Categories
Market News

Lateral Hiring Is Becoming So Competitive That Big Law Firms Are Seeking Mergers Instead

By Dylan Jackson for The American Lawyer

Consultants are portending a flurry of law firm mergers in 2022, especially among larger firms, as the tight lateral market shows no signs of abating and the elite pull further away from the rest of the pack.

Many firms are currently in merger talks, consultants told Law.com. The interest is driven by a few factors. For one, the incredibly competitive lateral market has significantly reduced the opportunities most firms have for acquiring talent, and many don’t expect that to ease up anytime soon—especially early next year after attorneys are paid out their end-of-year bonuses.

“Our merger practice is busier than it’s been in 20 years by about a factor of four,” said law firm merger consultant Kent Zimmermann.

Lisa Smith, principal at legal consulting firm Fairfax Associates, said many of the mergers in the works are at larger firms with between 200 and 600 attorneys. At many of these firms, leaders feel as if their business is undersized relative to the top law firms—a dynamic present before the pandemic, which has only become more prevalent, she said.

“It’s hard to grow substantially when you’re growing organically. It takes longer, is more difficult, and is more expensive,” Smith said. 

Many firms in the Am Law 100 performed well in the pandemic, growing revenue and increasing profit by double digits. But firms with greater scale and a broader base of revenue are the beneficiaries of compounding.

For instance, if “Firm A” generated $1 billion in revenue in 2020 and saw a 10% increase in revenue by the end of the year, that’s an additional $100 million in extra revenue. “Firm B,” on the other hand, began with $500 million in 2020 and also saw a 10% increase, using similar strategies to do so. In that case Firm B only grew its revenue by $50 million despite growing at the same spectacular rate.

Then, Firm A begins the next year with an even higher base revenue—and the gap continues to compound and grow.

This is why firms with aspirations of joining the elite ranks must capture more market share and revenue or fall further and further behind both financially and within the talent market, even with similar growth metrics, Zimmermann said.

And while merging can be risky, many firms feel as if they don’t have any other options, Zimmermann said. Combinations, especially large combinations, are tricky. But the market for talent has been unforgiving and good lateral partners and associates come at a premium nowadays.

“Most firms considering mergers are saying, ‘We should open up the aperture a bit because we’re not able to move the needle fast enough.’ The market is going to be even more competitive in the future, not less,” Zimmermann said.

Still, the number of combinations this year so far is down from pre-pandemic levels. The historic merger average from 2011 through 2020 is roughly 44 per year, according to Fairfax Associates. This year, there have been 33 mergers through Q3.

But this past quarter fits in with the trajectory Zimmermann and Smith are forecasting. In Q2 of 2021, there were just six mergers, and then in Q3, there were eight. Last year, there were just 32 mergers for all of 2020.

Given that many of the mergers in the works are among larger firms, Smith said, it’s still to be seen how next year will stack up against pre-pandemic years.

“Whether it gets back to the levels pre-pandemic, it’s a little hard to know,” Smith said. “The pandemic has made firms a bit more flexible and open to change. The only thing that might hold it back is the challenge of doing larger combinations.”