Legal firms aim to combat the crunch

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By Ian Fraser

Published: Scottish Business Insider

Date: 1 May 2008

edinburgh-castleWith 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 have done since the onset of the credit crunch last August – the firms appear 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 is about to do so. They are also fearful that post-April 5 2008 – the government’s deadline for lower levels of capital gains tax – an artificial tax-driven spike in M&A activity will have slowed considerably.

Derek Ellery, managing partner of Biggart Baillie, says his firm has not yet felt the effects of the credit crunch but concedes that 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 than most 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 takeover.

A third issue is that public/private partnerships — a highly profitable strand for law firms in recent years — are slowing down, partly due to the lack of enthusiasm for this funding mechanism from the nationalist government.

Law firms whose focus is on serving clients in sectors that are vulnerable to the liquidity squeeze – mass-market mortgage and remortgage processing for the banks, the house-building industry, commercial property and corporate finance – are expected to feel the most pain. Firms whose primary focus is large-scale mergers and acquisitions could also see turnover fall in the current year. Charles Barnett, a partner in accountancy firm PKF 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. 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 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 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 Ellery. As vulnerable sectors of the economy dry up, this enables a firm to refocus on other disciplines and sectors in order 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 see 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, law 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. Some firms that currently lack English outposts – like Semple Fraser and Biggart Baillie – are either planning to open in London or 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.”

McGrigors – with the largest London office of any Scottish firm – is perhaps being the most ambitious in terms of English growth.

Richard Masters – who in March 2008 took over as McGrigors managing partner – says the London office already accounts for 35 per cent of McGrigors £60.5m turnover and 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 shows it is serious about transforming 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 focused on the Scottish market will be 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 any 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 more upscale, 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.

However a more important issue for the 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, the likes of which which were swept away from stockbroking and investment banking in 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 should ‘Tesco Law’ be allowed. Larger corporate firms argue that without a level playing field with England and Wales – where the market is due to deregulate in 2011 – they will have to move their headquarters south.

Murphy does not believe the outcome will be particularly positive. He says: “I don’t think the Law Society is looking after the interests of corporate firms in Scotland. They are 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 legislative process.” However other leaders of the largest Scottish 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.

This article was first published in Scottish Business Insider’s May 2008 issue. To view it on Insider’s website click here.

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