Law Firm Mergers: Competition Over Consolidation
Yesterday Norton Rose announced it was merging with Fulbright & Jaworski.
A. The Norton Rose Playbook.
Norton Rose established a beachhead in North America in 2010 when it acquired Ogilvy Renault and enhanced its presence last year when MacLeod Dixon was folded in. Fulbright is a great firm, strong in energy among other areas. And it apparently held out for naming rights as the new firm will be known as Norton Rose Fulbright after closing, slated for June, 2013.
Norton Rose’s focus on key industries (such as mining, transport and energy) shows they have a strategy, and combining with key firms in major global markets is an important tactic. Contrary to what you read at times, a merger per se isn’t strategic. It only becomes more than a tactic when the merger is closed, and the people are integrated, and operations, revenues and margins are improved. Very few companies in any markets make mergers work (accretive to earnings after all investments).
(A short note on energy. When I worked on energy projects in North America, many were nine- figure deals, and some approached the “big 10.” While energy clients need clear budgets on legal fees, they will be higher when you are investing hundreds of millions in plants or pipelines, and navigating a maze of regulatory, financing and environmental issues).
B. True Consolidation.
So does Norton Rose joining with Fulbright & Jaworski herald a new phase of “consolidation” among large law firms? I vote “no.”
Typically, when an industry experiences consolidation there is growth in their key market and some better competitors are looking to add capacity and operate it more efficiently. Less successful players see consolidation as a way to cash out. Think of steel in 2006 (when Mittal purchased Arcelor) or personal computers in 2001 (HP buys Compaq). The targets in these cases may have been good companies, but the acquirors thought they could do better.
I see what Norton Rose is doing as slightly different. They are combining with excellent firms in their own right, but firms that look out 3, 5 or 10 years and see a much different legal landscape. In the energy practice area, they see growth, and perceive the ability to be a top three player in major energy centers as a competitive advantage.
When we shift from global energy to general corporate legal services, there are different signs on the horizon. Things like stagnant growth, excess capacity, and declining margins. Those sorts of market signals do not attract capital, be it financial, human, or otherwise. So there may be some managing partners of major global law firms who would like to “do a Norton Rose,” but there are precious few practice areas that (a) command premium fees and (b) aren’t well covered by other major firms already.
Norton Rose is about seven moves into a legal chess match; many other firms are still dusting off the board and trying to find a few stray game pieces.
C. Other Mergers Coming?
This doesn’t mean that some firms may not merge, and have a decent go of it. But I see Norton Rose joining with Fulbright & Jaworski as a sign of good competitors getting better. The law firm “consolidation” era has come and gone. The press releases of five-plus years ago that would announce two large U.S. firms combining to offer clients a better “platform” seem almost quaint upon reflection. (Ron Friedmann raises some excellent questions about mergers from the client perspective here.)
(Update: Since I posted this, Jordan Furlong has some great perspectives from Canada about what Norton Rose Fulbright means for mergers near and far. Clearly firms need a resilient strategy before they combine.)
D. Disruption Before Dawn?
Rather than consolidation, we are entering a disruption era in corporate legal services. While that’s a different issue for another day, it will exert more force on the competition for clients than law firm mergers. Norton Rose is disrupting through key mergers; the new service providers (LPOS and their ilk) are attracting client spending that formerly went to large law firms without a thought.
I think there will ultimately be more restructurings than mergers for the 500 largest law firms, worldwide. Some may start out as mergers and restructure years later when they realize the merger was more reactive than strategic.
And many law firms will learn what their clients have know for years: you have to work on the front line before you can relocate the back office.
(Update: A seriously trenchant assessment on the impact of the Norton Rose/Fulbright merger from Jordan Furlong has been posted by the Canadian Bar Association’s National publication. It is embedded below, and is an example of saying more in two minutes than some say in two days. I call that value.)