining talent is their key issue.

Pay increases

This has led to significant pay increases which continue to outstrip inflation, with 42% of all firms awarding pay increases of over 6% in the past twelve months.

In addition, firms are becoming more diverse.

For firms participating in the survey, women make up 55% of all qualified solicitors, 35% of all equity partners and 35% of salaried partners in Irish legal firms.

Authorisations 

Paul Wyse commented “With the first authorisations by the LSRA imminent we believe this will act as a precursor and facilitator of consolidation within the legal sector and that mergers or acquisition may become increasingly attractive”.

Smith & Williamson’s annual survey has been running since 2011.

The survey was conducted by Amárach Research this autumn and canvased the opinions of 120 firms – 15 large, 20 mid-tier, and 75 small law firms across Ireland.

Functional heads

A total of 68% of interviewees were managing partners, 31% were senior partners and 1% were functional heads.

Smith & Williamson is an independently-owned, financial and professional services group.

Earlier this year, Smith & Williamson produced the 2018 Smith & Williamson UK law firm survey, developed in association with The Lawyer magazine.

It showed that addressing the competitive landscape, rather than Brexit, remains the top priority for elite legal firms in the UK.