With banking, personal injury and M&A all down, law firm mergers are in the bracing Scottish air
This time last year there were 20 Scottish firms in the UK 200. This year, there are just 17. Consolidation and the grim economy have taken their toll and made the Scottish legal market more competitive than ever.
“In Scotland we’re over-lawyered and this has made competition stiff,” says Robin Shannon, chairman of McClure Naismith.
“There are too many fighting for the same piece of cake,” adds Pinsent Masons’ Northern Ireland and Scotland chair Kirk Murdoch.
As with any market, where there are too many suppliers there must be consolidation. Some Scottish firms have accordingly lost a number of people in the past year, including McClure Naismith. The firm’s headcount has fallen in the past 18 months, but this has had a positive impact on revenue per partner (RPP) and average profit per equity partner (PEP) figures, up by 16.6 per cent and 1.5 per cent respectively in the last financial year.
“We’re sharing a greater share of profits among partners, which we’re quite pleased with,” says Shannon.
As a result of the competitive market firms are under pressure to adapt and many are choosing a merger as an option. Perhaps most significant was the Pinsents and McGrigors merger at the start of the last financial year, which took McGrigors – for years the largest legal provider in Scotland – into the UK Top 20. After months of deliberation the two finally merged on 1 May 2012.
“It was the right thing to do due to market conditions,” says Murdoch. “There were two primary drivers to our merger. First, we wanted to follow our clients and remain relevant. Second, we wanted to deepen our pockets to invest in opportunities.”
Murdoch claims the firm has an even bigger presence in Scotland as result of the tie-up.
“We’re the biggest employer of lawyers in Scotland and we work for five of the six FTSE100 companies in Scotland,” he says.
Another example of a Scottish firm merging with a larger one is Biggart Baillie, which merged with national firm DWF in July 2012, moving it out of the Scottish Top 20 but into the UK Top 20. At the time of the tie-up both sides said the increased ability to work for clients across the UK was a draw.
At the time Biggart Baillie managing partner Alasdair Peacock added: “These are exciting times. Competition is fierce and this merger will enhance our ability to continue to compete at the top end of the market on quality and sector expertise.”
An alternative way Scottish firms are adapting is through domestic mergers, with the biggest example being the link-up between Paul & Williamsons and Burness which took effect on 1 December 2012. The merged firm, Burness Paull, has become a big force in the Scottish market, with turnover standing at £38.7m for 2012/13.
Tods Murray has also benefited from a domestic merger, having bolted on Edinburgh-based private client boutique Fyfe Ireland in April. The add-on has boosted Tods Murray’s private client base by 35 per cent.
Tods Murray executive partner David Dunsire says the firm is looking to build on this domestic merger.
“We’re looking at growth, which is key for us, in the form of further mergers with smaller Scottish firms,” he adds.
Smoke in their eyes
But merging is not the only way to adapt. As the strongest legal market in the UK, some firms see London as increasingly crucial and a way to expand their services.
“There’s obvious strength in the London market, which is why our office in London is critical,” says Shepherd & Wedderburn chief executive Stephen Gibb.
Shepherd & Wedderburn has weathered the storm fairly well. Despite turnover falling by 3 per cent last year, to £35.9m, PEP rose by 1.5 per cent, to £253,000, and net profit was stable. The firm added 10 partners last year, including six lateral hires.
“We are in a fortunate position in that we have financial stability,” says Gibb. “We have cash in the bank and strong reserves. Within the firm, you have to manage your reserves well and hire people who share the firm’s ethos”.
The firm has advised on M&A transactions worth £7.2bn this year, more than its rivals. Gibb attributes this to the firm’s broad and varied client base.
“You’re only as good as your clients,” he says. “We have a strong client base, including big names such as Scottish Power and Sainsbury’s.”
Shepherd & Wedderburn’s turnover drop is shared by others with London offices. Dundas & Wilson and Maclay Murray & Spens, two of the larger Scottish firms present in the City, both reported sizeable falls in revenue for the 2012/13 financial year. Further down the Scottish league table, another firm with a London office – McClure Naismith – also had a difficult year. It has fallen to 15th place in the rankings after a 9.1 per cent drop in revenue, from £13.2m in 2011/12 to £12m in 2012/13.
“It’s been a tough year,” says Shannon. “The past year wasn’t successful for us in that we didn’t achieve what we were hoping to. We’ve had a good start this financial year, although it’s too early to tell whether this will carry on.”
Harper Macleod is one of the few Scottish firms to have seen turnover rise. The firm’s 8.8 per cent increase was the highest organic rise over the past year in Scotland.
“The reason for our sustained growth is simple – we’re a strategic business looking at and making opportunities materialise,” says chief executive Martin Darroch. “I spend a lot of time looking at a lot of data, scrutinising opportunities and considering how we can benefit from them.”
He points to work won in recent years, such as the firm’s advice on the 2014 Glasgow Commonwealth Games, as an example of recent success.
The energy spot
Overall, the market has been down, with corporate and M&A flat, and personal injury work in decline. There has also been a decrease in the banking sector due partly to the poor economy but also due to the two biggest banks in Scotland – the Bank of Scotland and RBS – being primarily based in London.
However, an area that is doing well within the legal market is the energy sector.
“Generally speaking, levels of activity have been subdued but there has been growth in the energy sector – particularly renewables,” says Gillespie Macandrew chief executive Ian Turnbull.
Despite just missing out on a place in our Scottish Top 15 table, Gillespie Macandrew had a good year, with turnover based on legal services up by 5.3 per cent, from £8.74m to £9.2m.
Among the big energy winners is Shepherd & Wedderburn, which was involved in the two biggest energy deals in Scotland over the past year, both for Scottish-headquartered Cairn Energy. The firm advised on the €450m (£380m) acquisition of Norwegian oil company Agora Oil & Gas and the £415m public takeover of London-based oil firm Nautical Petroleum.
Tods Murray has also seen the benefits of the energy boom, having worked on more than 70 wind farm projects, with many more on the go. Furthermore, last year the firm won a competitive tendering process to become RWE Npower’s Scottish legal counsel.
The future of Scottish firms lies in their adaptability to the competitive environment, bringing to mind a Darwinian natural selection process in which only the most competent will survive.
Merging domestically could offer financial stability, but some argue that merging with larger or international firms is the best way to be able to compete and expand in the longer term.
“There will be more mergers like ours, setting a trend in the Scottish market,” says Murdoch.
He argues that, while the resulting drop in the number of purely Scottish firms could be seen as a negative, overall it is a plus for the legal market.
“Sentimentally speaking it is sad, but if you look at the top four accountancy firms in the world – KPMG, Deloitte, PwC and Ernst & Young – you’ll find Scottish roots. I see it as part of the evolution of the Scottish market,” Murdoch concludes.
|Rank||Firm||Turnover 2012-13 (£m)||Turnover 2011-12(£m)||Per cent change||RPP 2012-2013 (£K)||RPP 2011-12 (£k)||Per cent change|
|1||Dundas & Wilson||48.7||54.4||-10.48||624||680||-8.24|
|3||Maclay Murray & Spens||40.9||46.9||-12.79||705||782||-9.85|
|5||Shepherd & Wedderburn||35.9||37||-2.97||608||607||0.16|