L.A. Firms Sought After for Mergers, Survey Says (Perspective)

Editor’s Note: The authors are consultants to law firms.

In addition to our routine interactions with law firm leaders in our consulting work and at firm retreats, executive committee meetings, and in other forums, we created a confidential survey by conducting anonymous, non-attributed interviews.

Of the nearly 70 firms we surveyed, we received feedback from members of senior leadership in 25 firms, a 36 percent response rate. All hailed from firms that met our geographic and size definition above, and survey respondents were exclusively managing partners, senior leaders, firm-wide chairs and managing members. We conducted the survey in the second half of 2016.

We found that Los Angeles remains a sought-after growth destination, with 88% of respondents reporting they were approached to combine with another firm in the past year. The survey also indicated that:

• 42% of respondents are open to considering a combination with another firm in the next three to five years;

• Of these, 70% indicated interest in a transformational combination with a larger or similarly-sized firm;

• More than two thirds of participants want to grow their firm’s geographic footprint — when asked about geographic growth priorities, 64% of respondents indicated they want to double down on the West Coast by growing more there;

• 24% of respondents expressed interest in entering or growing in New York City, 16% expressed the same interest in Washington, D.C., and 12% expressed the same interest in both Chicago and Seattle;

• Participants generally have a positive outlook for their firm’s near future — 80% say they are generally optimistic about their firm’s prospects this year

• Over two-thirds of participants expect their revenue per lawyer (RPL) to increase compared to the past year—but only marginally, three-quarters expect their RPL to increase by only between 1-5%; and

• Many expect Los Angeles to continue growing increasingly competitive — 84% expect a more competitive market for sought-after talent and 75% indicated their firm was smaller than their most significant competitors.

Looking at these data points in relation to each other:

• Although the vast majority of participants indicated that their firms had been approached to combine with another law firm in the past year, most firms are selective about identifying a potential combination partner. Ensuring a long-term trajectory of stability and increasing profitability were the top two criteria that firms identified that a potential combination partner would need to have.

• At the same time, while 80% of respondents are optimistic about the future of their law firm, 20% are not. The percent expressing optimism decreases when we look at general confidence levels for the law firm environment in L.A. — only 52% feel optimistic about the future. Relatedly, one of the most commonly mentioned priorities is building a firm that will be more stable in the future. Taken together, this may suggest that some leaders are interested in combination as a means to better ensure their firm’s future success and long-term stability in an increasingly competitive market.

While roughly the same percentage of respondents in Chicago and LA (41% and 42%, respectively) are open to considering a combination with another firm in the near future, only 12% of LA respondents intend to grow in Chicago, double the amount (24%) of Chicago respondents interested in growing in Southern California, confirming signs that L.A. will continue to grow more competitive as outside law firms seek to enter the market.

Additional details about the firms that participated in this survey:

⁃ 90 attorneys was the average headcount for respondent firms. The range of firm headcount was roughly between 20 and 200 attorneys.

⁃ 75% of the average respondent firm’s headcount was based in the areas of greater Los Angeles that we focused on and 93% of the average firm’s headcount was based in California.

⁃ 44% of the average respondent firm’s headcount is focused on Litigation, followed by Real Estate and Corporate, at 20% and 12%, respectively.

⁃ 64% of respondent firms were ranked by Chambers in practice areas including Real Estate, Construction, Media & Entertainment, Bankruptcy/Restructuring, Litigation and Environmental.