Will we see a $10 billion Law Firm?

Editor’s Note: The author of this post is a partner at Beaton Capital and based in Australia.

By George Beaton, of Beaton Capital

Is a $10 billion (yes, ten billion) BigLaw firm unthinkable? When I was quoted in the Law Institute Journal (of Victoria, Australia) musing whether there might be “ten $10 billion [global] law firms in ten years’ time”, the proposition caused one BigLaw managing partner quoted in the same article to suggest “somebody needs to have a cold shower.”

Is this a realistic scenario? Is there a rationale for a $10 billion BigLaw firm, let alone ten of them in the world? Or do I need a cold shower?

The prospect of “ten legal juggernauts” is probably implausible for many of today’s BigLaw firms, and if it is a credible scenario, then it’s scary for good reasons. Let’s look across at the evolution of the accountancy profession and then crunch a few numbers on the legal profession.

In 1989, only 26 years ago, the Big 8 existed in accountancy. Then two mergers amongst them gave birth to Ernst & Young and Deloitte & Touche, leaving the Big 6. In 1998 PricewaterhouseCoopers was born, leaving the Big 5, reduced to four by the implosion of Arthur Andersen three years later. Some of these firms date back in trans-Atlantic terms to the 1920s when, for example, Arthur Young Broads Patterson and Peat Marwick Mitchell served international clients from offices in the U.K. and the U.S.A.

The modern Big 4 now all exceed $25 billion in annual revenues, each employing over 160,000 people around the world. Each is larger than many of their clients. Each is a very successful firm. They are capable of massive take-overs, witness PricewaterhouseCoopers acquiring Booz & Company in 2014. On a global basis few firms, if any, can challenge the Big 4. In the talent recruitment marketplace they are the first choice for most graduates in most countries. It’s daunting for any firm competing head-on with the Big 4.

Analysis of BigLaw firms shows the largest six all with annual revenue greater than $2 billion: Baker & McKenzie, DLA Piper, Latham & Watkins, Skadden, Arps, Slate, Meagher & Flom, Clifford Chance, and Kirkland & Ellis. Comparatively, these firms are each less than one-tenth of the size of the smallest of the Big Four. So perhaps a cold shower is warranted?

But wait, if two of these six merged (only for the sake of the arithmetic and this argument, mind you) and the merged firm grew at 10 percentper year, it would take just ten years to reach $10 billion (in today’s dollars). If annual organic growth was 5 percent, it would take about 19 years to reach $10 billion.

And, as with accountancy, if two mega firms merge, others have to follow. Given the contemporary penchant for mergers through vereins, it’s likely $10 billion would be reached in less than one or two decades, respectively, at least by some of the firms that enter this race.

Perhaps the better question is ‘Why won’t the global legal industry evolve in the same way as the accounting industry?’ I think that cold shower can wait.