Uptick in recent UK legal sector M&A likely to continue - report

There has been a recent increase in merger and acquisition (M&A) activity in the UK legal sector, and with continued cost pressures and economic uncertainty, the trend looks set to continue.

That's according to a new report from accounting and advisory firm Saffery, which found there had been a 60% uptick in transactions the year to June 30, 2023 - to 69 this year - compared to 43 deals in the year to end-June, 2022.

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M&A can bring benefits like improving economies of scale and the study also showed that despite the levels of recent activity, 92.9% of UK law firms still have less than 20 employees, underscoring the prevalence of small firms and showing how fragmented the sector remains.

The period under review has seen a number of pressures for law firms, including uncertainty following the pandemic and ongoing inflation.

M&A is now either a strategic priority or a necessity to maintain earnings and continue to develop services and expertise, the report showed.

"Private equity interest in professional services looks to be increasing, while interestingly, but perhaps not surprisingly, the majority of acquisitions are of smaller firms with 20 or less employees," noted Jamie Lane, partner at Saffery, which has offices in Bournemouth, London and High Wycombe.

"Cost pressures, particularly professional indemnity (PI) insurance renewals, are becoming increasingly painful and therefore merging with another firm is helping to mitigate the impact on profits," he added.

Professional services firm Saffery is also seeing mid-size law firms looking to acquire smaller counterparts and smaller firms looking to merge with larger equivalents.

Sheryl Davis, partner at Saffery, said that this trend "will likely increase activity, especially with the potential for further PI insurance pricing challenges".

"Succession, and lack of planning for this, is another driver for merger activity, and we may be seeing a generational shift in attitudes to risk.

"Plus with a continual change in economic conditions across the UK and globally, we may see further consolidation in the market," she added.

UK legal firms have broadly adopted two strategies to counter industry-wide challenges, according to the report.

The first is to invest in IT solutions to make use of AI and smart contracts to minimise the risk of human error and drive efficiency gains

Second have been these extensive M&A initiatives by companies to broaden service offerings and benefit from economies of scale.

Notably, transaction numbers have been buoyed by significant acquisition sprees by both Gately (Holdings) plc and Knights Group Holdings plc since their IPOs in 2015 and 2018 respectively, found the report.

In addition, average share prices in the UK legal sector decreased 35.9% over the 24 months to end June this year, compared to the FTSE AIM all-share index, which decreased 14.3% over the same period.

The full Saffery report can be read HERE.

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