With Blake Lapthorn, Morgan Cole and Boyes Turner looking to pulloff a three-way merger, Joanne Harris looks at the numbers behind the deal.
In the history of the legal market, tripartite mergers are rare. While the June 2011 merger between legacy Norton Rose, Deneys Reitz and Ogilvy Renault has largely been seen as a success, the jury is still out on the April 2013 tie-up between Fraser Milner Casgrain, Salans and SNR Denton.
While the dust is still settling on that particular ‘polycentric’ monster, along comes news of another three-way merger talk. This time, the firms concerned might be smaller, but the challenges of integrating practices across several offices remain if Blake Lapthorn, Boyes Turner and Morgan Cole come to an agreement in their current discussions.
The most obvious synergy between the UK trio is geography. All three are in the south of the UK. Blake Lapthorn and Morgan Cole both have offices in London and Oxford; Morgan Cole and Boyes Turner are both in Reading. If the merger goes ahead, the question marks will hang over Blake Lapthorn’s South Coast offices and Morgan Cole’s Cardiff and Swansea bases.
Financially, the trio are not too dissimilar. Although Boyes Turner is the smallest firm by turnover at £14.7m in 2012/13, it is the most profitable with net profit of £3.1m – a margin of 21.3 per cent. In comparison, Morgan Cole’s profit margin was just 13 per cent last year and Blake Lapthorn’s 17.3 per cent, on turnovers of £33.7m and £45.6m respectively. Morgan Cole’s low margin, which managing partner Elizabeth Carr attributed to “an issue in our premises portfolio”, brings the average profit margin of the three down to 16.4 per cent.
Boyes Turner boasted the highest average profit per equity partner (PEP) of the three last year, at £205,000. Again, Morgan Cole’s PEP was the lowest, at £162,000, with Blake Lapthorn’s in the middle at £180,000.
Boyes Turner also has the highest proportion of equity partners – 15 out of its total partnership of 22 – and the lowest leverage of the three firms, employing 3.5 lawyers for every equity partner. Morgan Cole’s leverage is the highest, at one equity partner for every 5.3 associates, and its equity represents just over 50 per cent of its 51-strong partnership.
Blake Lapthorn holds its equity most tightly. Only 49 per cent of its partners are in the equity. But the firm has a lower leverage than Morgan Cole, with 4.6 associates for every equity partner.
Commentators often point to the cost of premises as an issue for law firms, and certainly building costs were a factor in several recent mergers and law firms running into financial difficulties. Last year Boyes Turner invested heavily in expanded space, increasing its square footage by 40 per cent. Rent rose by 7 per cent, but nevertheless the firm is paying around £5 more per square foot than its putative merger partners.
Sources suggest that should the merger go ahead, Morgan Cole – which has fewer people in Reading than Boyes Turner – ought to shift into the smaller firm’s office there.
Debt has been another issue for firms in the past, and has caused the end of a number of merger discussions. Here Morgan Cole has the best position, with only £1.1m of net debt reported for the UK 200 this year.
Blake Lapthorn reported £8.3m of debt, while Boyes Turner’s first-ever set of LLP accounts showed bank loans and overdrafts of £6.2m for the 18 months to 31 March 2013. Pro rata, that equates to about £4.1m for a 12-month period – roughly equal to the amount paid out to all partners in remuneration for the year.
The discrepancies in model, culture and geographical location are among the obstacles which the three firms must sort if they proceed to a merger. In November Blake Lapthorn and Morgan Cole both said the talks were in early stages, and they could still go the way of Kennedys and Simpson & Marwick and fall through. In the increasingly volatile legal market, nothing is certain.