Law firms concerned that M&A slowdown will hit profitability

According to the ninth annual research survey by the firm, nearly a quarter (24 per cent) of the finance directors (FDs) of the UK’s top 100 law firms fear that weakness in M&A work is now a major risk to profitability, up from eight per cent last year.

The survey results reflect a trend seen elsewhere by Thomson Reuters. Global M&A activity was 18 per cent lower in the first quarter of 2016 than in the same period the prior year*.

Headwinds caused by Brexit may now further dent business confidence already hit by the continued oil price slump and on-going concerns over the slowing economy in China.

The UK IPO market has also seen a slowdown in activity, with the number of IPOs on the London Stock Exchange falling from 137 in 2014 to 92 in 2015, according to PwC.

Thomson Reuters points out that a decline in M&A activity is particularly significant for law firm revenues as this work tends to feed instructions in other areas such as employment, competition and tax.

“The buoyancy in M&A transaction volumes last year was a key driver of profitability for law firms, but further growth was in question even before the Brexit vote and will be even more so now,” said Samantha Steer, director, large law segment for Thomson Reuters UK&I Legal business.

She added: “M&A transactions are a vital source of work for law firms, both in themselves and because they generate a significant amount of workflow across a range of other practice areas. If fears that corporate finance activity is weakening are realised that could rattle the sector.”

Law firm FDs predict that technology will be one of the fastest-growing sectors in 2016, with 28 per cent of respondents foreseeing a rapid growth in work from this sector.

“The technology industry in particular has seen massive investment in recent years which has propelled growth in the UK and we expect this trend to continue into the long-term.

“London-based fintech start-ups have seen high levels of private equity investment flooding in which has helped to stimulate corporate activity whilst also cementing the city’s position as a leading fintech hub,” Steer added.

A sharp jump in demand for regulatory and compliance work is also expected this year, with 48 per cent anticipating fast growth – compared to 28 per cent last year and 18 per cent in 2010.

The study found that downward pressure on fees remains the biggest threat to the profitability of law firms, as it has since the recession, with around three quarters (72 per cent) seeing this as high risk – up from 60 per cent in 2010.

Cost overruns on fixed fee work is the next biggest concern, with 40 per cent citing this as a high risk to profitability.

“Although firms have become much better at pricing their quotes for work on a fixed fee, finance departments are still wary about potential cost over-runs,” Ms Steer said.

However, concerns about late payments by clients has receded markedly since the recession as law firms get tougher about chasing payments. Now, only 12 per cent of FDs rate this as a high risk to profitability, down from 27 per cent in 2010.

The survey, entitled Threats to Profitability and Opportunities for Growth: A Survey Amongst the UK’s Top 100 Law Firms, is carried out annually by Thomson Reuters to determine issues facing the industry and to provide valuable insight into law firms’ outlooks and strategies. Research is conducted amongst Finance Directors at 25 of the UK’s Top 100 law firms including Magic Circle and Silver Circle firms.