When size really does matter

As the legal market becomes more polarised, large regional firms face three key strategic choices, reports Richard Tyler

This year's big shake-up in the UK legal market came courtesy of Arthur Andersen and Wilde Sapte.

The impact will be felt not only by those City firms just below the top five by size. National and regional practices that are extremely profitable at the moment, but need to plan for the long term to secure their position in the marketplace, will also feel the shock waves.

Those national and regional firms that play down the significance of the accountants' domestic aspirations do so at their peril, because accountants are not only looking to expand their international legal services.

Andersens has Garretts and will continue to invest in its regional offices once the smaller law firm is incorporated into Wilde Sapte.

And the other accountancy firms are looking to expand their legal capabilities. Andrew Daws, head of legal at Ernst & Young, is interested in developing law offices across the UK.

But it is not only the accountants who are competing with the regionals. One regional firm managing partner acknowledges that a big name City brand moving into the regions would provide serious competition. This week Cameron McKenna did just that. It opened a corporate department in Bristol.

So those leading national and regional firms appearing in this year's top 20 need to consider their future in a domestic market that is a rapidly changing.

For Philip Brown, former managing partner at Wilde Sapte and now a consultant at legal practice specialist Hodgart Temporal, the Andersens merger is symptomatic of the continuing polarisation of the UK's legal market, and symbolic of the need for national and regional firms to start defining their future.

He cites three options: the first, to further strengthen strong regional practices with a merger in London; the second, to approach the accountants; and the third, to skip London and look to continental and transatlantic mergers.

Sheffield's Irwin Mitchell is ready to acknowledge the merit of Brown's first option – the need for a regional practice to provide clients with a London office.

Its merger with niche debt recovery practice Braby & Waller in April gave it a valuable foothold in the capital's commercial work. Now it is in the process of transferring the lawyers staffing its existing London practice to Brabys' offices and plans to consolidate its position over the coming year.

But London will remain a niche practice office. Irwin Mitchell's main focus is in Leeds, Birmingham and Sheffield. Last November it merged with Rigbeys, a five-partner insolvency, housing association and retail work practice in Birmingham, and its Leeds office has been bolstered by lateral hires from Eversheds.

As a strategy for growth, the acquisition of smaller firms will continue to be attractive, but managing partner Howard Culley believes that being taken over by a larger national firm does not appeal. “We are grooming ourselves to remain independent,” he says.

The same philosophy regarding London and the value of mergers is shared by Edge & Ellison senior partner James Retallack.

He says: “It is very important to have a London office – you cannot be an effective competitor in the UK legal market without one.”

Despite a spurned approach by Dibb Lupton Alsop and last year's failed merger talks with Pinsent Curtis – which led to the departure of its high-profile senior partner Digby Jones to KPMG – the firm plans to recapture its top 20 position in time for next year's Top 100.

Retallack thinks that Edge & Ellison has learnt from 1997. “There is no such thing as a merger, rather someone acquires someone else. It is never a marriage of equals,” he says.

Pinsent Curtis senior partner Julian Tonks shares this view and thinks that Wilde Sapte's partners should bear in mind that their deal with Andersens was struck from a position of financial weakness. “We are not building up a practice to be bought by an accountancy firm,” he states.

Pinsents has been on the offensive. Last year it recruited 21 lawyers to its London and Leeds offices, and Tonks also hints at firm plans to open in Manchester.

Part of Brown's third option, a transatlantic tie-up, is not on the cards for any of the leading regional and national firms interviewed.

But Birmingham's Wragge & Co and Pinsents have been working closely with US national firms like Chicago's Kirkland & Ellis, while Edge & Ellison maintains its long-standing relationship with Pittsburgh-based Buchanan Ingersoll.

This is not to downplay the merit of such a strategy. Addleshaw Booth & Co's senior partner Mark Jones argues that the legal profession is waiting for a transatlantic merger and says that “that would be more significant than the accountants”.

Pinsents is one firm that is taking up the continental challenge. Tonks says the Brussels office is essential to its UK business and there has been talk of it acting as a springboard into Europe.

And Hammond Suddards would like to go one step further. According to senior partner John Heller, the firm is exploring the possibility of merging with a German or a French practice.

The fact that firms such as Linklaters, Freshfields and Allen & Overy are doing mergers and alliances in Europe is opening the doors of many continental practices to the initiatives of second-tier firms.

“It makes the German and French firms sit up and realise that they have to do deals,” says Heller.

“The aim has got to be a branded merger and we would offer a genuine partnership.”

Eversheds, aside from trying to merge its, so far, independent offices nationally, is following a similar continental route.

The London office is currently in talks to take over Frere Cholmeley Bischoff complete with its Paris and Monaco offices and associated offices in Rome, Milan and Moscow. It also wants a German presence.

But some firms in the field have not taken up Brown's way of thinking.

Birmingham's Wragge & Co plans to dominate both the provision of all-round legal services on its local turf and to compete nationally in a small number of industry sectors, often arising out of the concentration of that particular industry in the Midlands.

Over the year it has expanded its structured energy practice and the firm's private finance initiative team has attracted some big name clients. This has boosted the firm's confidence in its long-term strategy.

“Size isn't everything,” says Wragge & Co senior partner John Crabtree, who feels there is more growth potential in the regional legal market.

And he rules out opening both a London office and finding a replacement for the Norton Rose M5 alliance that officially ends this August.

“We are a one-site firm,” managing partner Quentin Poole stresses time and again.

Addleshaws' Jones also sees little value in a London office. The firm is still consolidating after the merger of its two component parts – Addleshaw Sons & Latham of Manchester with Leeds' Booth & Co – and he thinks it has achieved a critical mass that is attracting a level of work previously unheard of at the firm.

“We are being approached by clients without targeting them,” he says.

But these firms are potential merger targets. Without a London office, regional practices are more likely to be attractive candidates for leading London practices because integration would be less painful.

Despite this, Wragge & Co's Crabtree dismisses the possibility: “I can't imagine any gain to be made by talking to another firm.”

Last year Wragge & Co focused approach brought praise from Hodgart Temporal, but times – and the plans of the accountants – are changing.

So firms are considering their options. Brown's list is not a blueprint for success, but an indication that far-sighted strategies may be needed if we are to see the same names in The Lawyer top 20 next year.