Legal firms aim to combat the crunch
COMMERCIAL LAW REVIEW: With the credit crisis putting the brakes on growth, Ian Fraser discovers that the legal sector is still finding ways to consolidate and expand
At times when the Scottish legal services market is buoyant, there is just about enough work to go round for the country’s 100,000 lawyers.
However when markets slow — as some markets have done since the onset of the credit crunch in August 2007 — law firms seem to think their best response is to target growth outside Scotland, at the same time as enhancing their domestic operations through lateral hires and small bolt-on acquisitions.
Most lawyers concede that the credit crunch is either already reining in deal-making and other forms of commercial activity, or else is about to do so. They are also fearful that, post-April 5 2008 — the UK government’s deadline for the introduction for levels of capital gains tax which, overall, will be lower — an artificial tax-driven spike in M&A activity will considerably slow.
Derek Ellery, managing partner of Biggart Baillie, says his firm has not yet felt the effects of the credit crunch but concedes this could come. “That is clearly something that will have an effect on the economy for a period. Clients will be putting things on hold and I think that the property market has been the first to be affected. It’s the result of banks being less bullish than before. We will all feel the effects.”
Patrick Andrews, Shepherd & Wedderburn’s managing partner, is more sanguine about the effects of the credit crunch. “A lot of investors are cash rich. In commercial property, some have sold out and are now looking to reinvest. On the corporate side, our London office had a busier January in 2007. Levels of activity across all our offices remain buoyant with Aberdeen going like a train.”
Another factor that could put the brakes on growth for Scotland’s law firms is that the nation’s quoted company base is shrinking — last year ScottishPower, Scottish & Newcastle and Abbot Group all succumbed to overseas takeovers.
A third issue is that the pipeline of new public/private partnerships — a highly profitable strand for law firms in recent years — is narrowing, partly due to the lack of enthusiasm for this funding mechanism from the nationalist government of first minister Alex Salmond.
Law firms whose focus is on serving clients in sectors that are vulnerable to the current liquidity squeeze — mass-market mortgage and remortgage processing for the banks, the housebuilding industry, commercial property and corporate finance — are expected to feel the most pain. Arguably, firms whose primary focus is large-scale mergers and acquisitions could see a big drop in turnover in the current financial year.
Charles Barnett, a partner in accountancy firm PKF, seems less blinkered than most lawyers about what could be in store. He says: “There’s a massive slowdown in mortgages and remortgaging and that’s clearly going to affect firms that focus on that area. Pretty soon, some of those firms will have to make redundancies.”
He adds: “The credit crunch is real. This is definitely the worst period since 2000 and there’s more bad news to come. In this climate weaker law firms will be prepared to sacrifice their independence and merge with stronger players.”
Alan Thomson, managing partner of law firm McClure Naismith, agrees that further consolidation is on the way. Indeed, he points out that it has already started with several small and medium-sized law firms seeking “a safe haven.”
He mentions recent deals involving Glasgow firms Kidstons — which merged with Lindsays — and Kerr & Co — which merged with Anderson Strathern. In a similar vein, MacRoberts recently lured four property partners and nine others from Glasgow-based Miller Samuel and Lindsays acquired Jedburgh-based firm Turnbull Simpson & Sturrock.
“The pressure is more likely to be felt by the four to six partner firms,” says Thomson.
Alister Fraser, managing partner of Semple Fraser, expects consolidation in legal services to intensify. “There is no reason to suppose that the trend towards consolidation will abate. Additionally, the fact that the Legal Services Act 2007 has been passed in England may provoke a bout of consolidation there and some of that may involve cross-border activity.”
Generalist firms that cover a broad range of disciplines are expected to be more resilient than smaller and specialist firms. “A balanced portfolio is a good thing to have right now,” says Biggart Baillie’s Ellery. As vulnerable sectors of the economy dry up, generalist firms are able to refocus on more bouyant disciplines and sectors to pick up some slack.
Lawyers say their primary growth areas at the moment include restructuring, dispute resolution and litigation – which is not surprising given the uncertain economic climate. Robert Carr, chairman of Anderson Strathern, says: “We position ourselves as a full-service law firm, and as part of that our offering includes dispute resolution, corporate restructuring and refinancing, wealth management and wealth protection. A slump is unlikely in these areas.”
Other firms have picked public sector work as a key growth area and have been ramping up their capability accordingly. Dundas & Wilson last year hired Colin Boyd QC to head up its public law practice, an appointment that insiders say is “already producing results”.
Andrews believes that, in the event of a Scottish market slowdown, firms are well placed to benefit from the growing demand for legal services from the rest of the UK and overseas. “I believe that we and others are well placed to capitalise on that,” he says.
Firms with London operations are almost universally focusing their efforts on building these up.
However those without English outposts — such as Semple Fraser and Biggart Baillie — are either planning to open in London or are giving serious thought to offices elsewhere in England. Last but not least, the bulk of the country’s ‘stay at home’ firms are targeting non-Scottish clients from their existing Edinburgh and Glasgow strongholds.
Ellery says: “The Scottish legal market is very mature and well provided for so it should come as no surprise that firms such as ourselves are looking to do more work outside Scotland.”
Wth the largest London office of any Scottish firm, McGrigors is perhaps the most ambitious in terms of English growth.
Richard Masters, who in March 2008 took over as McGrigors managing partner, says the firm’s London office already accounts for 35 per cent of McGrigors £60.5m turnover and he says he wants to grow this to at least 50 per cent. “We believe growth opportunities are most likely to be found in London.”
The firm’s recently opened Manchester office is evidence McGrigor’s has serious aspirations to transform itself into a genuine ‘UK’ firm. Masters says: “We have moved well beyond our Scottish roots and now have a truly national firm.”
However, Michael Murphy, managing partner at MacRoberts, says focusing too heavily on London could be disastrous for some Scottish firms, depending on the severity of the economic downturn.
“As the London market slows down I suspect it’ll become more difficult for them to find work down there,” he says. “They have failed to make the impact they wanted on the London market and are far less well recognised brands than players such as SJ Berwin and Ashurst.”
Murphy believes that firms that have chosen to remain focused on the Scottish market are going to prove less vulnerable to the vicissitudes of the liquidity squeeze, because the Scottish market does not tend to experience the same highs and lows as the Metropolis.
However Alan Campbell, joint managing partner of Dundas & Wilson, disputes such notions. “We take comfort from the diversification our London presence allows us, so we disagree with any suggestion that Scotland is immune.” He says his firm’s annual turnover for the year to April 30 2008 has increased to more than £70m.
Magnus Swanson, chief executive of Maclay Murray & Spens says: “Our London office gives us a bridgehead to possibly the biggest and most exciting legal marketplace in the world.”
Another major trend that has marked recent years has been law firms’ tendency to quit older premises and move into swankier offices, often with rentals in the £25 to £30 per sq ft bracket.
In Edinburgh, Shepherd & Wedderburn is moving into 57,000 sq ft at Exchange Crescent, while Maclay Murray & Spens has rented 48,000 sq ft at Quartermile. Other firms moving include Biggart Baillie to Lochrin Square and Brodies to Clydesdale Bank Plaza.
In Glasgow, Semple Fraser is moving to 123 St Vincent Street this July, and more firms are expecting to move their Glasgow operations in 2009-10.
A more important issue for the legal profession in Scotland is deregulation. This is going to happen in England and the profession now has little choice other than to scrap some of the restrictive practices which were swept away from the City of London in 1986. This has led to some pleading from different ends of the profession.
High street solicitors claim their days will be numbered if ‘Tesco Law’ is allowed. Larger corporate firms argue that without a level playing field with England and Wales — where the market is due to be deregulated in 2011 — they will have to move their headquarters south.
Murphy doesn’t believe the outcome will be particularly positive. He says: “I don’t think the Law Society of Scotland is looking after the interests of corporate firms in Scotland. They’re far too focused on looking after the small, high-street lawyers. There’s an irreconcilable difference between the major firms and the high-street lawyers. And the Law Society just doesn’t seem capable of squaring that circle.”
Fraser is equally sceptical. He says: “It remains to be seen whether the Law Society will pronounce on this profoundly difficult issue in a manner which enlightens and advances the legislation process.”
However other leaders of large firms are more confident that a positive outcome will be reached.
“I am comfortable that, from a slow start, both the Scottish Government and the Law Society have grasped the nettle,” says Campbell. “They now accept the need for change and have injected real momentum to the debate. This is a sensitive period with a general meeting of the Law Society scheduled for May this year. There are — as you would expect — many conflicting views being expressed both publicly and privately.
“But there is consensus on one point: all participants are seeking to sustain the professional values associated with the solicitor profession within a 21st century framework.”
Ian Fraser is a financial journalist.
‘Levels of activity across all our offices remain buoyant’ — Patrick Andrews, Shepherd & Wedderburn
‘The credit crunch is real – in this climate weaker law firms will be prepared to sacrifice their independence and merge with stronger players’ — Charles Barnett, PKF (Above top)
‘The Scottish legal market is very mature and well provided for’ — Derek Ellery, Biggart Baillie
The fee league: top earners ranked by fee income
Rank fee income (£m) latest year/prev year
1 Dundas & Wilson 60.8/53.02
2 McGrigors 60.5*/51.1
3 Maclay Murray & Spens 55.1*/48.7
4 Shepherd & Wedderburn 40.23*/34.83
5 Dickson Minto 31.1*/29
6 Brodies 30*/20.94
7 Tods Murray 22.6#/23.4
8 Burness 22.5#/18.2
9 Biggart Baillie 20.5#/18.5
10 Anderson Strathern 18.6*/15.5
11 Turcan Connell 18*/n/d
12 Thorntons 16*/13.41
13 McClure Naismith>15#/>14
14 Semple Fraser 15#/12.88
15 Harper Macleod 14#/12
16 Morton Fraser 13.56*/12.14
17 Lindsays 10.5*/9
18 Pinsent Masons 9-11#/7.5-10
19 Gillespie Macandrew 10#/9.24
20 Ledingham Chalmers 9#/7.5
21 Stronachs 8#/7
22 Morisons 6.5*/6
23 Wright Johnston & Mackenzie 5.87*/5.2
24 Bell & Scott 4.61*/3.98
25 Davidson Chalmers 2.5-3.5#/2-3
Notes: *2007 year end figures used. # 2008 figures used (including some projections). Other firms declined to participate or the fee income was less than £2m.
This article was published in Scottish Business Insider on 30 April 2008 . Read on Scottish Business Insider (insider.co.uk)
Note added 2 March 2026 – Scottish law firms’ loss of independence
Only four of the top ten Scottish law firms covered in the April 2008 article have remained independent.
Dundas & Wilson – merged with CMS Cameron McKenna in May 2014
McGrigors – merged with Pinsent Masons in May 2012
Maclay Murray & Spens – merged with Dentons October 2017
Shepherd & Wedderburn – remains independent
Dickson Minto – private equity practice acquired by US firm Millbank in December 2022
Brodies – remains independent
Tods Murray – acquired out of admin by Shepherd & Wedderburn in October 2014
Burness – remains independent
Biggart Baillie – merged with DWF in July 2012
Anderson Strathern – remains independent