A View from the US

Hardly a week goes by in New York city without another mid-size firm merger rumour. Roughly 80 per cent of the city’s 35 mid-size firms have been engaged in active merger discussions in the past 18 months. Firms in the 50 to 150 lawyer range are disappearing from the local landscape as more and more merge, dissolve or lose groups of lawyers to more powerful rivals. They can no longer rely on being full-service practices because they face intense competition in an increasingly international market.

One pressure is the growth of the branch offices established by non-New York firms. Five years ago, there were approximately 12 branch offices in New York. Today that figure has risen to 30, and about a dozen boast 150 lawyers or more. Morgan Lewis & Bockius is the largest with more than 250 attorneys. Others include O’Melveny & Myers, Latham & Watkins and Jones Day Reavis & Pogue.

These offices are formidable competitors for business, and their growth has been at the expense of the mid-size New York practices.

Ten years ago the legal market was adjusting to the rapid growth spurt of the late 1980s. Then the recession hit and there were lay-offs throughout the market. Firms of all sizes significantly reduced the number of first-year associate hires and larger firms either reduced or eliminated professional development and training programmes for associates.

These factors contributed to a shortage of talent in the mid-1990s.When the economy took off, lawyers with three to four years’ experience were scarce and the larger firms began cherry-picking talented lawyers. This hampered the abilities of the mid-size firms to grow and they have been treading water in the past few years, finding it necessary to dramatically increase hiring efforts just to maintain overall firm size. By comparison, big firms and branch offices have expanded and increased practice depth that many mid-size practices cannot match.

Further pressure has come from the salary explosion that has hit New York via Silicon Valley. Three years ago, mid-size firms could afford to match standard first-year salaries at the big firms – between $85,000 (£53,260) and $90,000 (£56,390). But big firms are now offering $125,000 (£78,320) and up to first years and the mid-size firms just cannot afford these rates. A number of them have decided not to recruit first-year associates because they cannot increase billing rates at the same increment or generate profit as quickly on the new talent, much less afford to spend time training them.

Those that have tried to follow the salary explosion are paying first years up to $115,000 (£72,060). But as salary rates rise they must require associates to bill more hours, jeopardising what has been one of the mid-size firms’ key selling points – quality of life. These firms have been pressed to grow in order to meet client needs in a global economy or have missed opportunities to take advantage of long-standing relationships with the major investment banks because they do not have the depth to handle large transactions.

The booming economy has been generous to the legal profession, and many mid-size firms have enjoyed bumper years because they are picking up fall-off work from the big firms, which are simply overloaded. But no one expects what is already one of the longest bull markets to last forever, and many firms are thinking about building counter-cyclical practices to be ready for the downturn – if and when the downturn hits, the big firms will hold on to much of the work mid-size firms are currently handling.

In the end, the escalation of the war for talent, the ability to service existing client needs and the looming fear of economic instability, is driving more and more mid-size firms to link-up with a national player or like-minded rivals.

Many mid-size firms enjoy healthy profits per partner in the range of $400,000 (£250,650) to $600,000 (£375,950) and they are now taking pre-emptive action by looking to merge, either with each other or, more likely, with out-of-town firms looking to enter New York or expand existing capabilities. To the 20 per cent of the mid-size market not exploring this option, the message is clear – either merge or face an unhappy future.

Amanda Yanuklis is a consultant at Hildebrandt International in New Jersey.