Looking for what?
The answer is simple – they are looking for firms like yours, provided the price and other factors are right.
A recent story in the Gazette (6th January) shows that insurance firm Keoghs, spent nearly £1m investigating potential acquisition opportunities which, in the end, did not materialise. Seasoned observers will recall that they were considering buying parts of the insolvent firm Parabis, which was later broken up and sold piecemeal in a pre-pack administration deal.
At the time of discontinuing talks, they declined to explain why, but said: ‘we will only proceed [with acquisitions] if they deliver the best possible outcomes for the clients, our business and our people… Keoghs will continue to be open to opportunities to further strengthen our position… Our focus is to continue to provide the highest level of expertise and advice to our clients and grow our very strong underlying business.’
For a firm to spend that much money – as they put it, ‘exceptional items of £893K in the year represent the fees incurred whilst investigating potential investment opportunities within the legal sector’ – demonstrates a serious commitment to growth by acquisition. It may also be an admission that it will be difficult to grow organically, or that lateral hires are inappropriate. But ‘will continue to be open to opportunities’ shows that they are still looking.
It’s impossible to say exactly why the deal foundered but there are some strong messages in the all-too-brief statement. The price has got to be right, the product (ie client files) has got to be of good quality, maybe Lexcel badged, and, importantly, it has to be profitable. With workflow errors in some workstreams – particularly civil litigation – costing potentially large sums, this means that case management and control has got to be top notch. Conveyancing firms that don’t have CQS are going to be at a severe disadvantage.
Keogh’s accounts to 31 May 2016, recently filed, state: ‘the firm’s competitive advantage is focused on combining low-cost workflow processing with operational and process excellence.’ This, of itself, speaks volumes about the sort of operation that will be attractive. Nobody wants to take on a firm only to have to undertake ruthless cost-cutting or to find that the operation was run in a totally different manner – a seamless transition is strongly desirable.
There are so many stories of failures – eg Slater & Gordon/Quindell – that it’s easy to think that there isn’t a market anymore. But that is totally wrong. As this very large due diligence spend shows, which of course might not have arisen from just one exercise, there will always be a market for law firms. But not for every law firm. Acquirers are interested in those that can truly add value – ie those with strong balance sheets, low-cost operations but with proper supervision, impressive workflow, and rain-making skills.
And M&A activity isn’t simply for mega-firms. Smaller firms are acquired – or merge – frequently too. The same principles apply – in essence, nobody wants to overpay for a basket case that will haemorrhage cash, cause culture shocks, take too long to integrate, or be a PI claims nightmare.
The next few blogs in this series will consider how to do this.