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Law360 (March 30, 2020, 2:48 PM EDT ) After two record years for U.S. law firm combinations, deal-making has come to a screeching halt this spring as the nation grapples with a pandemic, in what could be the first time in four years the industry will see a decline in deals.
Law firm mergers have come to a halt during the coronavirus pandemic and it's unclear when they might pick up again.
"Right now there's no doubt that it's a full stop in terms of mergers and acquisitions," Altman Weil principal Tom Clay said. "Nobody wants to travel, nobody wants to gather for [merger] negotiations — all of the things you need to do face-to-face."
Law firms are putting their long-term strategic goals on hold as they respond to short-term needs, Clay added. Law firm attorneys and staff have shifted to working remotely, some with children at home, and the economy is shuddering due to widespread social distancing efforts that have shut down businesses in order to slow the spread of the virus.
"Many will be slow to get back to pursuing their strategy, either to be the acquirer or acquiree," Clay said. "I would be stunned if we came close to what we did the last couple of years" in terms of overall law firm combinations, he added.
In a merger transaction, the personal aspects, such as how well people get along, are as important as the business case, making remote negotiations an unlikely method of inking a deal, according to law firm consultant William Johnston of W. Johnston Associates.
"There's really no way to bridge the personal aspect without spending time together," he said. "In a normal downturn, transactions can continue because people can meet. In today's environment, meeting in person is largely out of the question, so there is no real way to get past the personal hurdle."
There were 31 law firm combinations during the first quarter of 2018, and 27 during the first quarter of 2019, according to data from Altman Weil. Its preliminary data, which has not yet been updated through the end of the quarter, shows there have been 17 deals in 2020.
Of those, 11 were in January, after which the number of combinations began to drop off steeply, falling to five in February and one so far in March.
A large combination between Troutman Sanders and Pepper Hamilton was announced in January, but the firms have since revealed that deal is being put on hold until summer while the firms respond to the pandemic.
All of the combinations announced in February and onward have been small — none of the acquisition targets exceeded six attorneys in size.
David Barnard, founding partner of professional services consulting firm Blaqwell, said that even as the current crisis begins to subside, law firms will likely be reevaluating their priorities and revisiting their strategies, which could mean calling off a merger that was previously being considered.
"It will be extraordinarily hard in this environment of uncertainty to persuade the partners of any law firm to vote for radical change. They're just going to be extremely cautious," Barnard said.
At the same time, the economic disruption that the entire nation is experiencing could lead to longer-term consolidation in the industry as weaker firms are acquired by stronger firms, said John Remsen of The Remsen Group.
Some law firms have transitioned to working remotely seamlessly, while others have been "flat footed" due to a lack of technology. Those firms, along with those that were in a vulnerable financial position before the economic downturn, are at risk of dissolution, Remsen said.
"It's part of the evolution of the profession here as we see more consolidation. That's a long-term trend and this might be accelerating it as weaker firms are dissolving faster than they might otherwise have," he said.
Kent Zimmermann, a law firm merger consultant with the Zeughauser Group, said he is seeing some law firms proceeding with deals that are "relatively far down the tracks," other firms that have just started exploring deals putting their activity on hold, and still others showing a new interest in feeling out their options as the economy enters an unknown period of potential decline.
"There's some added urgency in the downturn because there's concern that if firms don't come through the downturn stronger, afterward their options will be fewer," Zimmermann said.
And then there are law firms that worry they may not come out the other side at all, he said.
"We would predict that there may be some implosions this year, particularly firms that are under a heavy debt load and have other obligations," he said. "And particularly firms that are under-sized relative to their competitors for talent, and are exposed to their stars potentially leaving to go to platforms they perceive as stronger and safer."
--Editing by Rebecca Flanagan and Marygrace Murphy.
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