Some 95 per cent of major law firm leaders in the United Kingdom anticipate that their firms will undertake a merger in the relatively near future, according to a report by legal communications specialists Byfield Consultancy and the law firm of Fox Williams.  In addition, the report, based on a survey of more than half of Britain’s top 200 law firms, concludes that the majority of firm managing partners believes that some 45 per cent of firms that have not yet done so will enter merger discussions within the next two years. 

Why should American firms care about the British merger scene?  After all, there is plenty of merger activity in the US as well, and no sign of a slowdown, with nearly 100 combinations announced or completed in 2014 and, as of this writing, 19 mergers announced this year, according to Altman Weil’s MergerLine compilation of media reports.  Texas, California, Florida and, lately, Chicago, have been hot markets for expansion through merger, so why look overseas? 

The significance of the Byfield/Fox Williams report is that it confirms and highlights a trend of consolidation among UK firms at the higher end of the food chain.  The merger activity anticipated by the respondents to the survey is not about mom-and-pop practices on the High Street, but rather about substantial law firms.  This in turn means that US firms seeking merger partners in Britain will be looking at bigger and bigger targets.

And let’s be very clear:  US firms are ramping up in London and, in some cases, looking farther afield in the UK, in places like Manchester, Bristol, Cambridge and Aberdeen.  

There are two reasons to anticipate that US law firms will be stepping up the search for merger opportunities in the United Kingdom.  The first is that US firms, in jostling for market share in London, will need to grow a lot faster than they have been able to do organically and through lateral acquisitions.  The second is that we have entered the age of mega-firming  --  the trend toward building global brands through strategic amalgamations on multiple continents.  In both cases, UK firms are in the cross-hairs of their colleagues across the Atlantic.   

The logic of being present in the UK, primarily London, continues to be compelling for many US firms, especially now that many of the top firms have seen several years of good growth and profitability since the latest recession.  Whether seen as a bridgehead to the rest of the world, as an essential financial centre, as the world’s insurance capital, or as a key dispute resolution hub, London has been viewed by American firms for decades as the indispensable foreign location.  

There are more than one-hundred American law firms with some physical presence in London, and new entrants, such as the Silicon Valley law firm Cooley, keep arriving.  A few dozen of these firms have done extremely well, many more have muddled along, and a good number have, well, just stagnated, or worse.  

But whatever the track record of the American firms, there is a growing recognition among many of them that size matters, and that, with the exception of highly specialised practices in profitable niche areas, having fifteen, twenty or even fifty lawyers in a vibrant legal market such as London just will not cut it.   It doesn’t cut it in New York, Los Angeles or Washington, and it certainly doesn’t in London.

The concept of critical mass is pretty amorphous  --  as the old American television advert for dried prunes had it:  “Is three enough?  Is six too many?”  Rather than grapple with the metaphysics of critical mass, US firms are increasingly focussing on transformational growth in the UK market, which means merger with a UK firm, rather than piecemeal growth through the addition of laterals.  Mergers, if properly executed, are the quickest means to adding revenue, manpower, complementary skill sets and of course visibility in the market.  And so a significant number of US firms, some with a long-standing presence in London, are reconsidering their strategy, with a view toward merger.  

Mega-firming has been with us for a while in the form of some of the large trans-Atlantic mergers, such as Hogan Lovells, Dechert (with its acquisition of Titmus Sainer), K&L Gates (Nicholson Graham & Jones) and Reed Smith (Richard Butler and Warner Cranston), followed by multi-continental tie-ups such as DLA, Norton Rose Fulbright and King & Wood Mallesons.   It was most recently taken up a notch with the Dentons/Dacheng combination.  

For most observers, Dentons/Dacheng has been a real headscratcher.  Dentons itself had just barely completed cobbling together into a kind of loose amalgamation three disparate Western firms, some of which were already hybrids operating under a variety of structures:  what did they hope to accomplish by throwing this somewhat obscure Chinese firm into the mix?  After all, Dacheng on a close look barely resembles the Western law firm partnership model:  it’s more of a cost-sharing arrangement among several thousand relatively low-earning lawyers in locations throughout China operating under the Dacheng brand.  

The answer of course is branding. With this deal, Dentons achieved the ability to put itself forward as a global player on many continents with an enormous cadre of professionals available to serve a colossal range of clients.  And with that, it has set the bar a good deal higher, especially for mid-tier firms looking to break out of the pack.  For US firms seeking to emulate, and perhaps improve upon, the Dentons/Dacheng mega-firming approach, the first step in their strategy will be a tie-up in the UK.

Whether to gain UK market share or to position themselves as global players, US firms are paying close attention to potential merger candidates in the UK. The Byfield/Fox Williams report will undoubtedly inspire even more scrutiny. 

Robert Bata is Founder and Principal of international law firm consultancy WarwickPlace Legal.